Entergy 2005 Annual Report Download - page 41

ENTERGY CORPORATION AND SUBSIDIARIES 2005
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PARENT COMPANY & OTHER BUSINESS SEGMENTS
Sales of Entergy-Koch Businesses
In the fourth quarter of 2004, Entergy-Koch sold its energy trading
and pipeline businesses to third parties. Entergy-Koch will continue
in existence pending final receipt of the purchase price. In 2004,
Entergy received $862 million of the sales proceeds in the form of
a cash distribution by Entergy-Koch. Entergy ultimately expects to
receive total net cash distributions exceeding $1 billion. Entergy
expects to record an approximate $60 million net-of-tax gain when
the remainder of the proceeds are received in 2006.
Entergy Corporation has guaranteed up to 50% of Entergy-
Koch’s indemnification obligations to the purchasers. However,
Entergy does not expect any material claims under these indemnifi-
cation obligations.
Results of Operations
2005 Compared to 2004
The decrease in earnings for Parent Company & Other Business
Segments from $21.1 million in earnings to a $44.1 million loss was
primarily due to the following:
■a tax benefit resulting from the sale in December 2004 of
preferred stock and less than 1% of the common stock of
Entergy Asset Management, an Entergy subsidiary. An Entergy
subsidiary sold the stock to a third party for $29.75 million.
The sale resulted in a capital loss for tax purposes of $370
million, producing a net tax benefit of $97 million that
Entergy recorded in the fourth quarter of 2004; and
■a loss from discontinued operations of $44.8 million net-of-tax
due to the planned divestiture of Entergy’s Competitive Retail
Services retail electric business in the ERCOT region of
Texas. This amount includes a net charge of $39.8 million
($25.8 million net-of-tax) related to the impairment reserve for
the remaining net book value of the Competitive Retail Services
business’ information technology systems.
These decreases were partially offset by the following:
■a charge recorded in 2004 of approximately $55 million
($36 million net-of-tax) as a result of an impairment of the value
of the Warren Power plant, which is owned in the non-nuclear
wholesale assets business. Entergy concluded that the plant is
impaired based on valuation studies prepared in connection with
the Entergy Asset Management stock sale discussed above;
■a loss of $46.4 million in 2004 from Entergy’s investment in
Entergy-Koch, primarily resulting from Entergy-Koch’s trading
business reporting a loss from its operations in 2004; and
■miscellaneous income from proceeds of $18.9 million from the
sale of SO2allowances.
2004 Compared to 2003
The decrease in earnings for Parent Company & Other Business
Segments from $157.1 million to $21.1 million was primarily due to:
■earnings from Entergy’s investment in Entergy-Koch were
$254 million lower in 2004, primarily as a result of Entergy-
Koch’s trading business reporting a loss from its operations in
2004; and
■a charge recorded in 2004 of approximately $55 million
($36 million net-of-tax) as a result of an impairment of the value
of the Warren Power plant, which is owned in the non-nuclear
wholesale assets business. Entergy concluded that the plant is
impaired based on valuation studies prepared in connection with
the Entergy Asset Management stock sale discussed below.
Partially offsetting the decrease in earnings were the following:
■a tax benefit resulting from the sale of preferred stock and less
than 1% of the common stock of Entergy Asset Management,
an Entergy subsidiary. In December 2004, an Entergy subsidiary
sold the stock to a third party for $29.75 million. The sale
resulted in a capital loss for tax purposes of $370 million,
producing a net tax benefit of $97 million that Entergy recorded
in the fourth quarter of 2004;
■realization of $16.7 million of tax benefits related to the
Entergy-Koch investment; and
■a loss from discontinued operations of $14.4 million net-of-tax
in 2003 from Entergy’s Competitive Retail Services business.
INCOME TAXES
The effective income tax rates for 2005, 2004, and 2003 were 36.7%,
28.2%, and 37.9%, respectively. See Note 3 to the consolidated finan-
cial statements for a reconciliation of the federal statutory rate of
35.0% to the effective income tax rates. The lower effective income tax
rate in 2004 is primarily due to the tax benefits resulting from the
Entergy Asset Management stock sale discussed above.
LIQUIDITY AND CAPITAL RESOURCES
This section discusses Entergy’s capital structure, capital spending
plans and other uses of capital, sources of capital, and the cash flow
activity presented in the cash flow statement.
LIQUIDITY EFFECTS OF HURRICANE KATRINA
AND HURRICANE RITA
As discussed above, Hurricanes Katrina and Rita impacted Entergy’s
service territory. In addition to the direct costs caused by the storms,
Hurricanes Katrina and Rita have had other impacts that have
affected the U.S. Utility’s liquidity position. The Entergy New
Orleans bankruptcy caused fuel and power suppliers to increase
their scrutiny of the remaining domestic utility companies with the
concern that one of them could suffer similar impacts, particularly
after Hurricane Rita. As a result, some suppliers began requiring
accelerated payments and decreased credit lines. In addition, the
hurricanes damaged certain gas supply lines, thereby decreasing the
number of potential suppliers. The hurricanes also exacerbated a
market run-up in natural gas and power prices, thereby increasing
the U.S. Utility’s ongoing costs, which consumed available credit
lines more quickly and in some instances required the posting of
additional collateral. The U.S. Utility managed through these
events thus far, adequately supplied the Entergy System with fuel
and power, and as a result of steps taken by it regarding its storm
costs, expects to have adequate liquidity and credit to continue
supplying the Entergy System with fuel and power. The Non-Utility
Nuclear business also has had to post increased collateral (principally
in the form of Entergy Corporation guarantees) due to rising fuel and
power prices, and it has had adequate liquidity to meet that demand.
After the hurricanes, Entergy implemented a new financing plan
that sourced $2.5 billion through a combination of debt and equity
units intended to provide adequate liquidity and capital resources to
Entergy and its subsidiaries while storm restoration cost recovery is
pursued. In addition, the plan is intended to provide adequate liquidity
and capital resources to support Non-Utility Nuclear and the
Competitive Retail Services business. The plan, which Entergy accom-
plished primarily in the fourth quarter 2005, included 1) increasing
Entergy’s credit revolver capacity by establishing a new $1.5 billion
Entergy Corporation facility; 2) issuing $0.5 billion of equity units;
3) issuing approximately $0.5 billion of new debt at various utility
operating companies; and 4) providing capital in the amount of
$300 million from Entergy Corporation to Entergy Gulf States.
MANAGEMENT’S FINANCIAL DISCUSSION and ANALYSIS continued