Entergy 2005 Annual Report Download - page 78

ENTERGY CORPORATION AND SUBSIDIARIES 2005
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federal and state net tax benefit of $97 million that Entergy recorded
in the fourth quarter of 2004. Entergy has established a contingency
provision in its financial statements that management believes will
sufficiently cover the risk associated with this issue.
Significant components of net deferred and non-current accrued
tax liabilities as of December 31, 2005 and 2004 are as follows
(in thousands):
2005 2004
Deferred and Non-current
Accrued Tax Liabilities:
Net regulatory liabilities $ (954,742) $ (978,815)
Plant-related basis differences (5,444,178) (4,699,803)
Power purchase agreements (2,422,967) (972,348)
Nuclear decommissioning (390,256) (545,109)
Other (621,179) (346,993)
Total (9,833,322) (7,543,068)
Deferred Tax Assets:
Accumulated deferred investment
tax credit 125,521 133,979
Capital losses 119,003 134,688
Net operating loss carryforwards 2,788,864 1,201,006
Sale and leaseback 238,557 227,155
Unbilled/deferred revenues 25,455 28,741
Pension-related items 231,154 247,662
Reserve for regulatory adjustments 120,792 131,112
Customer deposits 70,222 107,652
Nuclear decommissioning 168,928 158,796
Other 560,980 225,659
Valuation allowance (38,791) (43,864)
Total 4,410,685 2,552,586
Net deferred and non-current
accrued tax liability $(5,422,637) $(4,990,482)
At December 31, 2005, Entergy had $268.4 million in net realized
federal capital loss carryforwards that will expire as follows: $104.9 mil-
lion in 2007, $0.8 million in 2008, and $162.7 million in 2009.
At December 31, 2005, Entergy had federal net operating loss
carryforwards of $6.6 billion primarily resulting from changes in tax
accounting methods relating to (a) the domestic utility companies
calculation of cost of goods sold and (b) Non-Utility Nuclear’s
2005 mark-to-market tax accounting election, and losses due to
Hurricanes Katrina and Rita. Both tax accounting method changes
produce temporary book tax differences, which will reverse in the
future. Approximately $4.0 billion of the net operating loss, attrib-
utable to the two tax accounting method changes, is expected to
reverse within four years. The timing of the reversal depends on
several variables, including the price of power and nuclear plant life
extensions. If the federal net operating loss carryforwards are not
utilized, they will expire in the years 2023 through 2025. Entergy
expects to receive a refund of $242 million from prior tax years
under the special provisions of the Gulf Opportunity Zone Act
of 2005 and the Energy Policy Act of 2005 in the second
quarter of 2006. The expected refund is reflected as a receivable in
the “Prepayments and other” line on the balance sheet as of
December 31, 2005.
At December 31, 2005, Entergy had estimated state net operating
loss carryforwards of $8.4 billion, primarily resulting from Entergy
Louisiana’s mark-to-market tax election, the domestic utility
companies’ change in method of accounting for tax purposes related
to cost of goods sold, and Non-Utility Nuclear’s 2005 mark-to-
market tax accounting election, all discussed above. If the state net
operating loss carryforwards are not utilized, they will expire in the
years 2008 through 2020.
The 2005 and 2004 valuation allowances are provided against
United Kingdom (UK) capital loss and UK net operating loss carry-
forwards, and certain state net operating loss carryforwards. The
UK losses can be utilized against future UK taxable income. For UK
tax purposes, these carryforwards do not expire.
On October 22, 2004, the American Jobs Creation Act of 2004
(the Act) was enacted. The Act promotes domestic production and
investing activities by providing a number of tax incentives including a
temporary incentive to repatriate accumulated foreign earnings,
subject to certain limitations, by providing an 85% dividends
received deduction for certain repatriated earnings and also provid-
ing a tax deduction of up to 9% of qualifying production activities.
In 2004, Entergy repatriated $59.1 million of accumulated foreign
earnings, which resulted in approximately $11.0 million of tax ben-
efit. At December 31, 2005, Entergy had no undistributed earnings
from subsidiary companies outside the United States that are being
considered for repatriation. In accordance with FASB Staff Position
(FSP) 109-1, which was issued by the FASB to address the account-
ing for the impacts of the Act, the allowable production tax credit
will be treated as a special deduction in the period in which it is
deducted rather than treated as a tax rate change during 2004 which
is the period in which the Act was signed into law. The adoption of
FSP 109-1 and FSP 109-2, also issued by the FASB to address the
accounting for the repatriation provisions of the Act, did not have a
material effect on Entergy’s financial statements.
INCOME TAX AUDITS
Entergy is currently under audit by the IRS with respect to tax
returns for tax periods subsequent to 1995 and through 2003, and is
subject to audit by the IRS and other taxing authorities for subse-
quent tax periods. The amount and timing of any tax assessments
resulting from these audits are uncertain, and could have a material
effect on Entergy’s financial position and results of operations.
Entergy believes that the contingency provisions established in its
financial statements will sufficiently cover the liabilities that are rea-
sonably estimable associated with tax matters. Certain material audit
matters as to which management believes there is a reasonable
possibility of a future tax payment are discussed below.
Depreciable Property Lives
In October 2005, Entergy Arkansas, Entergy Louisiana, Entergy
Mississippi, Entergy New Orleans, and System Energy concluded
settlement discussions with IRS Appeals related to the 1996 – 1998
audit cycle. The most significant issue settled involved the changes
in tax depreciation methods with respect to certain types of depre-
ciable property. Entergy Arkansas, Entergy Louisiana, Entergy
Mississippi, and Entergy New Orleans partially conceded deprecia-
tion associated with assets other than street lighting and intend to
pursue the street lighting depreciation in litigation. Entergy Gulf
States was not part of the settlement and did not change its accounting
method for these certain assets until 1999. The total cash concession
related to these deductions for Entergy Arkansas, Entergy
Louisiana, Entergy Mississippi, Entergy New Orleans, and System
Energy is $56 million plus interest of $23 million. The effect of a
similar settlement by Entergy Gulf States would result in a cash tax
exposure of approximately $25 million plus interest of $8 million.
Because this issue relates to the timing of when depreciation expense
is deducted, the conceded amount for Entergy Arkansas, Entergy
Louisiana, Entergy Mississippi, Entergy New Orleans, and System
Energy, or any future conceded amounts by Entergy Gulf States
will be recovered in future periods. Entergy believes that the
contingency provision established in its financial statements
sufficiently covers the risk associated with this item.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued