Entergy 2006 Annual Report Download - page 74

ENTERGY CORPORATION AND SUBSIDIARIES 2
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NUCLEAR REFUELING OUTAGE COSTS
Nuclear refueling outage costs are deferred during the outage and
amortized over the period to the next outage because these refueling
outage expenses are incurred to prepare the units to operate for the
next operating cycle without having to be taken off line. Prior to
2006, River Bend’s costs were accrued in advance of the outage and
included in the cost of service used to establish retail rates. Entergy
Gulf States relieved the accrued liability when it incurred costs during
the next River Bend outage. In 2006, Entergy Gulf States adopted
FSP No. AUG AIR-1, “Accounting for Planned Major Maintenance
Activities,” for its River Bend nuclear refueling outage costs and now
accounts for these costs in the same manner as Entergy’s other sub-
sidiaries. Adoption of FSP No. AUG AIR-1 resulted in an immaterial
retrospective adjustment to Entergy’s and Entergy Gulf States’
retained earnings balance.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
AFUDC represents the approximate net composite interest cost of
borrowed funds and a reasonable return on the equity funds used for
construction by the Registrant Subsidiaries. Although AFUDC
increases both the plant balance and earnings, it is realized in cash
through depreciation provisions included in rates.
INCOME TAXES
Entergy Corporation and the majority of its subsidiaries file a United
States consolidated federal income tax return. Entergy Louisiana,
formed December 31, 2005, is not a member of the consolidated
group and files a separate federal income tax return. Income taxes are
allocated to the subsidiaries in proportion to their contribution to
consolidated taxable income. In accordance with SFAS 109,
“Accounting for Income Taxes,” deferred income taxes are recorded
for all temporary differences between the book and tax basis of assets
and liabilities, and for certain credits available for carryforward.
Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some por-
tion of the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and
rates in the period in which the tax or rate was enacted.
Investment tax credits are deferred and amortized based upon the
average useful life of the related property, in accordance with ratemak-
ing treatment.
EARNINGS PER SHARE
The following table presents Entergy’s basic and diluted earnings per
share (EPS) calculation included on the consolidated income state-
ment (in millions, except per share data):
For the years ended December 31,2006 2005 2004
$/share $/share $/share
Income from continuing
operations $1,133.1 $943.1 $909.6
Average number of common
shares outstanding – basic 207.5 $5.46 210.1 $4.49 226.9 $4.01
Average dilutive effect of:
Stock Options(1) 3.8 (0.098) 4.0 (0.085) 4.1 (0.071)
Deferred Units 0.2 (0.005) 0.3 (0.006) 0.2 (0.004)
Average number of common
shares outstanding – diluted 211.5 $5.36 214.4 $4.40 231.2 $3.93
Consolidated net income $1,132.6 $898.3 $909.5
Average number of common
shares outstanding – basic 207.5 $5.46 210.1 $4.27 226.9 $4.01
Average dilutive effect of:
Stock Options(1) 3.8 (0.098) 4.0 (0.081) 4.1 (0.071)
Deferred Units 0.2 (0.005) 0.3 (0.005) 0.2 (0.004)
Average number of common
shares outstanding – diluted 211.5 $5.36 214.4 $4.19 231.2 $3.93
(1) Options to purchase approximately 1,727,579 common stock shares in 2005
and 3,319 common stock shares in 2004 at various prices were outstanding at
the end of those years that were not included in the computation of diluted
earnings per share because the exercise prices were greater than the common
share average market price at the end of each of the years presented. All options
to purchase common stock shares in 2006 were included in the computation of
diluted earnings per share because the common share average market price at
the end of 2006 was greater than the exercise prices.
Entergy has 10,000,000 equity units outstanding as of December 31,
2006 that obligate the holders to purchase a certain number of shares
of Entergy common stock for a stated price no later than February 17,
2009. Each contract executed prior to February 17, 2009 would be
equal to 0.5705 common stock shares. The equity units were not
included in the calculation at December 31, 2006 and 2005 because
Entergy’s average stock price for the year was less than the threshold
appreciation price of the equity units.
STOCK-BASED COMPENSATION PLANS
Entergy grants stock options to key employees of the Entergy sub-
sidiaries, which is described more fully in Note 12 to the financial
statements. Effective January 1, 2003, Entergy prospectively adopted
the fair value based method of accounting for stock options prescribed
by SFAS 123, “Accounting for Stock-Based Compensation.” Awards
under Entergy’s plans vest over three years. Therefore, the cost related
to stock-based employee compensation included in the determination
of net income for 2004 is less than that which would have been rec-
ognized if the fair value based method had been applied to all awards
since the original effective date of SFAS 123. There is no pro forma
effect for 2006 and 2005 because all non-vested awards are account-
ed for at fair value. Stock-based compensation expense included in
consolidated net income, net of related tax effects, for 2006 is $6.8
million and for 2005 is $7.8 million. The following table illustrates
the effect on net income and earnings per share for 2004 if Entergy
NOTESto CONSOLIDATED FINANCIAL STATEMENTS continued