Entergy 2006 Annual Report Download - page 86

ENTERGY CORPORATION AND SUBSIDIARIES 2
2000066
70
Significant components of net deferred and noncurrent accrued tax
liabilities for Entergy Corporation and subsidiaries as of December
31, 2006 and 2005 are as follows (in thousands):
2006 2005
Deferred and Non-current
Accrued Tax Liabilities:
Net regulatory assets/liabilities $ (1,334,341) $ (1,150,210)
Plant-related basis differences (5,992,434) (5,487,161)
Power purchase agreements (1,755,345) (2,422,967)
Nuclear decommissioning trusts (915,380) (859,712)
Other (615,371) (643,793)
Total (10,612,871) (10,563,843)
Deferred Tax Assets:
Accumulated deferred investment
tax credit 118,990 125,521
Capital losses 256,089 119,003
Net operating loss carryforwards 2,002,541 2,788,864
Sale and leaseback 242,630 238,557
Unbilled/deferred revenues 39,566 25,455
Pension-related items 790,383 406,346
Reserve for regulatory adjustments 114,451 120,792
Customer deposits 77,166 70,222
Nuclear decommissioning liabilities 790,052 720,464
Other 405,490 561,242
Valuation allowance (33,507) (38,791)
Total 4,803,851 5,137,675
Net deferred and non-current
accrued tax liability $ (5,809,020) $ (5,426,168)
At December 31, 2006, Entergy had $713.1 million in net realized
federal capital loss carryforwards that will expire as follows: $75.9
million in 2007, $0.8 million in 2008, $230.2 million in 2009, and
$406.2 million in 2011.
At December 31, 2006, Entergy had estimated federal net operat-
ing loss carryforwards of $4.8 billion primarily resulting from changes
in tax accounting methods relating to (a) the Registrant Subsidiaries’
calculation of cost of goods sold and (b) Non-Utility Nuclear’s 2005
mark-to-market tax accounting election, and (c) losses due to
Hurricane Rita. Both tax accounting method changes produce tem-
porary book tax differences, which will reverse in the future.
Approximately $2.0 billion of the net operating loss, attributable to
the two tax accounting method changes, is expected to reverse within
two years. The timing of the reversal depends on several variables,
including the price of power. If the federal net operating loss carryfor-
wards are not utilized, they will expire in the years 2023 through
2026.
At December 31, 2006, Entergy had estimated state net operating
loss carryforwards of $4.8 billion, primarily resulting from Entergy
Louisiana Holdings’ mark-to-market tax election, the Utility compa-
nies’ 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. If the state net operating loss carryforwards are
not utilized, they will expire in the years 2008 through 2021.
For 2006 and 2005, valuation allowances are provided against
UK capital loss and UK net operating loss carryforwards, federal
and state capital loss carryforwards, and certain state net operating
loss carryforwards.
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, sub-
ject to certain limitations, by providing an 85% dividends received
deduction for certain repatriated earnings and also providing 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 benefit. At
December 31, 2006 and December 31, 2005, Entergy had no undis-
tributed earnings from subsidiary companies outside the United
States that are being considered for repatriation. In accordance with
FSP 109-1, which was issued by the FASB to address the accounting
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. 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 1999 through 2003, and is subject to audit by the IRS
and other taxing authorities for subsequent 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 posi-
tion and results of operations. Entergy believes that the contingency
provisions established in its financial statements will sufficiently cover
the liabilities that are reasonably 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 2006, Entergy Arkansas, Entergy Louisiana Holdings,
Entergy Mississippi Entergy New Orleans, and System Energy satis-
fied their tax liabilities related to the 1996 - 1998 IRS audit cycle. The
most significant issue in the audit involved the classification of certain
depreciable property using shortened lives for tax purposes. Entergy
Arkansas, Entergy Louisiana Holdings, Entergy Mississippi, and
Entergy New Orleans partially conceded accelerated tax depreciation
associated with these assets. Entergy Gulf States was not part of the
settlement and did not change its accounting method for these certain
assets until 1999. Also in October 2006, Entergy concluded settle-
ment discussions with IRS Appeals related to the 1999 - 2001 audit
cycle. The settlement was substantially similar to the settlement that
was reached for the 1996 - 1998 audit cycle. The total cash conces-
sion related to these deductions for all years subsequent to 1998 is $38
million plus interest of $9 million.
Because this issue relates to the timing of when depreciation
expense is deducted, the conceded amount will be recovered in
future periods.
Mark-to-Market of Certain Power Contracts
In 2001, Entergy Louisiana Holdings changed its method of account-
ing for income tax purposes related to its wholesale electric power
contracts. The most significant of these is the contract to purchase
power from the Vidalia hydroelectric project. On audit of Entergy
Louisiana Holdings’ 2001 tax return, the IRS made an adjustment
reducing the amount of the deduction associated with this method
change. The adjustment had no material effect on Entergy Louisiana
Holdings’ earnings and required no additional payment of 2001
income tax. The Vidalia contract method change has resulted in esti-
mated cumulative cash flow tax benefits of approximately $655
million through December 31, 2006. This benefit could reverse in the
years 2007 through 2031 depending on several variables, including
the price of power. The tax accounting election has had no effect on
total book income tax expense.
NOTESto CONSOLIDATED FINANCIAL STATEMENTS continued