Entergy 2007 Annual Report Download - page 36

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Entergy Corporation and Subsidiaries 2007
n฀ an increase of $16 million in fossil operating costs due to the
purchase of the Attala plant in January 2006 and the Perryville
plant coming online in July 2005;
n฀ an increase of $12 million related to storm reserves. is increase
does not include costs associated with Hurricanes Katrina and
Rita; and
n฀ an increase of $12 million due to a return to normal expense
patterns in 2006 versus the deferral or capitalization of storm costs
in 2005.
Other operation and maintenance expenses increased for Non-
Utility Nuclear from $588 million in 2005 to $637 million in 2006
primarily due to the timing of refueling outages, increased benet and
insurance costs, and increased NRC fees.
Taxes Other Than Income Taxes
Taxes other than income taxes increased for the Utility from $322
million in 2005 to $361 million in 2006 primarily due to an increase
in city franchise taxes in Arkansas due to a change in 2006 in the
accounting for city franchise tax revenues as directed by the APSC.
e change results in an increase in taxes other than income taxes with
a corresponding increase in rider revenue, resulting in no eect on
net income. Also contributing to the increase was higher franchise tax
expense at Entergy Gulf States, Inc. as a result of higher gross revenues
in 2006 and a customer refund in 2005.
Other Income
Other income increased for the Utility from $111 million in 2005 to
$156 million in 2006 primarily due to carrying charges recorded on
storm restoration costs.
Other income increased for Non-Utility Nuclear primarily due
to miscellaneous income of $27 million ($16.6 million net-of-tax)
resulting from a reduction in the decommissioning liability for a plant
as a result of a revised decommissioning cost study and changes in
assumptions regarding the timing of when decommissioning of a plant
will begin.
Other income increased for Parent & Other primarily due to a gain
related to its Entergy-Koch investment of approximately $55 million
(net-of-tax) in the fourth quarter of 2006. In 2004, Entergy-Koch
sold its energy trading and pipeline businesses to third parties. At
that time, Entergy received $862 million of the sales proceeds in the
form of a cash distribution by Entergy-Koch. Due to the November
2006 expiration of contingencies on the sale of Entergy-Koch’s trading
business, and the corresponding release to Entergy-Koch of sales
proceeds held in escrow, Entergy received additional cash distributions
of approximately $163 million during the fourth quarter of 2006 and
recorded a gain of approximately $55 million (net-of-tax). Entergy
expects future cash distributions upon liquidation of the partnership
will be less than $35 million.
Interest Charges
Interest charges increased for the Utility and Parent & Other primarily
due to additional borrowing to fund the signicant storm restoration
costs associated with Hurricanes Katrina and Rita.
Discontinued Operations
In April 2006, Entergy sold the retail electric portion of the Competitive
Retail Services business operating in the Electric Reliability Council of
Texas (ERCOT) region of Texas, and now reports this portion of the
business as a discontinued operation. Earnings for 2005 were negatively
aected by $44.8 million (net-of-tax) of discontinued operations due
to the planned sale. is amount includes a net charge of $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. Results for 2006 include an $11.1 million gain
(net-of-tax) on the sale of the retail electric portion of the Competitive
Retail Services business operating in the ERCOT region of Texas.
Income Taxes
e eective income tax rates for 2006 and 2005 were 27.6% and
36.6%, respectively. e lower eective income tax rate in 2006 is
primarily due to tax benets, net of reserves, resulting from the tax
capital loss recognized in connection with the liquidation of Entergy
Power International Holdings, Entergy’s holding company for
Entergy-Koch. Also contributing to the lower rate for 2006 is an IRS
audit settlement that allowed Entergy to release from its tax reserves
all settled issues relating to 1996-1998 audit cycle. See Note 3 to the
nancial statements for a reconciliation of the federal statutory rate of
35.0% to the eective income tax rates, and for additional discussion
regarding income taxes.
LIQUIDITY AND CAPITAL RESOURCES
is section discusses Entergy’s capital structure, capital spending
plans and other uses of capital, sources of capital, and the cash ow
activity presented in the cash ow statement.
CA P I TA L ST R U C T U R E
Entergy’s capitalization is balanced between equity and debt, as shown
in the following table. e increase in the debt to capital percentage
from 2006 to 2007 is primarily the result of additional borrowings under
Entergy Corporation’s revolving credit facility, along with a decrease in
shareholders’ equity primarily due to repurchases of common stock.
is increase in the debt to capital percentage is in line with Entergy’s
nancial and risk management aspirations. e decrease in the debt
to capital percentage from 2005 to 2006 is the result of an increase in
shareholders’ equity, primarily due to an increase in retained earnings,
partially oset by repurchases of common stock.
2007 2006 2005
Net debt to net capital at the end of the year 54.6% 49.4% 51.5%
Eect of subtracting cash from debt 3.0% 2.9% 1.6%
Debt to capital at the end of the year 57.6% 52.3% 53.1%
Net debt consists of debt less cash and cash equivalents. Debt consists
of notes payable, capital lease obligations, preferred stock with sinking
fund, and long-term debt, including the currently maturing portion.
Capital consists of debt, shareholders’ equity, and preferred stock
without sinking fund. Net capital consists of capital less cash and cash
equivalents. Entergy uses the net debt to net capital ratio in analyzing
its nancial condition and believes it provides useful information to its
investors and creditors in evaluating Entergy’s nancial condition.
Management’s Financial Discussion and Analysis conti nued