Entergy 2007 Annual Report Download - page 78

76
Entergy Corporation and Subsidiaries 2007
Notes to Consolidated Financial Statements continued
As Entergy has a consolidated net operating loss for 2003, these
adjustments have the eect of reducing the consolidated net operating
loss carryover and do not require a payment to the IRS at this time.
e settlement did not have a material impact on the Registrant
Subsidiaries’ earnings. Proposed IRS regulations, eective in year
2005, could substantially reduce the benet of the 2003 settlement.
Subsequently, Entergy led an amended 2004 tax return which
capitalized $2.8 billion of costs to inventory. ese costs are not
part of the settlement agreement with the IRS and are subject to IRS
scrutiny. Overall, on a consolidated basis, using a with and without
methodology, there has been an estimated $20 million state cash tax
benet, but only a $2 million federal cash tax benet from the cost of
goods sold method changes. On a separate company basis, however,
Entergy currently estimates the cumulative federal and state cash tax
benet through 2007 to be $303 million at Entergy Arkansas; $253
million at System Energy; $25 million at Entergy Mississippi; and $4
million at Entergy Louisiana. e estimates of cumulative cash tax
benet are dependent on the outcome of several tax items (including
mark to market elections and storm cost deductions). Should these
other items fail to be sustained on audit, the estimated cash tax impact
of these tax accounting method changes for cost of goods sold would
be signicantly greater. Were the IRS to successfully deny the use of
Entergy’s tax accounting method for cost of goods sold, the companies
would have to pay back under Entergy’s intercompany tax allocation
agreement the benets received.
In the report for the 2002-2003 audit cycle, the IRS also proposed
adjustments which Entergy did not agree to as follows: 1) the U.K.
Windfall Tax foreign tax credit issue mentioned above; 2) the
street lighting issue mentioned above; 3) certain repair deductions;
4) deductions claimed for research and experimentation (R&E)
expenditures; 5) income tax credits claimed for R&E; and 6) a 2003
deduction associated with the revisions to the emergency plans at the
Indian Point Energy Center. Regarding all of these issues, Entergy
disagrees with the IRS Examination Division position and led a formal
protest on July 30, 2007 with the IRS and will pursue administrative
relief within the IRS Appeals Division.
Entergy believes that the provisions recorded in its nancial
statements are sucient to address these issues as well as other
liabilities that are reasonably estimable, including an estimate of
probable interest expense, associated with all uncertain tax positions.
e IRS commenced an examination of Entergy’s 2004 and 2005
U.S. income tax returns in the fourth quarter 2007. As of December
31, 2007, the IRS has not proposed any adjustments to Entergy’s
computation of tax for those years.
Entergy has $237 million in deposits on account with the IRS to
cover its uncertain tax positions.
FASB IN T E R P R E TAT I O N NO. 48
FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (FIN 48) was issued in July 2006. FIN 48 establishes a “more-
likely-than-not” recognition threshold that must be met before a tax
benet can be recognized in the nancial statements. If a tax deduction
is taken on a tax return, but does not meet the more-likely-than-not
recognition threshold, an increase in income tax liability, above what
is payable on the tax return, is required to be recorded. Entergy and
the Registrant Subsidiaries adopted the provisions of FIN 48, on
January 1, 2007. As a result of the implementation of FIN 48, Entergy
recognized an increase in the liability for unrecognized tax benets of
approximately $5 million, which was accounted for as a reduction to
the January 1, 2007 balance of retained earnings. A reconciliation of
Entergy’s beginning and ending amount of unrecognized tax benets
is as follows (in thousands):
Balance at January 1, 2007 upon implementation $1,977,001
Additions based on tax positions
related to the current year 142,827
Additions for tax positions of prior years 670,385
Reductions for tax positions of prior years (564,162)
Settlements (102,485)
Lapse of statute of limitations (1,938)
Balance at December 31, 2007 $2,121,628
Included in the December 31, 2007 balance of unrecognized
tax benets are $1.9 billion of tax positions for which the ultimate
deductibility is highly certain but for which there is uncertainty about
the timing of such deductibility. Because of the eect of deferred tax
accounting, other than on interest and penalties, the disallowance of
the shorter deductibility period would not aect the annual eective
income tax rate but would accelerate the payment of cash to the taxing
authority to an earlier period. Entergy’s December 31, 2007 balance
of unrecognized tax benets includes $242 million which could aect
the eective income tax rate. Entergy accrues interest and penalties
expenses related to unrecognized tax benets in income tax expense.
Entergy’s December 31, 2007 balance of unrecognized tax benets
includes approximately $50 million accrued for the possible payment
of interest and penalties.
Entergy and the Registrant Subsidiaries do not expect that total
unrecognized tax benets will signicantly change within the next
twelve months; however, the results of audit settlements and pending
litigation could result in changes to this total. Entergy is unable to
predict or quantify any changes at this time.
NOTE 4. REVOLVING CREDIT FACILITIES, LINES OF CREDIT
AND SHORT-TERM BORROWINGS
Entergy Corporation has in place a ve-year credit facility, which
expires in August 2012 and has a borrowing capacity of $3.5 billion.
Entergy Corporation also has the ability to issue letters of credit
against the total borrowing capacity of the credit facility. e facility
fee is currently 0.09% of the commitment amount. Facility fees and
interest rates on loans under the credit facility can uctuate depending
on the senior unsecured debt ratings of Entergy Corporation. e
weighted average interest rate as of December 31, 2007 was 5.524%
on the drawn portion of the facility. Following is a summary of the
borrowings outstanding and capacity available under the facility as of
December 31, 2007 (in millions):
Capacity Borrowings Letters of Credit Capacity Available
$3,500 $2,251 $69 $1,180
Entergy Corporation’s facility requires it to maintain a consolidated
debt ratio of 65% or less of its total capitalization. If Entergy fails to
meet this ratio, or if Entergy or one of the Registrant Subsidiaries
(except Entergy New Orleans) defaults on other indebtedness or is in
bankruptcy or insolvency proceedings, an acceleration of the facility
maturity date may occur.