Entergy 2008 Annual Report Download - page 37

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ENTERGY CORPORATION AND SUBSIDIARIES 2008
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Management’s Financial Discussion and Analysis continued
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Parent & Other
Net revenue decreased for Parent & Other from $114 million for
2006 to $51 million for 2007 primarily due to the sale of the non-
nuclear wholesale asset business’ remaining interest in a power
development project in the second quarter 2006, which resulted in
a $14.1 million gain ($8.6 million net-of-tax). Also contributing to
the decrease were higher natural gas prices in 2007 compared to
the same period in 2006 as well as lower production as a result of
an additional plant outage in 2007 compared to the same period
in 2006. A substantial portion of the effect on net income of this
decline is offset by a related decrease in other operation and
maintenance expenses.
Other Income Statement Items
Utility
Other operation and maintenance expenses increased from $1,749
million for 2006 to $1,855 million for 2007 primarily due to:
nan increase of $34 million in nuclear expenses primarily due
to non-refueling outages, increased nuclear labor and contract
costs, and higher NRC fees;
nan increase of $21 million related to expenses in the fourth
quarter 2007 in connection with the nuclear operations fleet
alignment, as discussed above;
nan increase of $20 million in transmission expenses, including
independent coordinator of transmission expenses and
transmission line and substation maintenance;
nan increase of $16 million as a result of higher insurance
premiums in addition to the timing of premium payments
compared to 2006;
nan increase of $16 million in fossil plant expenses due to
differing outage schedules and scopes from 2006 to 2007 and
the return to normal operations work in 2007 versus storm
restoration activities in 2006 as a result of Hurricane Katrina;
nan increase of $11 million due to a provision for storm-related
bad debts; and
nan increase of $10 million in distribution expenses,
including higher contract labor costs, increases in vegetation
maintenance costs, and the return to normal operations work
in 2007 versus storm restoration activities in 2006 as a result of
Hurricane Katrina and Hurricane Rita. This increase is net of
an environmental liability credit of $8 million for resolution of
a pollution loss provision.
The increase is partially offset by a decrease of $23 million in
payroll, payroll-related, and benefits costs.
Depreciation and amortization expenses increased from $835
million for 2006 to $850 million for 2007 primarily due to an
increase in plant in service and a revision made in the first quarter
2006 to estimated depreciable lives involving certain intangible
assets. The increase was partially offset by a revision in the third
quarter 2007 related to depreciation previously recorded on
storm-related assets. Recovery of the cost of those assets will now
be through the securitization of storm costs approved by the LPSC
in the third quarter 2007. The securitization approval is discussed
in Note 2 to the financial statements.
Non-Utility Nuclear
Other operation and maintenance expenses increased from
$637 million for 2006 to $760 million for 2007 primarily due to
the acquisition of the Palisades plant in April 2007 and expenses
of $29 million in the fourth quarter 2007 in connection with the
nuclear operations fleet alignment.
Other expenses increased due to increases of $14.4 million
in nuclear refueling outage expense and $15.7 million in
decommissioning expense that resulted almost entirely from the
acquisition of Palisades in April 2007.
Parent & Other
Interest charges increased from $101 million for 2006 to
$183 million for 2007 primarily due to additional borrowings
under Entergy Corporation’s revolving credit facilities.
Other income decreased from $93 million for 2006 to
$3 million for 2007 primarily due to a gain of approximately
$55 million (net-of-tax) in the fourth quarter of 2006 related
to the Entergy-Koch investment. 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 distributions upon liquidation
of the partnership will be less than $35 million.
Income Taxes
The effective income tax rate for 2007 was 30.7%. The reduction
in the effective income tax rate versus the federal statutory rate of
35% in 2007 is primarily due to:
na reduction in income tax expense due to a step-up in the tax
basis on the Indian Point 2 non-qualified decommissioning
trust fund resulting from restructuring of the trusts, which
reduced deferred taxes on the trust fund and reduced current
tax expense;
nthe resolution of tax audit issues involving the 2002-2003
audit cycle;
nan adjustment to state income taxes for Non-Utility Nuclear
to reflect the effect of a change in the methodology of
computing New York state income taxes as required by that
state’s taxing authority;
nbook and tax differences related to the allowance for equity
funds used during construction; and
n the amortization of investment tax credits.
These factors were partially offset by book and tax differences for
utility plant items and state income taxes at the Utility operating
companies.
The effective income tax rate for 2006 was 27.6%. The reduction
in the effective income tax rate versus the federal statutory rate
of 35% in 2006 is primarily due to tax benefits, 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 settled issues relating to 1996-1998
audit cycle.
See Note 3 to the financial statements for a reconciliation of the
federal statutory rate of 35.0% to the effective income tax rates,
and for additional discussion regarding income taxes.
LIQUIDITY AND CAPITAL RESOURCES
This section discusses Entergy’s capital structure, capital spending
plans and other uses of capital, sources of capital, and the cash
flow activity presented in the cash flow statement.