Entergy 2010 Annual Report Download - page 84

Notes to Consolidated Financial Statements continued
2004-2005 IRS AUDIT
The IRS issued its 2004-2005 Revenue Agent’s Report on
May 26, 2009.
On June 25, 2009 Entergy filed a formal Protest with the IRS
Appeals Office indicating disagreement with certain issues
contained in the Revenue Agent’s Report. The major issues in
dispute are:
n Depreciation of street lighting assets (issue before the
5th Circuit)
n Qualified research expenditures for purposes of the
research credit
n Inclusion of nuclear decommissioning liabilities in cost of
goods sold
The initial IRS Appeals Conference to discuss these disputed
issues occurred in September of 2010. Negotiations are ongoing.
2006-2007 IRS AUDIT
The IRS commenced an examination of Entergy’s 2006 and
2007 U.S. federal income tax returns in the third quarter 2009.
The IRS has proposed adjustments for these years. The audit is
progressing according to plan. The audit report is expected to be
issued in the second quarter 2011.
The IRS has also examined the Entergy Wholesale Commodities
subsidiaries’ and Utility operating companies’ mark-to-market
deductions claimed on wholesale power contracts. With respect to
the mark-to-market issue, the total federal and state tax included
in unrecognized tax benefits is approximately $747 million for
Entergy and $62 million for Entergy Louisiana. Amounts for the
other Registrant Subsidiaries are not significant.
Other Tax Matters
Entergy regularly negotiates with the IRS to achieve settlements.
The results of all pending litigations and audit issues could result
in significant changes to the amounts of unrecognized tax benefits
as discussed above.
When Entergy Louisiana, Inc. restructured effective December
31, 2005, Entergy Louisiana agreed, under the terms of the merger
plan, to indemnify its parent, Entergy Louisiana Holdings, Inc.
(formerly, Entergy Louisiana, Inc.) for certain tax obligations
that arose from the 2002-2003 IRS partial agreement. Because the
agreement with the IRS was settled in the fourth quarter 2009,
Entergy Louisiana paid Entergy Louisiana Holdings approximately
$289 million pursuant to these intercompany obligations in the
fourth quarter 2009.
On November 20, 2009, Entergy Corporation and subsidiaries
amended the Entergy Corporation and Subsidiary Companies
Intercompany Income Tax Allocation Agreement such that
Entergy Corporation shall be treated, under all provisions of such
Agreement, in a manner that is identical to the treatment afforded
all subsidiaries, direct or indirect, of Entergy Corporation.
In the fourth quarter 2009, Entergy filed Applications for
Change in Method of Accounting for certain costs under Section
263A of the Internal Revenue Code. In the Application, Entergy
is requesting permission to treat the nuclear decommissioning
liability associated with the operation of its nuclear power plants
as a production cost properly includable in cost of goods sold.
The effect of this change for Entergy is a $5.7 billion reduction in
2009 taxable income within Entergy Wholesale Commodities.
In March of 2010, Entergy filed an Application for Change in
Accounting Method with the Internal Revenue Service. In the
application Entergy proposed to change the definition of Unit of
Property to determine the appropriate characterization of costs
associated with such Unit as capital or repair under the Internal
Revenue Code and related Treasury Regulations. The effect of
this change is an approximate $530 million reduction in 2010
taxable income for Entergy.
During the fourth quarter 2010, Entergy determined that its
calculation of certain temporary differences associated primarily
with plant-related basis differences had been either under or
overstated in prior periods and required adjustments to previously
reported amounts of accumulated deferred income taxes and
taxes accrued and the offsetting regulatory assets or liabilities
for income taxes. Entergy has restated its 2009 balance sheet as
shown below. Entergy also separately restated its 2009 balance
sheet to reclassify an amount from other regulatory liabilities to
accumulated deferred income taxes and taxes accrued. There
was no impact on the results of operations or cash flows as a
result of these corrections. The following corrections were made
to either increase or (decrease) the previously reported amounts
as of December 31, 2009 (in millions):
Accumulated Regulatory Regulatory
deferred income assets for liability for Other
taxes and income income regulatory
taxes accrued taxes-net taxes-net liabilities
Entergy $240 $197 $– $(43)
Note 4. Revolving Credit Facilities, Lines of Credit
and Short-Term Borrowings
Entergy Corporation has a revolving credit facility that 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. The facility
fee is currently 0.125% of the commitment amount. Facility fees
and interest rates on loans under the credit facility can fluctuate
depending on the senior unsecured debt ratings of Entergy
Corporation. The weighted average interest rate for the year
ended December 31, 2010 was 0.78% 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, 2010
(in millions):
Capacity Borrowings Letters of Credit Capacity Available
$3,466 $1,632 $25 $1,809
Entergy Corporation’s facility requires it to maintain a
consolidated debt ratio of 65% or less of its total capitalization.
Entergy is in compliance with this covenant. If Entergy fails to
meet this ratio, or if Entergy Corporation or one of the Utility
operating companies (except Entergy New Orleans) defaults
on other indebtedness or is in bankruptcy or insolvency
proceedings, an acceleration of the facility maturity date
may occur.
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