Entergy 2011 Annual Report Download - page 39

Entergy Corporation and Subsidiaries 2011
MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS continued
Interest expense decreased primarily due to a decrease in fees
paid to Entergy Corporation for providing collateral in the form
of guarantees in connection with some of the Entergy Wholesale
Commodities agreements to sell power. The guarantee fees paid
are intercompany transactions and are eliminated in consolidation.
The decrease was substantially offset by the write-off of $39 million
of debt financing costs, primarily incurred for a $1.2 billion credit
facility that will not be used, in connection with Entergy’s decision
to unwind the infrastructure created for the planned spin-off of its
non-utility nuclear business.
Parent & Other
Other income decreased primarily due to increases in the distributions
paid of $13 million to Entergy Louisiana and $7 million to Entergy Gulf
States Louisiana on investments in preferred membership interests of
Entergy Holdings Company, as discussed above.
Interest expense decreased primarily due to lower borrowings,
including the redemption of $267 million of notes payable in
December 2009, as well as lower interest rates on borrowings under
Entergy Corporation’s revolving credit facility.
INCO M E TA XE S
The effective income tax rate for 2010 was 32.7%. The difference in
the effective income tax rate versus the statutory rate of 35% in 2010
was primarily due to:
n a favorable Tax Court decision holding that the U.K. Windfall
Tax may be used as a credit for purposes of computing the U.S.
foreign tax credit, which allowed Entergy to reverse a provision
for uncertain tax positions of $43 million, included in Parent and
Other, on the issue. See Note 3 to the financial statements for
further discussion of this tax litigation;
n a $19 million tax benefit recorded in connection with Entergy’s
decision to unwind the infrastructure created for the planned
spin-off of its non-utility nuclear business; and
n the recognition of a $14 million Louisiana state income tax
benefit related to storm cost financing.
Partially offsetting the decreased effective income tax rate was a
charge of $16 million resulting from a change in tax law associated
with the recently enacted federal healthcare legislation, as discussed
below in “Critical Accounting Estimates” and state income taxes and
certain book and tax differences for Utility plant items.
The effective income tax rate for 2009 was 33.6%. The difference in
the effective income tax rate versus the federal statutory rate of 35%
in 2009 was primarily due to:
n recognition of a capital loss of $73.1 million resulting from the
sale of preferred stock of an Entergy Wholesale Commodities
subsidiary to a third party;
n reduction of a valuation allowance of $24.3 million on state
loss carryovers;
n reduction of a valuation allowance of $16.2 million on a federal
capital loss carryover;
n reduction of the provision for uncertain tax positions of
$15.2 million resulting from settlements and agreements with
taxing authorities;
n adjustment to state income taxes of $13.8 million for Entergy
Wholesale Commodities to reflect the effect of a change in the
methodology of computing Massachusetts state income taxes as
required by that state’s taxing authority; and
n additional deferred tax benefit of approximately $8 million
associated with writedowns on nuclear decommissioning
qualified trust securities.
These reductions were partially offset by increases related to book
and tax differences for utility plant items and state income taxes at
the Utility operating companies.
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.
PLAN TO SPIN OFF THE UTILITY’S
TRANSMISSION BUSINESS
On December 5, 2011, Entergy announced that it would spin off its
transmission business and merge it with a newly formed subsidiary
of ITC Holdings Corp. (ITC). In order to effect the spin-off and
merger, Entergy entered into (i) a Merger Agreement with Mid South
TransCo LLC, a newly formed, wholly owned subsidiary of Entergy
(TransCo); ITC; and Ibis Transaction Subsidiary LLC (Merger Sub), a
newly formed, wholly-owned subsidiary of ITC; and (ii) a Separation
Agreement with TransCo, ITC, each of the Utility operating
companies, and Entergy Services, Inc. These agreements, which
have been approved by the Boards of Directors of Entergy and ITC,
provide for the separation of Entergy’s transmission business (the
“Transmission Business”), the distribution to Entergy’s stockholders
of all of the common units of TransCo, a holding company subsidiary
formed to hold the Transmission Business, and the merger of
Merger Sub with and into TransCo, with TransCo continuing as the
surviving entity in the Merger (the Merger), following which each
common unit of TransCo will be converted into the right to receive
one fully paid and nonassessable share of ITC common stock. Both
the Distribution (as defined below) and the Merger are expected to
qualify as tax-free transactions.
Pursuant to the Merger Agreement, and subject to the terms
and conditions set forth therein, Entergy will distribute the
TransCo common units to its shareholders. At Entergy’s election,
it may distribute the TransCo common units by means of a pro rata
dividend in a spin-off or pursuant to an exchange offer in a split-off,
or a combination of a spin-off and a split-off (the Distribution). In
connection with the Merger, ITC expects to effectuate a $700 million
recapitalization, currently anticipated to take the form of a one-time
special dividend to its shareholders of record as of a record date prior
to the Merger, which will be determined by the board of directors
of ITC at a later date (the Special Dividend). Entergy’s shareholders
who become shareholders of ITC as a result of the Merger will not
receive the Special Dividend. Pursuant to the Merger Agreement, and
subject to the terms and conditions set forth therein, immediately
after the consummation of the Separation (as defined below), the
consummation of the Financings (as defined below), the payment of
the Special Dividend and the consummation of the Distribution, Merger
Sub will merge with and into TransCo, with TransCo continuing as the
surviving entity, and Entergy shareholders who hold common units of
TransCo will have those units exchanged for ITC common stock on
a one-for-one basis. Consummation of the transactions contemplated
by the Separation Agreement and the Merger Agreement is expected
to result in Entergy’s shareholders holding at least 50.1% of ITC’s
common stock and existing ITC shareholders holding no more than
49.9% of ITC’s common stock immediately after the Merger.
The Merger Agreement contains certain customary representa-
tions and warranties. The Merger Agreement may be terminated:
(i) by mutual consent of Entergy and ITC, (ii) by either Entergy
or ITC if the Merger has not been completed by June 30, 2013,
subject to an up to six month extension by either Entergy or
ITC in certain circumstances, (iii) by either Entergy or ITC if the
transactions are enjoined or otherwise prohibited by applicable
law, (iv) by Entergy, on the one hand, or ITC, on the other hand,
upon a material breach of the Merger Agreement by the other party
that has not been cured by the cure period specified in the Merger
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