Entergy 2011 Annual Report Download - page 83

Entergy Corporation and Subsidiaries 2011
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
In August 2011, Entergy entered into a settlement agreement with
the IRS relating to the mark-to-market income tax treatment of various
wholesale electric power purchase and sale agreements, including
Entergy Louisiana’s contract to purchase electricity from the Vidalia
hydroelectric facility. See Note 8 to the financial statements for
further details regarding this contract and a previous LPSC-approved
settlement regarding sharing of tax benefits from the tax treatment of
the contract.
With respect to income tax accounting for wholesale electric power
purchase agreements, Entergy recognized income for tax purposes of
approximately $1.5 billion, which represents a reversal of previously
deducted temporary differences on which deferred taxes had been
provided. Also in connection with this settlement, Entergy recognized
a gain for income tax purposes of approximately $1.03 billion on the
formation of a wholly-owned subsidiary in 2005 with a corresponding
step-up in the tax basis of depreciable assets resulting in additional
tax depreciation at Entergy Louisiana. Because Entergy Louisiana
is entitled to deduct additional tax depreciation of $1.03 billion in
the future, Entergy Louisiana recorded a deferred tax asset for this
additional tax basis. The tax expense associated with the gain is offset
by recording the deferred tax asset and by utilization of net operating
losses. With the recording of the deferred tax asset, there was a
corresponding increase to Entergy Louisiana’s member’s equity account.
The agreement with the IRS effectively settled the tax treatment of
various wholesale electric power purchase and sale agreements,
resulting in the reversal in third quarter 2011 of approximately
$422 million of deferred tax liabilities and liabilities for uncertain
tax positions at Entergy Louisiana, with a corresponding reduction
in income tax expense. Under the terms of an LPSC-approved final
settlement, Entergy Louisiana will share over a 15-year period a
portion of the benefits of the settlement with its customers, and
recorded a $199 million regulatory charge and a corresponding net-of-
tax regulatory liability to reflect this obligation.
After consideration of the taxable income recognition and the
additional depreciation deductions provided for in the settlement,
Entergy’s net operating loss carryover was reduced by approximately
$2.5 billion.
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 with the IRS for certain costs under Section
263A of the Internal Revenue Code. In the Applications, Entergy
proposed 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 was a $5.7 billion reduction in 2009 taxable income within the
Entergy Wholesale Commodities segment.
In March 2010, Entergy filed an Application for Change in Accounting
Method with the IRS. In the application Entergy proposed to change
the definition of unit of property for its generation assets to determine
the appropriate characterization of costs associated with such units as
capital or repair under the Internal Revenue Code and related Treasury
Regulations. The effect of this change was an approximate $1.3 billion
reduction in 2010 taxable income for Entergy, including reductions of
$292 million for Entergy Arkansas, $132 million for Entergy Gulf States
Louisiana, $185 million for Entergy Louisiana, $48 million for Entergy
Mississippi, $45 million for Entergy Texas, $13 million for Entergy New
Orleans, and $180 million for System Energy.
During the second quarter 2011, Entergy filed an Application for
Change in Accounting Method with the IRS related to the allocation
of overhead costs between production and non-production activities.
The accounting method affects the amount of overhead that will be
capitalized or deducted for tax purposes. The accounting method is
expected to be implemented for the 2014 tax year.
NOTE 4. REVOLVING CREDIT FACILITIES, LINES OF
CREDIT AND SHORT-TERM BORROWINGS
Entergy Corporation has in place a credit facility that has a borrowing
capacity of approximately $3.5 billion and expires in August 2012,
which Entergy intends to renew before expiration. Because the
facility is now within one year of its expiration date, borrowings
outstanding on the facility are classified as currently maturing long-
term debt on the balance sheet. 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, 2011 was 0.745% 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, 2011 (in millions):
Capacity Borrowings Letters of Credit Capacity Available
$3,451 $1,920 $28 $1,503
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.
81