Entergy 2012 Annual Report Download - page 31

Entergy Corporation and Subsidiaries 2012
MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS continued
Parent & Other
Other operation and maintenance expenses increased primarily due
to lower intercompany stock option credits recorded by the par-
ent company, Entergy Corporation, and an increase of $13 million
related to the planned spin-off and merger of Entergy’s transmission
business. See “Plan to Spin Off the Utility’s Transmission Business”
below for further discussion.
Interest expense increased primarily due to $1 billion of Entergy
Corporation senior notes issued in September 2010, with the proceeds
used to pay down borrowings outstanding on Entergy Corporation’s
revolving credit facility that were at a lower interest rate.
INCOME TAXES
The effective income tax rate for 2011 was 17.3%. The difference
in the effective income tax rate versus the statutory rate of 35% in
2011 was primarily due to a settlement with the IRS related to the
mark-to-market income tax treatment of power purchase contracts,
which resulted in a reduction in income tax expense of $422 mil-
lion. See Note 3 to the financial statements for further discussion of
the settlement.
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 U.S. 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 – Qualified Pension and
Other Postretirement Benefits” and state income taxes and certain
book and tax differences for Utility plant items.
See Note 3 to the financial statements for a reconciliation of the
federal statutory rate of 35% 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 ITC Midsouth LLC (formerly known as Ibis Transaction
Subsidiary LLC) (Merger Sub), a newly formed, wholly-owned subsid-
iary 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 transmis-
sion business (the Transmission Business), the distribution to Entergy’s
stockholders of all of the common units, excluding any common units
to be contributed to an exchange trust in the event Entergy makes
the exchange trust election described below, 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), follow-
ing 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 com-
mon units to its shareholders, excluding any TransCo common units
to be contributed to an exchange trust in the event Entergy makes
the exchange trust election described below. 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 will effectuate a $700 million
recapitalization, which will take the form of a one-time special divi-
dend to its shareholders of record as of a record date prior to the
Merger (the Special Dividend), a share repurchase or a combination
thereof. The decision regarding the form of the recapitalization will
be determined by the board of directors of ITC at a later date closer
to the Merger. 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 con-
ditions 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, together with the exchange trust described
below if it is utilized, 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.
Pursuant to the Merger Agreement, Entergy may elect to retain
up to the number of TransCo common units that would convert in
the Merger into up to 4.9999% of the total number of shares of ITC
common stock outstanding on a fully diluted basis immediately fol-
lowing the consummation of the Merger that otherwise would have
been distributed in the Distribution (the Exchange Trust Election).
If Entergy makes the Exchange Trust Election, Entergy will trans-
fer the retained TransCo common units to an irrevocable trust (the
Exchange Trust). The TransCo common units transferred to the
Exchange Trust will not be distributed to the distribution agent on
behalf of Entergy shareholders in the Distribution. At the closing of
the Merger, the TransCo common units transferred to the Exchange
Trust will convert to ITC common stock. The trustee of the Exchange
Trust will own and hold legal title to the TransCo common units
and, following consummation of the Merger, ITC common stock for
the benefit of Entergy and Entergy shareholders; provided, however,
in no event will the ITC common stock held by the Exchange Trust
be transferred to Entergy. Upon delivery of notice by Entergy, the
trustee of the Exchange Trust will conduct an exchange offer (the
Exchange Trust Exchange Offer) pursuant to which Entergy share-
holders may exchange Entergy common stock for the ITC common
stock held by the Exchange Trust. Any ITC common stock remaining
in the Exchange Trust after six months following the completion of
the Merger will be distributed to Entergy shareholders pro rata. The
purpose of the Exchange Trust is to permit an exchange offer with
Entergy shareholders to occur during a period after the closing, when
the trading market for the ITC common stock has settled following
the Merger. The Exchange Trust Exchange Offer, if elected by Entergy,
is an option to help Entergy efficiently manage its post-transaction
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