Entergy 2012 Annual Report Download - page 80

Entergy Corporation and Subsidiaries 2012
During the fourth quarter 2012, Entergy settled the position relating
to the 2004 CAM. Under the settlement Entergy conceded its tax
position, resulting in an increase in taxable income of approximately
$2.97 billion for the tax years 2004 - 2007. The settlement provides
that Entergy Louisiana is entitled to additional tax depreciation of
approximately $547 million for years 2006 and beyond. The deferred
tax asset net of interest charges associated with the settlement is
$155 million for Entergy. There was a related increase to Entergy
Louisiana’s member’s equity account.
2006 - 2007 IRS AUDIT
The IRS issued its 2006-2007 RAR in October 2011. In connection
with the 2006-2007 IRS audit and resulting RAR, Entergy resolved
the significant issues discussed below.
In August 2011, Entergy entered into a settlement agreement with
the IRS relating to the mark-to-market income tax treatment of vari-
ous 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 fur-
ther details regarding this contract and a previous LPSC-approved
settlement regarding 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 recorded a $199 million
regulatory charge and a corresponding net-of-tax regulatory liability.
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.
2008 - 2009 IRS AUDIT
In the third quarter 2008, Entergy Louisiana and Entergy Gulf States
Louisiana received $679 million and $274.7 million, respectively,
from the Louisiana Utilities Restoration Corporation (“LURC”).
These receipts from LURC were from the proceeds of a Louisiana
Act 55 financing of the costs incurred to restore service following
Hurricane Katrina and Hurricane Rita. See Note 2 to the financial
statements for further details regarding the financings.
In June 2012, Entergy effectively settled the tax treatment of the
receipt of these funds, which resulted in an increase to 2008 taxable
income of $129 million and $104 million for Entergy Louisiana and
Entergy Gulf States Louisiana, respectively. As a result of the settlement,
Entergy recorded an income tax benefit of $172 million, including $143
million for Entergy Louisiana and $20 million for Entergy Gulf States
Louisiana, resulting from the reversal of liabilities for uncertain tax
positions. Under the terms of an LPSC-approved settlement related to
the Louisiana Act 55 financings, Entergy Louisiana and Entergy Gulf
States Louisiana recorded, respectively, a $137 million ($84 million
net-of-tax) and a $28 million ($17 million net-of-tax) regulatory charge
and a corresponding regulatory liability to reflect their obligations to
customers with respect to the settlement. See Note 8 to the financial
statements for further discussion of the LPSC settlement.
In the fourth quarter 2009, Entergy filed Applications for Change
in Accounting Method (the “2009 CAM”) for tax purposes 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 the 2009 CAM was a $5.7 billion reduction in 2009
taxable income. The 2009 CAM was adjusted to $9.3 billion in 2012.
In the fourth quarter 2012, the IRS disallowed the reduction to
2009 taxable income related to the 2009 CAM. Entergy has disagreed
with this disallowance and will file a protest with IRS Appeals at the
conclusion of the 2008-09 examination.
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.
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 bor-
rowing capacity of $3.5 billion and expires in March 2017. Entergy
Corporation also has the ability to issue letters of credit against 50%
of the total borrowing capacity of the credit facility. The commitment
fee is currently 0.275% of the commitment amount. Commitment
fees and interest rates on loans under the credit facility can fluctu-
ate depending on the senior unsecured debt ratings of Entergy
Corporation. The weighted average interest rate for the year ended
December 31, 2012 was 2.04% 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, 2012 (in millions):
Capacity Borrowings Letters of Credit Capacity Available
$3,500 $795 $8 $2,697
Entergy Corporation’s facility requires it to maintain a consoli-
dated debt ratio of 65% or less of its total capitalization. Entergy is
in compliance with this covenant. If Entergy fails to meet this ratio,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
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