__________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q |
(Mark One) | ||
X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF | |
For the Quarterly Period Ended September 30, 2003 | ||
OR | ||
TRANSITION REPORT PURSUANT TO SECTION 13 | ||
For the transition period from ____________ to ____________ | ||
Commission | Registrant, State of Incorporation, | I.R.S. Employer |
1-11299 | ENTERGY CORPORATION | 72-1229752 |
1-10764 | ENTERGY ARKANSAS, INC. | 71-0005900 |
1-27031 | ENTERGY GULF STATES, INC. | 74-0662730 |
1-8474 | ENTERGY LOUISIANA, INC. | 72-0245590 |
1-31508 | ENTERGY MISSISSIPPI, INC. | 64-0205830 |
0-5807 | ENTERGY NEW ORLEANS, INC. | 72-0273040 |
1-9067 | SYSTEM ENERGY RESOURCES, INC. | 72-0752777 |
__________________________________________________________________________________________
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
Yes | X | No |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes | No | |
Entergy Corporation | Ö |
|
Common Stock Outstanding | Outstanding at October 31, 2003 | |
Entergy Corporation | ($0.01 par value) | 228,805,825 |
Entergy Corporation, Entergy Arkansas, Inc., Entergy Gulf States, Inc., Entergy Louisiana, Inc., Entergy Mississippi, Inc., Entergy New Orleans, Inc., and System Energy Resources, Inc. separately file this combined Quarterly Report on Form 10-Q. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company reports herein only as to itself and makes no other representations whatsoever as to any other company. This combined Quarterly Report on Form 10-Q supplements and updates the Annual Report on Form 10-K for the calendar year ended December 31, 2002, and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003, filed by the individual registrants with the SEC, and should be read in conjunction therewith.
ENTERGY CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2003
Page Number | |
Definitions | 1 |
Entergy Corporation and Subsidiaries | |
Management's Financial Discussion and Analysis | |
Results of Operations | 4 |
Liquidity and Capital Resources | 9 |
Significant Factors and Known Trends | 12 |
Critical Accounting Estimates | 17 |
Consolidated Statements of Income | 19 |
Consolidated Statements of Cash Flows | 20 |
Consolidated Balance Sheets | 22 |
Consolidated Statements of Retained Earnings, Comprehensive Income, and | 24 |
Selected Operating Results | 25 |
Notes to Consolidated Financial Statements | 26 |
Entergy Arkansas, Inc. | |
Management's Financial Discussion and Analysis | |
Results of Operations | 40 |
Liquidity and Capital Resources | 41 |
Significant Factors and Known Trends | 43 |
Critical Accounting Estimates | 44 |
Income Statements | 45 |
Statements of Cash Flows | 47 |
Balance Sheets | 48 |
Selected Operating Results | 50 |
Entergy Gulf States, Inc. | |
Management's Financial Discussion and Analysis | |
Results of Operations | 51 |
Liquidity and Capital Resources | 53 |
Significant Factors and Known Trends | 55 |
Critical Accounting Estimates | 56 |
Income Statements | 57 |
Statements of Cash Flows | 59 |
Balance Sheets | 60 |
Statements of Retained Earnings and Comprehensive Income | 62 |
Selected Operating Results | 63 |
Entergy Louisiana, Inc. | |
Management's Financial Discussion and Analysis | |
Results of Operations | 64 |
Liquidity and Capital Resources | 66 |
Significant Factors and Known Trends | 68 |
Critical Accounting Estimates | 68 |
Income Statements | 69 |
Statements of Cash Flows | 71 |
Balance Sheets | 72 |
Selected Operating Results | 74 |
Entergy Mississippi, Inc. | |
Management's Financial Discussion and Analysis | |
Results of Operations | 75 |
Liquidity and Capital Resources | 76 |
Significant Factors and Known Trends | 79 |
Critical Accounting Estimates | 79 |
Income Statements | 80 |
Statements of Cash Flows | 81 |
ENTERGY CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2003
Page Number | |
Balance Sheets | 82 |
Selected Operating Results | 84 |
Entergy New Orleans, Inc. | |
Management's Financial Discussion and Analysis | |
Results of Operations | 85 |
Liquidity and Capital Resources | 86 |
Significant Factors and Known Trends | 88 |
Critical Accounting Estimates | 88 |
Income Statements | 89 |
Statements of Cash Flows | 91 |
Balance Sheets | 92 |
Selected Operating Results | 94 |
System Energy Resources, Inc. | |
Management's Financial Discussion and Analysis | |
Results of Operations | 95 |
Liquidity and Capital Resources | 95 |
Significant Factors and Known Trends | 96 |
Critical Accounting Estimates | 96 |
Income Statements | 98 |
Statements of Cash Flows | 99 |
Balance Sheets | 100 |
Notes to Respective Financial Statements | 102 |
Item 4. Controls and Procedures | 113 |
Part II. Other Information | |
Item 1. Legal Proceedings | 114 |
Item 5. Other Information | 115 |
Item 6. Exhibits and Reports on Form 8-K | 121 |
Signature | 124 |
FORWARD-LOOKING INFORMATION
From time to time, Entergy makes statements concerning its expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. Such statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although Entergy believes that these forward-looking statements and the underlying assumptions are reasonable, it cannot provide assurance that they will prove correct. Except to the extent required by the federal securities laws, Entergy undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Forward-looking statements involve a number of risks and uncertainties, and there are factors that could cause actual results to differ materially from those expressed or implied in the statements. Some of those factors (in addition to others described elsewhere in this report and in subsequent securities filings) include:
- resolution of pending and future rate cases and negotiations, including various performance-based rate discussions, and other regulatory decisions, including those related to Entergy's utility supply plan
- Entergy's ability to reduce its operation and maintenance costs, particularly at its Non-Utility Nuclear generating facilities, including the uncertainty of negotiations with unions to agree to such reductions
- the performance of Entergy's generating plants, and particularly the capacity factors at its nuclear generating facilities
- prices for power generated by Entergy's unregulated generating facilities, particularly the ability to extend or replace the existing power purchase agreements for the Non-Utility Nuclear plants, and the prices and availability of power Entergy must purchase for its utility customers
- Entergy's ability to develop and execute on a point of view regarding prices of electricity, natural gas, and other energy-related commodities
- Entergy-Koch's profitability in trading electricity, natural gas, and other energy-related commodities
- resolution of pending investigations of Entergy-Koch's past trading practices
- changes in the number of participants in the energy trading market, and in their creditworthiness and risk profile
- changes in the financial markets, particularly those affecting the availability of capital and Entergy's ability to refinance existing debt and to fund investments and acquisitions
- actions of rating agencies, including changes in the ratings of debt and preferred stock
- changes in inflation and interest rates
- Entergy's ability to purchase and sell assets at attractive prices and on other attractive terms
- volatility and changes in markets for electricity, natural gas, and other energy-related commodities
- changes in utility regulation, including the beginning or end of retail and wholesale competition, the ability to recover net utility assets and other potential stranded costs, and the establishment of SeTrans or another regional transmission organization
- changes in regulation of nuclear generating facilities and nuclear materials and fuel, including possible shutdown of Indian Point or other nuclear generating facilities
- changes in law resulting from proposed energy legislation
- changes in environmental, tax, and other laws, including requirements for reduced emissions of sulfur, nitrogen, carbon, and other substances
- the economic climate, and particularly growth in Entergy's service territory
- variations in weather, hurricanes, and other disasters
- advances in technology
- the potential impacts of threatened or actual terrorism and war
- the success of Entergy's strategies to reduce taxes
- the effects of litigation
- changes in accounting standards
- changes in corporate governance and securities law requirements
- Entergy's ability to attract and retain talented management and directors.
DEFINITIONS
Certain abbreviations or acronyms used in the text are defined below:
Abbreviation or Acronym | Term |
AFUDC | Allowance for Funds Used During Construction |
ALJ | Administrative Law Judge |
ANO 1 and 2 | Units 1 and 2 of Arkansas Nuclear One Steam Electric Generating Station (nuclear) |
APSC | Arkansas Public Service Commission |
BCF/D | One billion cubic feet of natural gas per day |
Board | Board of Directors of Entergy Corporation |
Cajun | Cajun Electric Power Cooperative, Inc. |
capacity factor | Actual plant output divided by maximum potential plant output for the period |
CitiPower | CitiPower Pty., an electric distribution company serving Melbourne, Australia and surrounding suburbs, which was sold by Entergy effective December 31, 1998 |
City Council | Council of the City of New Orleans, Louisiana |
Damhead Creek | 800 MW (gas) combined cycle electric generating facility that entered commercial operations in the first quarter of 2001, located in the United Kingdom, which was sold by Entergy in 2002 |
DOE | United States Department of Energy |
domestic utility companies | Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans, collectively |
EITF | Emerging Issues Task Force |
EPA | United States Environmental Protection Agency |
EPDC | Entergy Power Development Corporation, a wholly-owned subsidiary of Entergy Corporation |
electricity marketed | Total physical GWh volumes marketed by Entergy-Koch in the U.S. and Europe during the period |
electricity volatility | Measure of price fluctuation over time using standard deviation of daily price differences for into-Entergy and into-Cinergy power prices for the upcoming month |
Entergy | Entergy Corporation and its direct and indirect subsidiaries |
Entergy Arkansas | Entergy Arkansas, Inc. |
Entergy Gulf States | Entergy Gulf States, Inc., including its wholly owned subsidiaries - Varibus Corporation, GSG&T, Inc., Prudential Oil & Gas, Inc., and Southern Gulf Railway Company |
Entergy-Koch | Entergy-Koch, L.P., a joint venture equally owned by subsidiaries of Entergy and Koch Industries, Inc. |
Entergy Louisiana | Entergy Louisiana, Inc. |
Entergy Mississippi | Entergy Mississippi, Inc. |
Entergy New Orleans | Entergy New Orleans, Inc. |
FEMA | Federal Emergency Management Agency |
FERC | Federal Energy Regulatory Commission |
FitzPatrick | James A. FitzPatrick nuclear power plant, 825 MW facility located near Oswego, New York, purchased in November 2000 from NYPA by Entergy's Non-Utility Nuclear business |
DEFINITIONS (Continued)
Abbreviation or Acronym | Term |
Form 10-K | The combined Annual Report on Form 10-K for the year ended December 31, 2002 of Entergy, Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy |
gain/loss days | Ratio of the number of days when Entergy-Koch recognized a net gain from commodity trading activities to the number of days when Entergy-Koch recognized a net loss from commodity trading activities |
gas marketed | Total volume of physical gas purchased plus volume of physical gas sold by Entergy-Koch in the U.S. and Europe denominated in billions of cubic feet per day |
gas volatility | Measure of price fluctuation over time using standard deviation of daily price differences for Henry Hub natural gas prices for the upcoming month |
Grand Gulf 1 | Unit No. 1 of the Grand Gulf Nuclear Generating Station |
GGART | Grand Gulf Accelerated Recovery Tariff |
GWh | Gigawatt hour(s), which equals one million kilowatt-hours |
Independence | Independence Steam Electric Station (coal), owned 16% by Entergy Arkansas, 25% by Entergy Mississippi, and 7% by Entergy Power |
Indian Point 2 | Indian Point Energy Center Unit 2 - nuclear power plant, 984 MW facility located in Westchester County, New York, purchased in September 2001 from Consolidated Edison by Entergy's Non-Utility Nuclear business |
Indian Point 3 | Indian Point Energy Center Unit 3 - nuclear power plant, 994 MW facility located in Westchester County, New York, purchased in November 2000 from NYPA by Entergy's Non-Utility Nuclear business |
kWh | Kilowatt-hour(s) |
LDEQ | Louisiana Department of Environmental Quality |
LPSC | Louisiana Public Service Commission |
miles of pipeline | Total miles of transmission and gathering pipeline |
MMBtu | One million British Thermal Units |
MPSC | Mississippi Public Service Commission |
MW | Megawatt(s), which equals one thousand kilowatt(s) |
MWh | Megawatt-hours |
Net MW in operation | Installed capacity owned or operated |
Net revenue | Operating revenue net of fuel, fuel-related, and purchased power expenses; other regulatory credits; and amortization of rate deferrals |
NRC | Nuclear Regulatory Commission |
NYPA | New York Power Authority |
Pilgrim | Pilgrim Nuclear Station, 688 MW facility located in Plymouth, Massachusetts, purchased in July 1999 from Boston Edison by Entergy's Non-Utility Nuclear business |
production cost | Cost in $/MMBtu associated with delivering gas, excluding the cost of the gas |
PPA | Purchased power agreement |
PRP | Potentially responsible party (a person or entity that may be responsible for remediation of environmental contamination) |
PUCT | Public Utility Commission of Texas |
PUHCA | Public Utility Holding Company Act of 1935, as amended |
PURPA | Public Utility Regulatory Policies Act of 1978 |
RTO | Regional transmission organization |
DEFINITIONS(Concluded)
Abbreviation or Acronym | Term |
River Bend | River Bend Steam Electric Generating Station (nuclear) |
SEC | Securities and Exchange Commission |
SFAS | Statement of Financial Accounting Standards as promulgated by the Financial Accounting Standards Board |
spark spread | The dollar difference between electricity prices per unit and natural gas prices after assuming a conversion ratio for the number of natural gas units necessary to generate one unit of electricity |
storage capacity | Working gas storage capacity |
System Agreement | Agreement, effective January 1, 1983, as modified, among the domestic utility companies relating to the sharing of generating capacity and other power resources |
System Energy | System Energy Resources, Inc. |
System Fuels | System Fuels, Inc. |
throughput | Gas in BCF/D transported through a pipeline during the period |
Unit Power Sales Agreement | Agreement, dated as of June 10, 1982, as amended and approved by FERC, among Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy, relating to the sale of capacity and energy from System Energy's share of Grand Gulf 1 |
Vermont Yankee | Vermont Yankee nuclear power plant, 510 MW facility located in Vernon, Vermont, purchased in July 2002 from Vermont Yankee Nuclear Power Corporation by Entergy's Non-Utility Nuclear business |
Waterford 3 | Unit No. 3 (nuclear) of the Waterford Steam Electric Generating Station, 100% owned or leased by Entergy Louisiana |
ENTERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
Results of Operations
Entergy's consolidated earnings applicable to common stock for the third quarter and nine months ended September 30, 2003 and 2002 were as follows:
Entergy's income before taxes is discussed below according to the operating segments listed above. Earnings for the nine months ended September 30, 2003 include the $142.9 million net-of-tax cumulative effect of changes in accounting principle that increased earnings in the first quarter of 2003, almost entirely resulting from the implementation of SFAS 143. See "Critical Accounting Estimates - SFAS 143" below for discussion of the implementation of SFAS 143. Earnings for the nine months ended September 30, 2002 include net charges of $254.2 million net-of-tax reflecting the effect of Entergy's decision to discontinue additional greenfield power plant development and asset impairments resulting from the deteriorating economics of wholesale power markets principally in the United States and the United Kingdom. The net charges are discussed in more detail below in the Energy Commodity Services discussion. See Note 6 to the consolidated financial statements for more inf ormation concerning Entergy's operating segments and their financial results in 2003 and 2002.
Refer toSELECTED OPERATING RESULTS OF ENTERGY CORPORATION AND SUBSIDIARIES for further information with respect to operating statistics.
U.S. Utility
The increase in earnings for the U.S. Utility in the third quarter of 2003 compared to the third quarter of 2002 from $243.7 million to $272.9 million was primarily due to an increase in net revenue and a decrease in interest charges, partially offset by an increase in depreciation and amortization expenses.
The decrease in earnings for the U.S. Utility for the nine months ended September 30, 2003 compared to the same period in 2002 from $540.9 million to $502.4 million was primarily due to a $107.7 million ($65.6 million net-of-tax) accrual of the loss that would be associated with a final, non-appealable decision disallowing abeyed River Bend plant costs. Also contributing to the decrease was the $21.3 million net-of-tax cumulative effect of a change in accounting principle that reduced earnings at Entergy Gulf States in the first quarter of 2003 upon implementation of SFAS 143, combined with an increase in depreciation and amortization expenses. See "Critical Accounting Estimates - SFAS 143" below for discussion of the implementation of SFAS 143. Substantially offsetting the decrease in earnings were increased net revenue and decreased interest charges.
Operating Income
Third Quarter 2003 Compared to Third Quarter 2002
Operating income increased $32 million, or 6.3%, primarily due to an increase in net revenue that included the following:
- an increase of $22 million due to base rate increases at Entergy Mississippi and Entergy New Orleans that became effective in January 2003 and June 2003, respectively; and
- an increase of $27 million due to an increase in price applied to unbilled sales and more favorable volume, including the effect of weather, from unbilled sales.
The increase in operating income was partially offset by the following:
- an increase of $9 million in depreciation and amortization expense due to an increase in plant in service; and
- a decrease of $8 million due to the loss of the net revenue from three large industrial customers lost to cogeneration. The $8 million of lost net revenue represents less than 1% of the U.S. Utility's net revenue. Entergy expects to lose one additional customer to cogeneration in 2005. Current sales to that customer account for approximately $11 million of Entergy's net revenue annually. Entergy does not currently expect additional significant losses to cogeneration because of the current economics of the electricity markets and Entergy's marketing efforts in retaining industrial customers.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Operating income increased $28 million, or 2.2%.The following items increased operating income for the period:
- an increase of $45 million in net revenue due to base rate increases at Entergy Mississippi and Entergy New Orleans that became effective in January 2003 and June 2003, respectively;
- an increase of $32 million in net revenue due to increased electricity usage of 779 GWh in the residential and commercial sectors; and
- an increase of $23 million in net revenue due to an increase in the price applied to unbilled sales.
The following items decreased operating income and partially offset the items that increased operating income for the period:
- an increase of $25 million in depreciation and amortization expensesdue to an increase in plant in service;
- a decrease of $25 million due to the loss of the net revenue from three large industrial customers lost to cogeneration. The $25 million of lost net revenue represents less than 1% of the U.S. Utility's net revenue. See the explanation for the third quarter given above for Entergy's expectations regarding additional losses to cogeneration; and
- a decrease of $15 million due to the recognition in income in 2002 at Entergy Gulf States of the unamortized deferred gain on the 1988 sale of Nelson Units 1 and 2. The deferred gain was recognized because the LPSC no longer required that the gain reduce Entergy Gulf States' recoverable fuel.
Other Impacts on Earnings
Third Quarter 2003 Compared to Third Quarter 2002
Interest and other charges decreased $10.9 million primarily due to the redemption and refinancing of long-term debt. Refer to Note 4 to the consolidated financial statements for detail of long-term debt issuances and retirements in 2003.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Miscellaneous income - net decreased $115.5 million primarily due to a $107.7 million accrual in the second quarter 2003 for the loss that would be associated with a final, non-appealable decision disallowing abeyed River Bend plant costs. See Note 2 to the consolidated financial statements for more details regarding the River Bend abeyed plant costs.
Interest charges decreased $24.9 million primarily due to:
- a decrease of $9.9 million in interest on long-term debt due to the redemption and refinancing of long-term debt. Refer to Note 4 to the consolidated financial statements for detail of long-term debt issuances and retirements in 2003;
- a decrease of $4.5 million at Entergy Arkansas due to an increase in interest expense in 2002 resulting from the true-up of the annual fuel recovery rider in March 2002; and
- a decrease of $4.2 million at Entergy New Orleans primarily due to interest accrued in 2002 for potential rate actions and refunds and a true-up of those accruals in May 2003.
Other Income Statement Variances
Third Quarter 2003 Compared to Third Quarter 2002
Fuel recovery mechanisms at the domestic utility companies generally provide for the deferral of fuel and purchased power costs incurred above the amounts included in existing rates. Operating revenues in 2003 include an increase in fuel cost recovery revenue of $184.5 million and $5.4 million related to electric sales and gas sales, respectively, due to higher fuel costs resulting from increases in the market prices of natural gas and purchased power in 2003. The fuel recovery increase is offset by increased fuel and purchased power expenses.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Operating revenues in 2003 include an increase in fuel cost recovery revenue of $541.0 million and $45.8 million related to electric sales and gas sales, respectively, due to higher fuel costs resulting from increases in the market prices of natural gas and purchased power in 2003. The fuel recovery increase is offset by increased fuel and purchased power expenses.
Other operation and maintenance expenses decreased $159.1 million primarily due to decreased expenses at Entergy Arkansas. The March 2002 Settlement Agreement and 2001 earnings review that became final in the second quarter of 2002, allowing Entergy Arkansas to recover a large majority of 2000 and 2001 ice storm repair expenses through previously-collected transition cost account amounts, increased Entergy Arkansas expenses by $159.9 million in 2002. This increase in expenses in 2002 was offset by a regulatory credit resulting in a minimal effect on 2002 net income.
Non-Utility Nuclear
Following are key performance measures for Non-Utility Nuclear for the third quarter and nine months ended September 30, 2003 and 2002:
Third Quarter | Nine Months Ended | |||||||
2003 | 2002 | 2003 | 2002 | |||||
Net MW in operation at September 30 | 4,001 | 3,955 | 4,001 | 3,955 | ||||
Generation in GWh for the period | 8,246 | |||||||
8,152
23,676
23,110
Capacity factor for the period
93.6%
96.8%
90.5%
98.5%
Third Quarter 2003 Compared to Third Quarter 2002
The decrease in earnings for Non-Utility Nuclear from $73.1 million to $59.6 million was primarily due to the lower capacity factor for the quarter, lower pricing, and increased amortization of nuclear refueling outage expenses. The lower capacity factor resulted primarily from unplanned outages and the widespread blackout that occurred in the Northeast in August 2003, which caused Entergy's three nuclear power plants in New York to go offline for a cumulative total of 10.5 days. The decrease was partially offset by the ongoing effect of applying SFAS 143 post-implementation lowering both depreciation of adjusted plant costs and accretion of decommissioning liabilities, and the inclusion of earnings from Vermont Yankee, acquired in July 2002.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
The increase in earnings for Non-Utility Nuclear from $166.7 million to $301.5 million was primarily due to the $160.3 million net-of-tax cumulative effect of a change in accounting principle recognized in the first quarter of 2003 upon implementation of SFAS 143. See "Critical Accounting Estimates - SFAS 143" below for discussion of the implementation of SFAS 143. Income before the cumulative effect of accounting change decreased by $25.6 million.The lower capacity factor and increased amortization of nuclear refueling outage expenses discussed above in the third quarter comparison caused the decrease. Also contributing to the lower capacity factor for the nine months ended September 30, 2003 were two planned refueling outages in 2003 as compared to no refueling outages in 2002.The decrease was partially offset by the ongoing effect of applying SFAS 143 post-implementation, also as discussed above, and the inclusion of earnings from Vermont Yankee, acquired in July 2002.
Energy Commodity Services
Earnings for Energy Commodity Services for the third quarter and nine months ended September 30, 2003 were primarily driven by Entergy's investment in Entergy-Koch. Following are key performance measures for Entergy-Koch's operations for the third quarter and nine months ended September 30, 2003 and 2002:
Third Quarter | Nine Months Ended | |||||||
2003 | 2002 | 2003 | 2002 | |||||
Entergy-Koch Trading | ||||||||
Gas volatility | 39% | 58% | 62% | 64% | ||||
Electricity volatility | 34% | 57% | 62% | 50% | ||||
Gas marketed (BCF/D) (1) | 5.8 | 6.7 | 6.3 | 6.0 | ||||
Electricity marketed (GWh) (1) | 105,184 | 94,980 | 329,528 | 271,206 | ||||
Gain/loss days | 1.7 | 2.0 | 1.5 | 1.9 | ||||
Gulf South Pipeline | ||||||||
Throughput (BCF/D) | 1.84 | 2.27 | 1.98 | 2.40 | ||||
Production cost ($/MMBtu) | $0.171 | $0.096 | $0.137 | $0.088 | ||||
- Previously reported volumes, which included only U.S. trading, have been adjusted to reflect both U.S. and Europe volumes traded.
Third Quarter 2003 Compared to Third Quarter 2002
The decrease in earnings for Energy Commodity Services from $48.3 million to $36.3 million was primarily due to the gain of $25.7 million ($15.9 million net-of-tax) realized by the non-nuclear wholesale assets business in 2002 resulting from the sale of projects under development in Spain. Partially offsetting the decrease in earnings were higher earnings from Entergy's investment in Entergy-Koch. The income from Entergy's investment in Entergy-Koch was $9.6 million higher in 2003 primarily as a result of higher earnings at Entergy-Koch Trading (EKT). While volatility was down, trading results reflected strong earnings in point-of-view trading. In addition, EKT's physical optimization business continued to be a key driver of profitability, and its European business contributed increases as trading activities expanded beyond the United Kingdom. Earnings at Gulf South Pipeline were lower due to lower throughput and higher production costs. The decreased throughput was due to higher gas prices causing generally lower gas demand as industrial and power plant customers switched to fuel oil. Higher costs were primarily the result of incremental legal expenses in connection with Gulf South Pipeline's defense of a lawsuit which it believes has no merit.
As discussed in the Form 10-K, Entergy accounts for its 50% share in Entergy-Koch under the equity method of accounting. Earnings from Entergy-Koch are reported as equity in earnings of unconsolidated equity affiliates in the financial statements. Certain terms of the partnership arrangement allocate income from various sources, and the taxes on that income, on a significantly disproportionate basis through 2003. Losses and distributions from operations are allocated to the partners equally. Substantially all of Entergy-Koch's profits were allocated to Entergy thus far in 2003 and for all of 2002. Effective January 1, 2004, a revaluation of Entergy-Koch's assets for legal capital account purposes will occur, and future profit allocations will change after the revaluation. Management expects that, taking the various profit categories into account that are discussed further in the Form 10-K, Entergy's share of the future profit allocations beginning on January 1, 2004 will be approxima tely 50% of Entergy-Koch's total profits.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
The increase in earnings for Energy Commodity Services from a $169.1 million loss to $178.7 million in earnings was primarily due to $391.6 million ($254.2 million net-of-tax) of charges recorded in 2002, including income of $28.0 million ($17.3 million net-of-tax) in the third quarter 2002, to reflect the effect of Entergy's decision to discontinue additional greenfield power plant development and to reflect asset impairments resulting from the deteriorating economics of wholesale power markets in the United States and United Kingdom. The charge consisted of the following:
- The power development business obtained contracts in October 1999 to acquire 36 turbines from General Electric. Entergy's rights and obligations under the contracts for 22 of the turbines were sold to an independent special-purpose entity in May 2001. $178.0 million of the charge was a provision for the net costs resulting from cancellation or sale of the turbines subject to purchase commitments with the special-purpose entity;
- $167.5 million of the charges resulted from the write-off of the equity investment in the Damhead Creek project and the impairment of the values of the Warren Power power plant, the Crete project, and the RS Cogen project. This portion of the charges reflected Entergy's estimate of the effects of reduced spark spreads in the United States and the United Kingdom;
- $39.1 million of the charges related to the restructuring of the non-nuclear wholesale assets business, including impairments of administrative fixed assets, estimated sub-lease losse s, and employee-related costs for approximately 135 affected employees;
- $32.7 million of the charges resulted from the write-off of capitalized project development costs for projects that would not be completed; and
- a gain of $25.7 million ($15.9 million net-of-tax) realized on the sale in August 2002 of the non-nuclear wholesale assets business' interest in projects under development in Spain.
Higher earnings from Entergy's investment in Entergy-Koch, as discussed above, also contributed to the increase in earnings for the period. The income from Entergy's investment in Entergy-Koch was $120.8 million higher in 2003 primarily as a result of higher earnings at EKT, which were driven by the factors discussed above.
Revenues for Energy Commodity Services decreased by $109.6 million primarily due to the sale of Damhead Creek in December 2002. The decrease had a minimal effect on earnings in 2003 because of a corresponding reduction in the expenses associated with owning and operating the plant.
Income Taxes
The effective income tax rates for the third quarters of 2003 and 2002 were 37.3% and 38.4%, respectively. The effective income tax rates for the nine months ended September 30, 2003 and 2002 were 37.6% and 39.4%, respectively. The difference in the effective income tax rate for the nine months ended September 30, 2002 versus the federal statutory rate of 35.0% is primarily due to the effect of book and tax timing differences related to depreciation in the U.S. Utility segment and book losses at Energy Commodity Services, in addition to state income taxes.
Liquidity and Capital Resources
See "Management's Financial Discussion and Analysis - Liquidity and Capital Resources" in the Form 10-K for a discussion of Entergy's capital structure, capital expenditure plans and other uses of capital, and sources of capital. Following are updates to that information and a discussion of Entergy's cash flow activity in 2003.
Capital Structure
Entergy's capitalization is balanced between equity and debt, as shown in the following table. The reduction in the percentage of debt from the 2001 level is primarily the result of the sale of Damhead Creek in December 2002. Debt outstanding on the Damhead Creek facility was $458 million as of December 31, 2001.
September 30, 2003 | December 31, 2002 | December 31, 2001 | ||||
Net debt to net capital | 46.6% | 46.3% | 49.7% |
Net debt consists of gross debt less cash and cash equivalents. Gross debt consists of notes payable, capital lease obligations, preferred stock with sinking fund, mandatorily redeemable preferred securities, and long-term debt, including the currently maturing portion. Net capital consists of net debt, common shareholders' equity, and preferred stock without sinking fund. The preferred stock with sinking fund and mandatorily redeemable preferred securities are included in gross debt pursuant to SFAS 150, which Entergy implemented in the third quarter 2003. The 2002 and 2001 ratios do not reflect those two types of securities as debt, but do include them in net capital, which is how Entergy presented those securities prior to implementation of SFAS 150.
As discussed in the Form 10-K, Entergy Corporation, Entergy Arkansas, Entergy Louisiana, and Entergy Mississippi each had a 364-day credit facility due to expire in May 2003. In April 2003, Entergy Arkansas renewed its credit facility for the same amount, $63 million, until April 2004. In May 2003, Entergy Louisiana and Entergy Mississippi each renewed their facilities for the same amounts, $15 million and $25 million, respectively, until May 2004. Entergy Corporation also renewed its facility in May 2003 for the same amount, $1.45 billion, until May 2004. As of September 30, 2003, $405 million was outstanding on the Entergy Corporation credit facility. No borrowings were outstanding on the other facilities at September 30, 2003.
Capital Expenditure Plans and Other Uses of Capital
Following are the amounts of Entergy's planned construction and other capital investments by operating segment for 2003 through 2005, which reflect changes in management's estimate from the planned investments presented in the Form 10-K due mainly to the effect of actual spending in 2003 (the figures for 2003 include the effect of actual spending thus far in 2003):
Planned construction and capital investment | 2003 | 2004 | 2005 | |||
(In Millions) | ||||||
U.S. Utility | $1,073 | $922 | $975 | |||
Non-Utility Nuclear | $242 | $186 | $135 | |||
Energy Commodity Services | $86 | $73 | $1 | |||
Other | $10 | $6 | $6 | |||
See the Form 10-K for further discussion of Entergy's capital spending plans for 2003 through 2005.
Dividends and Stock Repurchases
Declarations of dividends on Entergy's common stock are made at the discretion of the Board. Among other things, the Board evaluates the level of Entergy's common stock dividends based upon Entergy's earnings, financial strength, and future investment opportunities. At its July 2003 meeting, the Board increased Entergy's quarterly dividend per share by 29%, to $0.45. Entergy expects the next review of a potential dividend increase will occur in October 2004. Given the current number of Entergy common shares outstanding, Entergy expects the July 2003 dividend increase to result in an incremental annual increase in cash used of approximately $90 million.
Cash Flow Activity
As shown in Entergy's Statements of Cash Flows, cash flows for the nine months ended September 30, 2003 and 2002 were as follows:
2003 | 2002 | |||
(In Millions) | ||||
Cash and cash equivalents at beginning of period | $1,335 | $752 | ||
Cash flow provided by (used in): | ||||
Operating activities | 1,176 | 1,670 | ||
Investing activities | (1,552) | (831) | ||
Financing activities | (383) | (647) | ||
Effect of exchange rates on cash and cash equivalents | 2 | 5 | ||
Net increase (decrease) in cash and cash equivalents | (757) | 197 | ||
Cash and cash equivalents at end of period | $578 | $949 | ||
Operating Cash Flow Activity
Entergy's cash flow provided by operating activities decreased by $494 million for the nine months ended September 30, 2003 compared to the same period in 2002 primarily due to the following:
- The U.S. Utility provided $1,177 million in operating cash flow in 2003 compared to providing $1,449 million in 2002. The decrease primarily resulted from higher payments for fuel during the period, which also significantly increased the amount of deferred fuel costs. Management expects that the deferred fuel costs will be recovered through regulatory recovery mechanisms currently in place.
- The Non-Utility Nuclear segment provided $198 million in operating cash flow in 2003 compared to providing $303 million in 2002 primarily due to increased nuclear refueling outage costs in 2003.
- The non-nuclear wholesale asset business used $75 million in operating cash flow in 2003 compared to using $27 million in 2002. The increase in cash used primarily resulted from a one-time $33 million payment related to a gas services and generation contract in the non-nuclear wholesale assets business.
- Operating cash flow used by the investment in Entergy-Koch, L.P. increased by $13 million. This increase was due to an increase in tax payments related to Entergy's investment in Entergy-Koch due to increased income from the investment. Almost entirely offsetting the increased tax payments was the receipt of a $75 million dividend from Entergy-Koch in 2003.
Recent tax legislation and elections
As discussed in the Form 10-K, Entergy Louisiana made a change in its method of accounting for tax purposes related to the contract to purchase power from the Vidalia project. This change provided cash flow benefits in 2001 and 2002.
In addition, due to book/tax timing differences associated with recent income tax legislation and certain income tax elections, Entergy could obtain cash flow benefits of $1 billion over the years 2003 through 2005. These timing differences will then reverse over the remaining life of Entergy's depreciable assets.
Investing Activities
Net cash used in investing activities increased by $721 million for the nine months ended September 30, 2003 compared to the same period in 2002 primarily due to the following:
- System Energy had three-year letters of credit in place that were scheduled to expire in March 2003 securing certain of its obligations related to the sale-leaseback of a portion of Grand Gulf 1. System Energy replaced the letters of credit with new three-year letters of credit totaling approximately $198 million that are backed by cash collateral. System Energy used approximately $194 million in 2003 to provide this cash collateral.
- The non-nuclear wholesale asset business realized $244 million in net proceeds from sales of businesses in 2002.
- Temporary investments of $150 million matured in 2002, which provided cash flow in 2002.
- Entergy Gulf States has $87 million and Entergy Mississippi has $73 million of other regulatory investments in 2003 as a result of fuel cost under-recoveries. See Note 1 to the consolidated financial statements in the Form 10-K for discussion of the accounting treatment of these fuel cost under-recoveries. See Note 2 to the consolidated financial statements in this report for discussion of the change in Entergy Mississippi's energy cost recovery rider.
Financing Activities
Net cash used in financing activities decreased $264 million for the nine months ended September 30, 2003 compared to the same period in 2002 primarily due to the following:
- Net long-term debt retirements by the U.S. Utility segment were approximately $360 million in 2003 compared to net retirements of approximately $460 million in 2002. See Note 4 to the consolidated financial statements for the details of the long-term debt activity in 2003.
- Entergy Corporation issued $383 million of long-term notes in 2003.
- The non-nuclear wholesale asset business retired $268 million of long-term debt in 2002 related to the repurchase of the rights to acquire turbines discussed inResults of Operations above. Partially offsetting this was the retirement of the $79 million Top of Iowa wind project debt at its maturity in January 2003.
- Entergy repurchased $104 million of its common stock in 2002.
The items causing cash used to decrease in 2003 were partially offset by a decrease in the net borrowings under Entergy Corporation's credit facilities of $130 million in 2003 compared to an increase of $365 million in 2002.
Following is a summary of the activity for the nine months ended September 30, 2003 involving Entergy's long-term debt maturities.
Maturity Date | ||||||||
2003 | 2004 | 2005 | after 2005 | |||||
(In Millions) | ||||||||
Long-term debt maturities | U. S. Utility | $1,111 | $855 | $470 | $4,217 | |||
as of December 31, 2002 | Non-Utility Nuclear | $87 | $91 | $95 | $410 | |||
Energy Commodity Services | $79 | - | - | - | ||||
Parent and Other | - | $595 | - | $267 | ||||
Long-term debt issuances | U. S. Utility | - | - | - | $1,800 | |||
in 2003 through | Non-Utility Nuclear | $4 | - | - | - | |||
September 30 | Energy Commodity Services | - | - | - | - | |||
Parent and Other | - | - | - | $383 | ||||
Long-term debt retirements | U. S. Utility | $1,000 | $405 | $115 | $615 | |||
in 2003 through | Non-Utility Nuclear | $29 | $20 | $21 | $42 | |||
September 30 | Energy Commodity Services | $79 | - | - | - | |||
Parent and Other | - | $130 | - | - | ||||
Long-term debt maturities | U. S. Utility | $111 | $450 | $355 | $5,402 | |||
as of September 30, 2003 | Non-Utility Nuclear | $62 | $71 | $74 | $368 | |||
Energy Commodity Services | - | - | - | - | ||||
Parent and Other | - | $465 | - | $650 | ||||
See Note 4 to the consolidated financial statements for further details of long-term debt issuances and retirements in 2003.
On October 1, 2003, Entergy Louisiana purchased its $110.95 million 5.35% Series St. Charles Parish bonds from the holders, pursuant to a mandatory tender provision, and has not remarketed the bonds at this time. Entergy Louisiana used a combination of cash on hand and short-term borrowing to buy-in the bonds.
In July 2003, a principal payment of $102 million was made prior to maturity on Non-Utility Nuclear's notes payable to NYPA using money drawn on Entergy Corporation's 364-day credit facility. As a result of this payment, the letters of credit securing the note payable to NYPA will be resized in November 2003. Entergy expects that a portion of the cash collateral backing the letters of credit will be released at that time.
Significant Factors and Known Trends
See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS -Significant Factors and Known Trends" in the Form 10-K for discussions of rate regulation and fuel cost recovery, market and credit risks, utility restructuring, and nuclear matters. Following are updates to the information provided in the Form 10-K.
Rate Regulation and Retail Rate Proceedings
See Note 2 to the consolidated financial statements in the Form 10-K for a discussion of Entergy Gulf States' ninth and last required post-merger analysis filed with the LPSC in May 2002. In April 2003, the LPSC staff filed testimony in which it recommended that the LPSC require a rate refund of $30.3 million and a prospective rate reduction of $75.9 million, before taking into account the $11.5 million rate reduction that Entergy Gulf States implemented effective June 2002. In July 2003, Entergy Gulf States filed testimony rebutting the LPSC staff's testimony and supporting the filing. During discovery, the LPSC staff requested that Entergy Gulf States provide updated cost of service data to reflect changes in costs, revenues, and rate base through December 31, 2002. In September 2003, Entergy Gulf States supplied the updated data. The LPSC staff has not yet indicated whether the updated data will result in changes to its recommendations. A new procedural schedule has been estab lished that requires the LPSC staff to file testimony in December 2003. This testimony will also address new issues presented by the updated 2002 cost of service data. Hearings are scheduled for May 2004. Entergy Gulf States cannot predict the ultimate outcome of this proceeding.
See Note 2 to the consolidated financial statements in the Form 10-K for a discussion of the July 2002 settlement between Entergy Louisiana and the LPSC Staff. In accordance with the settlement, Entergy Louisiana filed a revenue requirement analysis in June 2003. The analysis reflected a revenue deficiency, but Entergy Louisiana has not requested a change in rates. Entergy Louisiana is expected to make a rate filing with the LPSC by mid-2004.
See Note 2 to the consolidated financial statements in the Form 10-K for a discussion of Entergy New Orleans' cost of service study and revenue requirement filed in May 2002 with the City Council for the 2001 test year, and the agreement in principle presented to the City Council in March 2003. In May 2003, the City Council approved the agreement in principle allowing for a $30.2 million increase in base rates effective June 1, 2003. The City Council also approved implementation of formula rate plans for electric and gas service that will be evaluated annually until 2005. The midpoint return on equity of both plans is 11.25%, with a target equity component of 42%. The electric plan provides for a bandwidth of 10.25% to 12.25% and the gas plan provides for a bandwidth of 11% to 11.5%, with earnings within those ranges not resulting in a change in rates. In addition, the City Council approved implementation of a generation performance-based rate calculation in the electric fuel adjust ment clause under which Entergy New Orleans will receive 10% of fuel and purchased power cost savings in excess of $20 million, subject to a 13.25% return on equity limitation for electric operations as provided for in the electric formula rate plan. Entergy New Orleans will bear 10% of any "negative" fuel and purchased power cost savings. Certain intervenors in the proceeding have appealed the City Council's approval to the Civil District Court for the Parish of Orleans. Entergy New Orleans and the City Council will oppose the appeal, but the outcome cannot be predicted.
In approving the agreement in principle, the City Council indicated that if the City Council decides in favor of the plaintiffs in either of the lawsuits described in Part I, Item 1 of the Form 10-K in the paragraphs entitled "Entergy New Orleans Fuel Clause Lawsuit" and "Entergy New Orleans Rate of Return Lawsuit," the effect of that decision on the rate agreement would have to be determined. The City Council also indicated that the Entergy New Orleans power agreements described in Part II, Item 5, "Generation" in this report are fundamental to the rate agreement, and a FERC decision or order requiring a material change in the power agreements may result in a City Council investigation to determine what prospective action, if any, would be warranted by any such FERC decision or order to preserve the benefits that were otherwise projected to accrue to customers under the rate settlement.
Market and Credit Risks
Commodity Price Risk
Power Generation
As discussed more fully in the Form 10-K, the sale of electricity from the power generation plants owned by Entergy's Non-Utility Nuclear business and Energy Commodity Services, unless otherwise contracted, is subject to the fluctuation of market power prices. Following is an updated summary of the amount of Non-Utility Nuclear's and Energy Commodity Services' output that is sold forward as of September 30, 2003 under physical or financial contracts at fixed prices (2003 represents the remainder of the year):
2003 | 2004 | 2005 | 2006 | 2007 | |||||
Non-Utility Nuclear: | |||||||||
% of planned generation sold forward | 100% | 100% | 37% | 23% | 16% | ||||
Planned generation (GWh) | 8,722 | 32,950 | 34,175 | 34,897 | 34,560 | ||||
Average contracted price per MWh | $36.38 | $38.28 | $36.57 | $34.95 | $34.14 | ||||
Energy Commodity Services: | |||||||||
% of planned generation sold forward | 73% | 59% | 61% | 46% | 38% | ||||
Planned generation (GWh) | 831 | 3,952 | 3,836 | 3,837 | 3,954 | ||||
Contracted spark spread per MWh | $8.04 | $8.08 | $8.10 | $9.17 | $10.16 |
The Vermont Yankee acquisition included a 10-year PPA under which the former owners will buy the power produced by the plant, which is through the expiration of the current operating license for the plant. The PPA includes an adjustment clause under which the prices specified in the PPA will be adjusted downward annually, beginning in November 2005, if power market prices drop below PPA prices. Accordingly, because the price is not fixed, the table above does not report power from that plant as sold forward after October 2005. Approximately 2% of Non-Utility Nuclear's planned generation in 2005, 12% in 2006, and 11% in 2007 is sold forward from Vermont Yankee after October 2005.
Included in the Non-Utility Nuclear planned generation sold forward percentages are contracts entered into in 2003 that are not unit contingent but are firm contracts containing liquidated damages provisions. These firm contracts are for 4% of Non-Utility Nuclear's planned generation in 2005, 4% in 2006, and 2% in 2007.
The increase in the Energy Commodity Services planned generation sold forward percentages from the percentages reported in the Form 10-K is attributable to the Entergy Louisiana and Entergy New Orleans contracts involving RS Cogen and Independence entered into in 2003 that are described more fully in Part II, Item 5, "Generation." As discussed in Part II, Item 5, these contracts are still subject to a FERC review proceeding scheduled for hearing in April 2004.
Marketing and Trading
As discussed in the Form 10-K, EKT uses value-at-risk models as one measure of the market risk of a loss in fair value for EKT's natural gas and power trading portfolio. EKT's value-at-risk measures, which it calls Daily Earnings at Risk (DE@R), for its trading portfolio were as follows (using a 97.5% confidence level):
September 30, 2003 | December 31, 2002 | September 30, 2002 | December 31, 2001 | |||||
DE@R at end of period | $8.4 million | $15.2 million | $10.7 million | $5.5 million | ||||
Average DE@R for the year-to-date period | $14.9 million | $10.8 million | $10.0 million | $6.4 million |
The average DE@R through September 2003 is higher than the average DE@R for the year-to-date 2002 periods because of higher electricity volatility year-to-date in 2003 along with EKT's point-of-view that has led to a larger investment position, on average, during 2003 than during 2002. DE@R and EKT's other risk measures were managed in accordance with its established trading policies and procedures during all of these periods.
Following are EKT's mark-to-market assets (liabilities) and the period within which the assets (liabilities) would be realized (paid) in cash if they are held to maturity and market prices are unchanged:
Maturities and Sources for Fair Value of Trading Contracts at September 30, 2003 |
|
|
|
| ||||
(In Millions) | ||||||||
Prices actively quoted | $147.2 | ($5.5) | ($15.0) | $126.7 | ||||
Prices provided by other sources | 11.1 | (27.0) | (13.1) | (29.0) | ||||
Prices based on models | 13.1 | (8.0) | 2.4 | 7.5 | ||||
Total | $171.4 | ($40.5) | ($25.7) | $105.2 | ||||
As of September 30, 2003, approximately 90% of EKT's counterparty credit exposure was associated with parties that have at least investment grade credit ratings.
Following is a roll-forward of the change in the fair value of EKT's mark-to-market contracts for the nine months ended September 30, 2003:
2003 | ||
(In Millions) | ||
Fair value of contracts at December 31, 2002 | $90.9 | |
(Gain)/loss from contracts realized/settled during the period | (453.7) | |
Net option premiums received during the period | 111.6 | |
Change in fair value of contracts attributable to market movements during the period | 356.4 | |
Net change in contracts outstanding during the period | 14.3 | |
Fair value of contracts at September 30, 2003 | $105.2 |
Utility Restructuring
Transmission
See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS -Significant Factors and Known Trends,Transmission" in the Form 10-K for discussion of the proposed SeTrans RTO. At this time, management does not expect the proposed SeTrans RTO to become operational before the last half of 2005.
Texas
See Note 2 to the consolidated financial statements in the Form 10-K for a discussion of the status of retail open access in Entergy Gulf States' Texas service territory, and the proposal that Entergy Gulf States filed for an interim solution (retail open access without a FERC-approved RTO). The PUCT considered the proposal at a March 2003 hearing, and issued an order in April 2003. The order set forth a sequence of proceedings and activities designed to initiate an interim solution in the first half of 2004. These proceedings and activities include ruling on market protocols; initiating a proceeding to certify an independent organization to administer the market protocols and ensure nondiscriminatory access to transmission and distribution systems; resuming business separation proceedings; re-invigorating the pilot project; and initiating a market-readiness proceeding. In June 2003, the PUCT voted 2 to 1 to issue an order on rehearing in the interim solution procee ding. The PUCT issued the written order on rehearing in late-July 2003 in which it identified December 2004 as the target date for the beginning of the interim solution. Also in July 2003, the PUCT directed the parties to continue negotiations on unresolved issues in the market protocols docket. Several of the parties to that proceeding filed a settlement agreement with respect to the market protocols that the PUCT approved, after hearings, in an order issued in September 2003. Consistent with the order, Entergy Services has made a filing at the FERC requesting approval on an expedited basis of the market protocols subject to FERC jurisdiction.
In September 2003, the PUCT issued a written order that approved the Price to Beat (PTB) fuel factor for Entergy Gulf States, which is to be implemented upon the commencement of retail open access in its Texas service territory. This PTB fuel factor is subject to revision based on PUCT rules. The PUCT declined consideration of a request for rehearing sought by certain cities in Texas served by Entergy Gulf States and the Office of Public Utility Counsel. The period for appeal of the order remains open.
Federal Legislation
Federal legislation intended to facilitate wholesale competition in the electric power industry has been seriously considered by the last three United States Congresses, in both the House of Representatives and the Senate. In 2003, both the House and Senate have passed separate versions of comprehensive energy legislation. The bills contain electricity provisions that would, among other things, repeal PUHCA, repeal or modify PURPA, enact a mechanism for establishing enforceable reliability standards, provide FERC with new authority over utility mergers and acquisitions, and codify FERC's authority over market-based rates. The legislation is currently before a conference committee for resolution of the differences between the two bills.
Nuclear Matters
See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS -Significant Factors and Known Trends, Nuclear Matters" in the Form 10-K for discussion of various issues related to Entergy owning and operating nuclear power plants, and in particular the Indian Point units. Regarding FEMA's February 2003 report, and FEMA possibly reevaluating its decision not to provide "reasonable assurance" regarding Indian Point's radiological emergency measures, in July 2003 FEMA sent a letter to the Governor of New York transmitting its determination of reasonable assurance that the off-site preparedness for the Indian Point units is adequate. FEMA stated that it had reasonable assurance that appropriate measures to protect the health and safety of surrounding communities can be taken and are capable of being implemented in the event of a radiological incident at Indian Point. After receiving FEMA's review of the Indian Point off-site emergency preparedness plans and procedures, the NRC st ated that it had determined that Indian Point's on-site emergency preparedness plans and procedures for radiological events meet the requisite criteria for reasonable assurance of adequate protection. The NRC then stated that its overall determination continues to be that Indian Point emergency preparedness is satisfactory and provides reasonable assurance of adequate protection. In August 2003, Westchester County filed an administrative appeal of FEMA's ruling stating that the emergency plans are adequate to protect the public health and safety.
Generation
As described in Part II, Item 5 herein, Entergy has filed with the FERC several agreements for the supply of power to Entergy Louisiana and Entergy New Orleans. The agreements involve power purchases from Entergy affiliates. In May 2003, the FERC accepted the agreements for filing, subject to refund, with the contracts becoming effective on June 1, 2003. The FERC also established a hearing process to review the agreements. Several parties have intervened or filed protests regarding the agreements filed with the FERC and the request-for-proposals process that led to the agreements, and the proceeding is set for hearing in April 2004.
Productivity Improvements Initiative
In July 2003, Entergy announced an initiative to achieve productivity improvements with a goal of reducing costs, primarily in the Non-Utility Nuclear and U.S. Utility businesses, while maintaining reliability, safety, and service levels. As part of that initiative, Entergy is offering a voluntary severance program to employees in various departments targeting a reduction of approximately 1,000 employees with acceptances occurring in October through December 2003. Approximately 600 nuclear employees in total from the Non-Utility Nuclear and U.S. Utility businesses have accepted thus far, with additional offers currently in process to union employees in the Non-Utility Nuclear business. Additional Entergy departments also have offers in process. Management expects the voluntary severance program to cause severance expense for Entergy in the fourth quarter of 2003 of approximately $80 million to $105 million, after-tax.
Critical Accounting Estimates
See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS -Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy's accounting for nuclear decommissioning costs, impairment of long-lived assets, mark-to-market derivative instruments, pension and other postretirement costs, and other contingencies. Following is an update to the information provided in the Form 10-K.
SFAS 143
As discussed in the Form 10-K, Entergy implemented SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. Implementation had the following effect on Entergy's financial statements:
- The net effect of implementing this standard for the rate-regulated portion of the domestic utility companies and System Energy was recorded as a regulatory asset, with no resulting impact on Entergy's net income. Assets and liabilities increased approximately $1.1 billion for the domestic utility companies and System Energy as a result of increasing the asset retirement obligations by $1.1 billion to their fair values as determined under SFAS 143, increasing utility plant by $288 million, reducing accumulated depreciation by $361 million, and recording the related regulatory assets of $422 million. The implementation of SFAS 143 for the portion of River Bend not subject to cost-based ratemaking decreased earnings by approximately $21 million net-of-tax ($0.09 per share) as a result of the one-time cumulative effect of accounting change.
- For the Non-Utility Nuclear business, the implementation of SFAS 143 resulted in a decrease in liabilities of approximately $520 million due to reductions in decommissioning liabilities, a decrease in assets of approximately $360 million, including a decrease in electric plant in service of $336 million, and an increase in earnings of approximately $160 million ($0.70 per share) as a result of the one-time cumulative effect of accounting change.
Also, Entergy expects 2003 earnings for the Non-Utility Nuclear business to increase by approximately $19 million after-tax because of the change in accretion of the decommissioning liability and depreciation of the adjusted plant costs. This effect will gradually decrease over future years as the accretion of the liability increases. Management expects that applying SFAS 143 post-implementation will have a minimal effect on ongoing earnings for the U.S. Utility business.
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ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Nine Months Ended
2003 2002 2003 2002
(In Thousands, Except Share Data)
OPERATING REVENUES
Domestic electric $2,235,618 $2,037,957 $5,763,298 $5,125,722
Natural gas 25,866 18,953 139,803 90,313
Competitive businesses 438,641 411,965 1,188,659 1,210,254
------------------------------------------------------------
TOTAL 2,700,125 2,468,875 7,091,760 6,426,289
------------------------------------------------------------
OPERATING EXPENSES
Operating and Maintenance:
Fuel, fuel-related expenses, and
gas purchased for resale 596,046 672,217 1,480,101 1,612,490
Purchased power 529,437 222,472 1,338,609 625,476
Nuclear refueling outage expenses 40,154 24,183 119,298 74,057
Provision for turbine commitments, asset - (27,985) (7,743) 391,557
impairments and restructuring charges
Other operation and maintenance 554,472 564,762 1,650,380 1,816,131
Decommissioning 35,929 18,192 107,787 54,573
Taxes other than income taxes 105,360 107,189 303,601 291,753
Depreciation and amortization 220,667 214,408 637,159 625,407
Other regulatory charges (credits) - net (945) 19,742 18,581 (149,340)
------------------------------------------------------------
TOTAL 2,081,120 1,815,180 5,647,773 5,342,104
------------------------------------------------------------
OPERATING INCOME 619,005 653,695 1,443,987 1,084,185
------------------------------------------------------------
OTHER INCOME
Allowance for equity funds used during 9,936 8,726 26,962 23,730
construction
Interest and dividend income 24,040 20,688 83,792 71,924
Equity in earnings of unconsolidated 60,099 44,997 258,451 128,248
equity affiliates
Miscellaneous - net 7,932 13,704 (83,904) 13,749
------------------------------------------------------------
TOTAL 102,007 88,115 285,301 237,651
------------------------------------------------------------
INTEREST AND OTHER CHARGES
Interest on long-term debt 118,460 131,905 353,422 376,825
Other interest - net 13,345 16,266 42,636 56,646
Distributions on preferred securities of 4,709 4,709 14,128 14,128
subsidiaries
Allowance for borrowed funds used during
construction (7,968) (6,548) (21,136) (18,478)
------------------------------------------------------------
TOTAL 128,546 146,332 389,050 429,121
------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES 592,466 595,478 1,340,238 892,715
Income taxes 220,816 228,678 499,068 351,314
------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGES 371,650 366,800 841,170 541,401
CUMULATIVE EFFECT OF ACCOUNTING
CHANGES (net of income taxes of $93,754) - - 142,922 -
------------------------------------------------------------
CONSOLIDATED NET INCOME 371,650 366,800 984,092 541,401
Preferred dividend requirements and other 5,876 5,924 17,669 17,796
------------------------------------------------------------
EARNINGS APPLICABLE TO
COMMON STOCK $365,774 $360,876 $966,423 $523,605
============================================================
Earnings per average common share before cumulative
effect of accounting changes:
Basic $1.60 $1.61 $3.64 $2.34
Diluted $1.57 $1.59 $3.57 $2.30
Earnings per average common share:
Basic $1.60 $1.61 $4.27 $2.34
Diluted $1.57 $1.59 $4.19 $2.30
Dividends declared per common share $0.45 $0.33 $1.15 $0.99
Average number of common shares outstanding:
Basic 228,105,505 223,714,449 226,145,567 223,336,005
Diluted 232,515,434 227,054,321 230,388,260 227,402,737
See Notes to Consolidated Financial Statements.
ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
(In Thousands)
OPERATING ACTIVITIES
Consolidated net income $984,092 $541,401
Noncash items included in net income:
Reserve for regulatory adjustments (9,806) 10,767
Other regulatory charges (credits) - net 18,581 (149,340)
Depreciation, amortization, and decommissioning 744,946 679,980
Deferred income taxes and investment tax credits 999,496 (169,905)
Allowance for equity funds used during construction (26,962) (23,730)
Cumulative effect of accounting changes (142,922) -
Equity in undistributed earnings of unconsolidated equity (179,253) (126,248)
affiliates
Provision for turbine commitments, asset impairments, and
restructuring charges (7,743) 391,557
Changes in working capital:
Receivables (327,439) (233,194)
Fuel inventory (28,101) (193)
Accounts payable (282,127) 68,004
Taxes accrued (642,118) 496,789
Interest accrued (15,387) 5,158
Deferred fuel (58,505) 85,998
Other working capital accounts (20,785) (83,990)
Provision for estimated losses and reserves 130,444 198
Changes in other regulatory assets 23,460 206,504
Other 16,209 (29,479)
----------- ----------
Net cash flow provided by operating activities 1,176,080 1,670,277
----------- ----------
INVESTING ACTIVITIES
Construction/capital expenditures (1,051,649) (1,053,000)
Allowance for equity funds used during construction 26,962 23,730
Nuclear fuel purchases (190,243) (217,398)
Proceeds from sale/leaseback of nuclear fuel 119,174 160,062
Proceeds from sale of businesses 25,987 244,578
Investment in other non-regulated/non-utility properties (47,733) (200,119)
Decrease (increase) in other investments (171,045) 38,964
Changes in other temporary investments (15,602) 150,000
Decommissioning trust contributions and realized change in trust assets (65,754) (49,458)
Other regulatory investments (174,163) (45,262)
Other (8,643) 116,654
----------- ----------
Net cash flow used in investing activities (1,552,709) (831,249)
----------- ----------
See Notes to Consolidated Financial Statements.
ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
(In Thousands)
FINANCING ACTIVITIES
Proceeds from the issuance of:
Long-term debt 2,067,393 368,589
Common stock and treasury stock 198,466 115,569
Retirement of long-term debt (2,238,430) (1,166,412)
Repurchase of common stock - (103,579)
Redemption of preferred stock (3,450) (1,858)
Changes in short-term borrowings - net (130,000) 379,333
Dividends paid:
Common stock (259,854) (221,215)
Preferred stock (17,669) (17,796)
----------- ----------
Net cash flow used in financing activities (383,544) (647,369)
----------- ----------
Effect of exchange rates on cash and cash equivalents 2,389 5,614
----------- ----------
Net increase (decrease) in cash and cash equivalents (757,784) 197,273
Cash and cash equivalents at beginning of period 1,335,328 751,573
----------- ----------
Cash and cash equivalents at end of period $577,544 $948,846
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest - net of amount capitalized $409,518 $454,489
Income taxes $180,390 $37,770
Noncash investing and financing activities:
Change in unrealized appreciation/(depreciation) of
decommissioning trust assets $26,999 ($78,156)
Decommissioning trust funds acquired in nuclear plant acquisitions - $310,000
Long-term debt refunded with proceeds from
long-term debt issued in prior period - ($47,000)
See Notes to Consolidated Financial Statements.
ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT ASSETS
Cash and cash equivalents:
Cash $173,799 $169,788
Temporary cash investments - at cost,
which approximates market 403,583 1,165,260
Special deposits 162 280
----------- -----------
Total cash and cash equivalents 577,544 1,335,328
----------- -----------
Other temporary investments 18,818 -
Notes receivable 2,013 2,078
Accounts receivable:
Customer 532,498 323,215
Allowance for doubtful accounts (23,396) (27,285)
Other 249,657 244,621
Accrued unbilled revenues 428,341 319,133
----------- -----------
Total receivables 1,187,100 859,684
----------- -----------
Deferred fuel costs 288,322 55,653
Fuel inventory - at average cost 124,568 96,467
Materials and supplies - at average cost 552,345 525,900
Deferred nuclear refueling outage costs 147,318 163,646
Prepayments and other 143,371 166,827
----------- -----------
TOTAL 3,041,399 3,205,583
----------- -----------
OTHER PROPERTY AND INVESTMENTS
Investment in affiliates - at equity 1,097,083 824,209
Decommissioning trust funds 2,191,590 2,069,198
Non-utility property - at cost (less accumulated 238,624 297,294
depreciation)
Other 441,581 270,889
----------- -----------
TOTAL 3,968,878 3,461,590
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Electric 27,350,894 26,789,538
Property under capital lease 755,190 746,624
Natural gas 219,379 209,969
Construction work in progress 1,647,084 1,232,891
Nuclear fuel under capital lease 280,219 259,433
Nuclear fuel 251,913 263,609
----------- -----------
TOTAL PROPERTY, PLANT AND EQUIPMENT 30,504,679 29,502,064
Less - accumulated depreciation and amortization 12,460,124 12,307,112
----------- -----------
PROPERTY, PLANT AND EQUIPMENT - NET 18,044,555 17,194,952
----------- -----------
DEFERRED DEBITS AND OTHER ASSETS
Regulatory assets:
SFAS 109 regulatory asset - net 805,851 844,105
Unamortized loss on reacquired debt 168,205 155,161
Other regulatory assets 1,204,701 738,328
Long-term receivables 21,884 24,703
Goodwill 377,172 377,172
Other 935,185 946,375
----------- -----------
TOTAL 3,512,998 3,085,844
----------- -----------
TOTAL ASSETS $28,567,830 $26,947,969
=========== ===========
See Notes to Consolidated Financial Statements.
ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT LIABILITIES
Currently maturing long-term debt $570,381 $1,191,320
Notes payable 351 351
Accounts payable 573,259 855,446
Customer deposits 207,147 198,442
Taxes accrued 451,603 385,315
Accumulated deferred income taxes 89,634 26,468
Nuclear refueling outage costs 4,987 14,244
Interest accrued 160,053 175,440
Obligations under capital leases 154,911 153,822
Other 140,692 171,341
----------- -----------
TOTAL 2,353,018 3,172,189
----------- -----------
NON-CURRENT LIABILITIES
Accumulated deferred income taxes and taxes 4,581,436 4,250,800
accrued
Accumulated deferred investment tax credits 425,812 447,925
Obligations under capital leases 165,512 155,943
Other regulatory liabilities 267,574 185,579
Decommissioning 2,149,322 1,565,997
Transition to competition 79,098 79,098
Regulatory reserves 46,632 56,438
Accumulated provisions 436,464 389,868
Long-term debt 7,440,816 7,086,999
Preferred stock with sinking fund 20,877 -
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding
solely junior subordinated deferrable debentures 215,000 -
Other 1,280,934 1,145,232
----------- -----------
TOTAL 17,109,477 15,363,879
----------- -----------
Preferred stock with sinking fund - 24,327
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding
solely junior subordinated deferrable debentures - 215,000
Preferred stock without sinking fund 334,337 334,337
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, authorized 500,000,000
shares; issued 248,174,087 shares in 2003 and in 2002 2,482 2,482
Paid-in capital 4,696,598 4,666,753
Retained earnings 4,644,880 3,938,693
Accumulated other comprehensive loss (3,765) (22,360)
Less - treasury stock, at cost (19,678,683 shares in 2003 and
25,752,410 shares in 2002) 569,197 747,331
----------- -----------
TOTAL 8,770,998 7,838,237
----------- -----------
Commitments and Contingencies
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,567,830 $26,947,969
=========== ===========
See Notes to Consolidated Financial Statements.
ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME, AND PAID-IN CAPITAL
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended
2003 2002
(In Thousands)
RETAINED EARNINGS
Retained Earnings - Beginning of period $4,382,757 $3,653,841
Add - Earnings applicable to common stock 365,774 $365,774 360,876 $360,876
Deduct:
Dividends declared on common stock 102,611 73,933
Capital stock and other expenses 1,040 (456)
---------- ----------
Total 103,651 73,477
---------- ----------
Retained Earnings - End of period $4,644,880 $3,941,240
========== ==========
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS) (Net of Taxes):
Balance at beginning of period
Accumulated derivative instrument fair value $17,490 ($3,628)
changes
Other accumulated comprehensive loss items (10,937) (13,613)
---------- ----------
Total 6,553 (17,241)
---------- ----------
Net derivative instrument fair value changes
arising during the period (874) (874) (17,108) (17,108)
Foreign currency translation adjustments 1,539 1,539 255 255
Net unrealized investment losses (10,983) (10,983) (11,062) (11,062)
---------- -------- ---------- --------
Balance at end of period:
Accumulated derivative instrument fair value $16,616 ($20,736)
changes
Other accumulated comprehensive loss items (20,381) (24,420)
---------- ----------
Total ($3,765) ($45,156)
========== -------- ========== --------
Comprehensive Income $355,456 $332,961
======== ========
PAID-IN CAPITAL
Paid-in Capital - Beginning of period $4,690,152 $4,666,754
Add: Common stock issuances related to
stock plans 6,446 199
---------- ----------
Paid-in Capital - End of period $4,696,598 $4,666,953
========== ==========
Nine Months Ended
2003 2002
(In Thousands)
RETAINED EARNINGS
Retained Earnings - Beginning of period $3,938,693 $3,638,448
Add - Earnings applicable to common stock 966,423 $966,423 523,605 $523,605
Deduct:
Dividends declared on common stock 259,955 221,288
Capital stock and other expenses 281 (475)
---------- ----------
Total 260,236 220,813
---------- ----------
Retained Earnings - End of period $4,644,880 $3,941,240
========== ==========
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS) (Net of Taxes):
Balance at beginning of period
Accumulated derivative instrument fair value $17,313 ($17,973)
changes
Other accumulated comprehensive loss items (39,673) (70,821)
---------- ----------
Total (22,360) (88,794)
---------- ----------
Net derivative instrument fair value changes
arising during the period (697) (697) (2,763) (2,763)
Foreign currency translation adjustments 3,249 3,249 68,312 1,978
Net unrealized investment gains (losses) 16,043 16,043 (21,911) (21,911)
---------- -------- ---------- --------
Balance at end of period:
Accumulated derivative instrument fair value $16,616 ($20,736)
changes
Other accumulated comprehensive loss items (20,381) (24,420)
---------- ----------
Total ($3,765) ($45,156)
========== -------- ========== --------
Comprehensive Income $985,018 $500,909
======== ========
PAID-IN CAPITAL
Paid-in Capital - Beginning of period $4,666,753 $4,662,704
Add: Common stock issuances related to
stock plans 29,845 4,249
---------- ----------
Paid-in Capital - End of period $4,696,598 $4,666,953
========== ==========
See Notes to Consolidated Financial Statements.
ENTERGY CORPORATION AND SUBSIDIARIES
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended
Increase/
Description 2003 2002 (Decrease) %
(In Millions)
Domestic Electric
Operating Revenues:
Residential $ 928.4 $ 847.6 $ 80.8 10
Commercial 561.3 501.8 59.5 12
Industrial 565.7 523.3 42.4 8
Governmental 56.3 50.5 5.8 11
-----------------------------------
Total retail 2,111.7 1,923.2 188.5 10
Sales for resale 101.9 107.3 (5.4) (5)
Other 22.0 7.4 14.6 197
-----------------------------------
Total $2,235.6 $ 2,037.9 $ 197.7 10
===================================
Billed Electric Energy
Sales (GWh):
Residential 10,763 10,827 (64) (1)
Commercial 7,539 7,509 30 -
Industrial 9,975 10,839 (864) (8)
Governmental 737 731 6 1
-----------------------------------
Total retail 29,014 29,906 (892) (3)
Sales for resale 2,093 2,823 (730) (26)
-----------------------------------
Total 31,107 32,729 (1,622) (5)
===================================
Nine Months Ended Increase/
Description 2003 2002 (Decrease) %
(In Millions)
Domestic Electric
Operating Revenues:
Residential $ 2,111.3 $ 1,898.8 $ 212.5 11
Commercial 1,426.8 1,264.3 162.5 13
Industrial 1,561.9 1,385.0 176.9 13
Governmental 151.5 132.3 19.2 15
-----------------------------------
Total retail 5,251.5 4,680.4 571.1 12
Sales for resale 303.1 262.0 41.1 16
Other 208.7 183.3 25.4 14
-----------------------------------
Total $5,763.3 $ 5,125.7 $ 637.6 12
===================================
Billed Electric Energy
Sales (GWh):
Residential 25,776 25,303 473 2
Commercial 19,525 19,219 306 2
Industrial 28,855 30,770 (1,915) (6)
Governmental 2,033 2,002 31 2
-----------------------------------
Total retail 76,189 77,294 (1,105) (1)
Sales for resale 7,196 7,480 (284) (4)
-----------------------------------
Total 83,385 84,774 (1,389) (2)
===================================
ENTERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. COMMITMENTS AND CONTINGENCIES
Sales Warranties and Indemnities
See Note 9 to the consolidated financial statements in the Form 10-K for information on certain warranties made by Entergy or its subsidiaries in the CitiPower and Saltend sales transactions. Regarding the CitiPower warranties and the tax matters described in the Form 10-K, after extended negotiations with the Australian Taxation Office, a settlement agreement was reached in which the Australian Taxation Office agreed to a deduction that reduced the amount of the assessments to A$5.1 million ($3.2 million). Additionally, a settlement agreement was reached with CitiPower in which Entergy agreed to pay the full amount of the amended assessments and CitiPower agreed to pay its own costs and expenses with respect to the Australian Taxation Office negotiations and assessments.
Nuclear Insurance and Spent Nuclear Fuel
See Note 9 to the consolidated financial statements in the Form 10-K for information on nuclear liability, property and replacement power insurance, related NRC regulations, and the disposal of spent nuclear fuel and other high-level radioactive waste associated with Entergy's nuclear power plants.
Third Party Liability Insurance
The Price-Anderson Act provides insurance for the public in the event of a nuclear power plant accident. The costs of this insurance are borne by the nuclear power industry. Originally passed by Congress in 1957 and most recently amended in 1988, the Price-Anderson Act requires nuclear power plants to show evidence of financial protection in the event of a nuclear accident. This protection must consist of two levels:
- The primary level is private insurance underwritten by American Nuclear Insurers and provides liability insurance coverage of $300 million. If this amount is not sufficient to cover claims arising from the accident, the second level, Secondary Financial Protection, applies. An industry-wide aggregate limitation of $300 million exists for domestically-sponsored terrorist acts. There is no limitation for foreign-sponsored terrorist acts.
- Within the Secondary Financial Protection level, each nuclear plant must pay a retrospective premium, equal to its proportionate share of the loss in excess of the primary level, up to a maximum of $100.6 million per reactor per incident. This consists of a $95.8 million maximum retrospective premium plus a five percent surcharge that may be applied, if needed, at a rate that is presently set at $10 million per year per nuclear power reactor. There are no domestically- or foreign-sponsored terrorism limitations.
Currently, 105 nuclear reactors are participating in the Secondary Financial Protection program - 103 operating reactors and two closed units that still store used nuclear fuel on site. The product of the maximum retrospective premium assessment to the nuclear power industry and the number of nuclear power reactors provides over $10 billion in insurance coverage to compensate the public in the event of a nuclear power reactor accident.
Entergy owns and operates ten of the 105 nuclear power reactors (10% of Grand Gulf 1 is owned by a non-affiliated company which would share on a pro-rata basis in any retrospective premium assessment under the Act).
An additional but temporary contingent liability exists for all nuclear power reactor owners because of a previous Nuclear Worker Tort (long-term bodily injury caused by exposure to nuclear radiation while employed at a nuclear power plant) insurance program that was in place from 1988 to 1998. The maximum premium assessment exposure to each reactor is $3 million and will only be applied if such claims exceed the program's accumulated reserve funds. This contingent premium assessment feature will expire with the Nuclear Worker Tort program's expiration, which is scheduled for 2008.
Property Insurance
Entergy's nuclear owner/licensee subsidiaries are members of certain mutual insurance companies that provide property damage coverage, including decontamination and premature decommissioning expense, to the members' nuclear generating plants. These programs are underwritten by Nuclear Electric Insurance Limited (NEIL). As of September 30, 2003, Entergy was insured against such losses per the following structures:
U.S. Utility Plants (ANO 1 and 2, Grand Gulf 1, River Bend, and Waterford 3)
- Primary Layer (per plant) - $500 million per occurrence
- Excess Layer (per plant) - $100 million per occurrence
- Blanket Layer (shared among all plants) - $1.0 billion per occurrence
- Total limit - $1.6 billion per occurrence
- Deductibles:
$1.0 million per occurrence - Equipment breakdown/failure
$2.5 million per occurrence - Other than equipment breakdown/failure
Note: ANO 1 and 2 share in the Primary Layer with one policy in common.
Non-Utility Nuclear Plants (Indian Point 2 and 3, FitzPatrick, Pilgrim, and Vermont Yankee)
- Primary Layer (per plant) - $500 million per occurrence
- Blanket Layer (shared among all plants) - $615 million per occurrence
- Total limit - $1.115 billion per occurrence
- Deductibles:
$1.0 million per occurrence - Equipment breakdown/failure
$1.0 million per occurrence (all plants except Vermont Yankee which is $500,000) - Other than equipment breakdown/failure
Note: Indian Point 2 and 3 share in the Primary Layer with one policy in common.
In addition, the Non-Utility Nuclear plants are also covered under NEIL's Accidental Outage Coverage program. This coverage provides certain fixed indemnities in the event of an unplanned outage that results from a covered NEIL property damage loss, subject to a deductible. The following summarizes this coverage as of September 30, 2003:
- Indian Point 2 and 3, FitzPatrick, and Pilgrim (each plant has an individual policy with the noted parameters):
$4.5 million weekly indemnity
$490 million maximum indemnity
Deductible: 12 week waiting period
- Vermont Yankee
$4.0 million weekly indemnity
$435 million maximum indemnity
Deductible: 12 week waiting period
Entergy's U.S. Utility nuclear plants have significantly less or no accidental outage coverage. Under the property damage and accidental outage insurance programs, Entergy nuclear plants could be subject to assessments should losses exceed the accumulated funds available from NEIL. As of September 30, 2003, the maximum amounts of such possible assessments per occurrence were $77 million for the Non-Utility Nuclear plants and $79.3 million for the U.S. Utility plants.
Entergy maintains property insurance for its nuclear units in excess of the NRC's minimum requirement of $1.06 billion per site for nuclear power plant licensees. NRC regulations provide that the proceeds of this insurance must be used, first, to render the reactor safe and stable, and second, to complete decontamination operations. Only after proceeds are dedicated for such use and regulatory approval is secured would any remaining proceeds be made available for the benefit of plant owners or their creditors.
In the event that one or more acts of domestically-sponsored terrorism causes property damage under one or more or all nuclear insurance policies issued by NEIL (including, but not limited to, those described above) within 12 months from the date the first property damage occurs, the maximum recovery under all such nuclear insurance policies shall be an aggregate of $3.24 billion plus the additional amounts recovered for such losses from reinsurance, indemnity, and any other sources applicable to such losses. There is no aggregate limit involving one or more acts of foreign-sponsored terrorism.
Spent Nuclear Fuel
Regarding the spent nuclear fuel storage capacity reported in the Form 10-K, current on-site spent nuclear fuel storage capacity at Grand Gulf 1 is now estimated to be sufficient until approximately 2007, at which time dry cask storage facilities will be placed into service. Higher density storage racks at Waterford 3 are now expected to provide sufficient storage until after 2015. Current on-site spent nuclear fuel storage capacity at Indian Point is now estimated to be sufficient until 2006, at which time planned additional dry cask storage capacity is to begin operation.
Nuclear Decommissioning Costs
See Note 9 to the consolidated financial statements in the Form 10-K for information on nuclear decommissioning costs. As discussed in Note 7, Entergy implemented SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. The implementation of this new accounting standard resulted in a reevaluation of Entergy's decommissioning liabilities. Additionally, future decommissioning expense under this new standard will represent the accretion of this liability at the applicable discount rate, and will no longer be equal to the amounts collected in rates for decommissioning for the rate-regulated portion of the U.S. Utility's nuclear plants, as was the case before the implementation of SFAS 143. For these plants, the net difference between the accretion expense and depreciation expense under SFAS 143 and the earnings on the decommissioning trust funds and collections in rates will be recorded as a regulatory charge or credit, except for the non-rate-regulated porti on of River Bend. The table below summarizes the activity in the decommissioning liabilities during the first nine months of 2003:
Employment Litigation
Entergy Corporation and certain subsidiaries are defendants in numerous lawsuits filed by former employees asserting that they were wrongfully terminated and/or discriminated against on the basis of age, race, sex, or other protected characteristics. The defendant companies are vigorously defending these suits and deny any liability to the plaintiffs.
NOTE 2. RATE AND REGULATORY MATTERS
Electric Industry Restructuring and the Continued Application of SFAS 71
Previous developments and information related to electric industry restructuring are presented in Note 2 to the consolidated financial statements in the Form 10-K.
Texas
See Note 2 to the consolidated financial statements in the Form 10-K for a discussion of the status of retail open access in Entergy Gulf States' Texas service territory, and the proposal that Entergy Gulf States filed for an interim solution (retail open access without a FERC-approved RTO). The PUCT considered the proposal at a March 2003 hearing, and issued an order in April 2003. The order set forth a sequence of proceedings and activities designed to initiate an interim solution in the first half of 2004. These proceedings and activities include ruling on market protocols; initiating a proceeding to certify an independent organization to administer the market protocols and ensure nondiscriminatory access to transmission and distribution systems; resuming business separation proceedings; re-invigorating the pilot project; and initiating a market-readiness proceeding. In June 2003, the PUCT voted 2 to 1 to issue an order on rehearing in the interim solution proceeding. The PUCT issued the written order on rehearing in late-July 2003 in which it identified December 2004 as the target date for the beginning of the interim solution. Also in July 2003, the PUCT directed the parties to continue negotiations on unresolved issues in the market protocols docket. Several of the parties to that proceeding filed a settlement agreement with respect to the market protocols that the PUCT approved, after hearings, in an order issued in September 2003. Consistent with the order, Entergy Services has made a filing at the FERC requesting approval on an expedited basis of the market protocols subject to FERC jurisdiction.
In September 2003, the PUCT issued a written order that approved the Price to Beat (PTB) fuel factor for Entergy Gulf States, which is to be implemented upon the commencement of retail open access in its Texas service territory. This PTB fuel factor is subject to revision based on PUCT rules. The PUCT declined consideration of a request for rehearing sought by certain cities in Texas served by Entergy Gulf States and the Office of Public Utility Counsel. The period for appeal of the order remains open. Management cannot predict the ultimate outcome of this proceeding at this time.
Deferred Fuel Costs
In January 2001, Entergy Gulf States' filed a fuel reconciliation with the PUCT that covered the period from March 1999 through August 2000 and requested a surcharge. The case was argued before the Travis County Texas District Court in August 2003 challenging the PUCT's disallowance of approximately $4.2 million related to imputed capacity costs and its disallowance related to costs for energy delivered from the 30% non-regulated share of River Bend. The Travis County District Court judge affirmed the PUCT's order. In October 2003, Entergy Gulf States appealed this decision to the Court of Appeals.
In February 2003, Entergy Gulf States implemented a $54 million interim fuel surcharge authorized by the PUCT to collect under-recovered fuel costs from March through August 2002. The surcharge will be collected through December 2003.
In September 2003, Entergy Gulf States filed an application with the PUCT to implement an $87.3 million interim fuel surcharge, including interest, to collect under-recovered fuel and purchased power expenses incurred from September 2002 through August 2003. Hearings were held in October 2003 and the PUCT is expected to issue an order in December 2003. Entergy Gulf States has requested that the surcharge be collected over a twelve-month period beginning January 2004. The outcome of this proceeding cannot be predicted at this time.
In January 2003, the LPSC authorized its staff to initiate a proceeding to audit the fuel adjustment clause filings of Entergy Gulf States and its affiliates pursuant to a November 1997 LPSC general order. The audit will include a review of the reasonableness of charges flowed by Entergy Gulf States through its fuel adjustment clause in Louisiana for the period January 1, 1995 through December 1, 2002. Discovery is underway, but a detailed procedural schedule extending beyond the discovery stage has not yet been established and the LPSC staff has not yet issued its audit report.
In August 2000, the LPSC authorized its staff to initiate a proceeding to audit the fuel adjustment clause filings of Entergy Louisiana pursuant to a November 1997 LPSC general order. The time period that is the subject of the audit is January 1, 2000 through December 31, 2001. In September 2003, the LPSC staff issued its audit report and only recommended one material issue as disallowable. The issue, which was previously raised in the summer 2001 purchased power docket, relates to the alleged failure to uprate Waterford 3 in a timely manner. The LPSC staff has quantified the possible disallowance as between $7.6 and $14 million. Entergy Louisiana is currently evaluating the LPSC staff report and expects to contest the recommendation.
In May 2003, Entergy Mississippi filed and the MPSC approved a change in Entergy Mississippi's energy cost recovery rider. Under the MPSC's order, Entergy Mississippi has deferred until 2004 the collection of fuel under-recoveries for the first and second quarters of 2003 that would have been collected in the third and fourth quarters of 2003, respectively. The deferred amount of $77.6 million plus carrying charges will be collected through the energy cost recovery rider over a six-month period beginning January 2004.
Retail Rate Proceedings
Filings with the PUCT and Texas Cities
Recovery of River Bend Costs
See Note 2 to the consolidated financial statements in the Form 10-K for a discussion of the March 1998 PUCT disallowance of recovery of River Bend plant costs that had been held in abeyance since 1988, and subsequent proceedings. On July 11, 2003, the Third District Court of Appeals unanimously affirmed the judgment of the Travis County District Court that had affirmed the PUCT disallowance. In August 2003, Entergy Gulf States filed a petition for review by the Texas Supreme Court. Nevertheless, after considering the progress of the proceeding in light of the decision of the Court of Appeals, management has concluded that it is prudent to accrue for the loss that would be associated with a final, non-appealable decision disallowing the abeyed plant costs. The net carrying value of the abeyed plant costs was $107.7 million as of June 30, 2003, and after this accrual Entergy Gulf States provided for all potential loss related to current or past contested costs of construction o f the River Bend plant. Accrual of the loss was recorded in the second quarter 2003 and reduced net income by $65.6 million.
Filings with the LPSC
Annual Earnings Reviews
Formula Rate Plan Filings
See Note 2 to the consolidated financial statements in the Form 10-K for a discussion of proceedings in Entergy Louisiana's second annual performance-based formula rate plan filing made with the LPSC for the 1996 test year. The case was argued before the U.S. Supreme Court in April 2003. The U.S. Supreme Court ruled in favor of Entergy Louisiana and reversed the LPSC's decision requiring an additional rate reduction and refund.
See Note 2 to the consolidated financial statements in the Form 10-K for a discussion of the July 2002 settlement between Entergy Louisiana and the LPSC Staff. In accordance with the settlement, Entergy Louisiana filed a revenue requirement analysis on June 27, 2003. The analysis reflected a deficiency, but Entergy Louisiana has not requested a change in rates. Entergy Louisiana is expected to make a rate filing with the LPSC by mid-2004.
Filings with the City Council
Rate Proceedings
See Note 2 to the consolidated financial statements in the Form 10-K for a discussion of Entergy New Orleans' cost of service study and revenue requirement filed in May 2002 with the City Council for the 2001 test year, and the agreement in principle presented to the City Council in March 2003. In May 2003, the City Council approved the agreement in principle allowing for the $30.2 million increase in base rates effective June 1, 2003. Certain intervenors have appealed the City Council's approval to Civil District Court for the Parish of Orleans. Entergy New Orleans and the City Council will oppose the appeal, but the outcome cannot be predicted.
Natural Gas
See Note 2 to the consolidated financial statements in the Form 10-K for a discussion of a resolution adopted in August 2001 by the City Council that ordered Entergy New Orleans to account for $36 million of certain natural gas costs charged to its gas distribution customers from July 1997 through May 2001. In May 2003, the City Council approved a settlement that resolved all matters relating to this proceeding. Pursuant to the resolution of the matter, effective with the first billing cycle in June 2003, Entergy New Orleans credited $14.6 million to the purchased gas adjustment clause account, decreasing the cost responsibility of the gas customers, and debited $6.7 million to the electric fuel adjustment clause account, which increased the cost responsibility of Entergy New Orleans' retail electric customers. Resolution of the matter also required that Entergy New Orleans forego recovery from its gas customers of approximately $3.6 million of gas costs, reflecting an adjustme nt that had been made in the purchased gas adjustment clause account as of January 2002.
Fuel Adjustment Clause Litigation
See "Fuel Adjustment Clause Litigation" in Note 2 to the consolidated financial statements in the Form 10-K for a discussion of the complaint filed by a group of ratepayers in state court in Orleans Parish and with the City Council regarding certain costs passed on to ratepayers in Entergy New Orleans' fuel adjustment filings with the City Council.
NOTE 3. COMMON STOCK
The following tables present Entergy's basic and diluted earnings per share (EPS) calculations included on the consolidated income statement:
Entergy's stock option and other stock compensation plans are discussed in Note 5 to the consolidated financial statements in the Form 10-K.
During the nine months ended September 30, 2003, Entergy Corporation issued 6,073,727 shares of its previously repurchased common stock to satisfy stock option exercises and other stock-based awards.
NOTE 4. LINES OF CREDIT, RELATED SHORT-TERM BORROWINGS, AND LONG-TERM DEBT
Entergy Corporation has in place a 364-day bank credit facility that expires in May 2004 with a borrowing capacity of $1.45 billion, of which $405 million was outstanding as of September 30, 2003. Although the Entergy Corporation credit line expires in May 2004, Entergy has the discretionary option to extend the period to repay the amount then outstanding for an additional 364-day term. Because of this option, which Entergy intends to exercise if it does not renew the credit line or obtain an alternative source of financing, the debt outstanding under the credit line is reflected in long-term debt on the balance sheet. The weighted-average interest rate on Entergy's outstanding borrowings under this facility as of September 30, 2003 was 2.45%. The commitment fee for this facility is currently 0.20% of the line amount. Commitment fees and interest rates on loans under the credit facility can fluctuate depending on the senior debt ratings of the domestic utility companies.
The short-term borrowings of Entergy's subsidiaries are limited to amounts authorized by the SEC. The current limits authorized are effective through November 30, 2004. In addition to borrowing from commercial banks, Entergy's subsidiaries are authorized to borrow from the Entergy System Money Pool (money pool). The money pool is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries' dependence on external short-term borrowings. Borrowings from the money pool and external borrowings combined may not exceed the SEC authorized limits. As of September 30, 2003, Entergy's subsidiaries' authorized limit was $1.6 billion and the outstanding borrowing from the money pool was $145.1 million. There were no borrowings outstanding from external sources.
Entergy Arkansas, Entergy Louisiana, and Entergy Mississippi each have 364-day credit facilities available as follows:
| Expiration Date | Amount of Facility | Amount Drawn as of September 30, 2003 | |||
Entergy Arkansas | April 2004 | $63 million | - | |||
Entergy Louisiana | May 2004 | $15 million | - | |||
Entergy Mississippi | May 2004 | $25 million | - |
The facilities have variable interest rates and the average commitment fee is 0.14%.
The following long-term debt has been issued by Entergy in 2003:
Issue Date | (In Thousands) | ||
Entergy Corporation | |||
Long-term note, 6.17% coupon due March 2008 | March 2003 | $72,000 | |
Long-term note, 7.06% coupon due March 2011 | March 2003 | 86,000 | |
Long-term note, 6.58% coupon due May 2010 | May 2003 | 75,000 | |
Long-term note, 6.13% coupon due September 2008 | September 2003 | 150,000 | |
$383,000 | |||
U.S. Utility | |||
Mortgage Bonds: | |||
5.15% Series due February 2013 - Entergy Mississippi | January 2003 | $100,000 | |
4.35% Series due April 2008 - Entergy Mississippi | March 2003 | 100,000 | |
5.4% Series due May 2018 - Entergy Arkansas | May 2003 | 150,000 | |
4.95% Series due June 2018 - Entergy Mississippi | May 2003 | 95,000 | |
3.6% Series due June 2008 - Entergy Gulf States | June 2003 | 325,000 | |
Libor + 0.90% Series due June 2007 - Entergy Gulf States | June 2003 | 275,000 | |
5.9% Series due June 2033 - Entergy Arkansas | June 2003 | 100,000 | |
5.0% Series due July 2018 - Entergy Arkansas | June 2003 | 115,000 | |
6.2% Series due July 2033 - Entergy Gulf States | July 2003 | 240,000 | |
5.25% Series due August 2015 - Entergy Gulf States | July 2003 | 200,000 | |
3.875% Series due August 2008 - Entergy New Orleans | July 2003 | 30,000 | |
5.25% Series due August 2013 - Entergy New Orleans | July 2003 | 70,000 | |
$1,800,000 |
The following long-term debt has been retired by Entergy in 2003:
Retirement Date | (In Thousands) | ||
Entergy Corporation | |||
Note Payable to NYPA, non-interest bearing, 4.8% implicit rate | - | $112,404 | |
U.S. Utility | |||
Mortgage Bonds: | |||
7.75% Series due February 2003 - Entergy Mississippi | February 2003 | $120,000 | |
6.25% Series due February 2003 - Entergy Mississippi | February 2003 | 70,000 | |
6.625% Series due November 2003 - Entergy Mississippi | March 2003 | 65,000 | |
8.25% Series due July 2004 - Entergy Mississippi | March 2003 | 25,000 | |
7.72% Series due March 2003 - Entergy Arkansas | March 2003 | 100,000 | |
6.75% Series due March 2003 - Entergy Gulf States | March 2003 | 33,000 | |
Libor + 1.2% Series due June 2003 - Entergy Gulf States | March 2003 | 260,000 | |
Libor + 0.65% Series due May 2004 - Entergy Mississippi | June 2003 | 50,000 | |
8.50% Series due June 2003 - Entergy Louisiana | June 2003 | 150,000 | |
8.94% Series due January 2022 - Entergy Gulf States | July 2003 | 150,000 | |
6.65% Series due August 2005 - Entergy Arkansas | August 2003 | 115,000 | |
7.5% Series due August 2007 - Entergy Arkansas | August 2003 | 100,000 | |
8.7% Series due April 2024 - Entergy Gulf States | August 2003 | 294,950 | |
6.65% Series due March 2004 - Entergy New Orleans | September 2003 | 30,000 | |
8.0% Series due March 2006 - Entergy New Orleans | September 2003 | 40,000 | |
7.0% Series due July 2008 - Entergy New Orleans | September 2003 | 30,000 | |
6.0% Series due October 2003 - Entergy Arkansas | September 2003 | 155,000 | |
Libor + 1.3% Series due September 2004 - Entergy Gulf States | September 2003 | 300,000 | |
Other Long-term Debt: | |||
Grand Gulf Lease Obligation payment | - | 11,375 | |
Waterford 3 Lease Obligation payments | - | 35,416 | |
$2,134,741 | |||
Energy Commodity Services | |||
Top of Iowa wind project, avg. rate 3.15% due January 2003 | January 2003 | $79,046 |
On October 1, 2003, Entergy Louisiana purchased its $110.95 million 5.35% Series St. Charles Parish bonds from the holders, pursuant to a mandatory tender provision, and has not remarketed the bonds at this time. Entergy Louisiana used a combination of cash on hand and short-term borrowing to buy-in the bonds.
NOTE 5. RETAINED EARNINGS
On October 31, 2003, Entergy Corporation's Board of Directors declared a common stock dividend of $0.45 per share, payable on December 1, 2003, to holders of record as of November 12, 2003.
NOTE 6. BUSINESS SEGMENT INFORMATION
Entergy's reportable segments as of September 30, 2003 are U.S. Utility, Non-Utility Nuclear, and Energy Commodity Services. "All Other" includes the parent company, Entergy Corporation, and other business activity, including earnings on the proceeds of sales of previously-owned businesses.
Entergy's segment financial information for the third quarters of 2003 and 2002 is as follows:
Entergy's segment financial information for the nine months ended September 30, 2003 and 2002 is as follows:
Businesses marked with * are sometimes referred to as the "competitive businesses," with the exception of the parent company, Entergy Corporation. Eliminations are primarily intersegment activity.
Energy Commodity Services' net loss for the nine months ended September 30, 2002 includes charges of $391.6 million to operating expenses ($254.2 million net-of-tax) to reflect the effect of Entergy's decision to discontinue additional greenfield power plant development and to reflect asset impairments resulting from the deteriorating economics of wholesale power markets in the United States and the United Kingdom.
NOTE 7. NEW ACCOUNTING PRONOUNCEMENTS
SFAS 143, "Accounting for Asset Retirement Obligations," which was implemented effective January 1, 2003, requires the recording of liabilities for all legal obligations associated with the retirement of long-lived assets that result from the normal operation of those assets. These liabilities are recorded at their fair values (which are likely to be the present values of the estimated future cash outflows) in the period in which they are incurred, with an accompanying addition to the recorded cost of the long-lived asset. The asset retirement obligation is accreted each year through a charge to expense, to reflect the time value of money for this present value obligation. The amounts added to the carrying amounts of the long-lived assets are depreciated over the useful lives of the assets. The net effect of implementing this standard for the rate-regulated business of the domestic utility companies and System Energy was recorded as a regulatory asset, with no resulting impact on E ntergy's net income. Entergy recorded these regulatory assets because existing rate mechanisms in each jurisdiction are based on the principle that Entergy will recover all ultimate costs of decommissioning from customers. As a result of this treatment, SFAS 143 is expected to be earnings neutral to the rate-regulated business of the domestic utility companies and System Energy. Assets and liabilities increased by approximately $1.1 billion for the domestic utility companies and System Energy as a result of recording the asset retirement obligations at their fair values of $1.1 billion as determined under SFAS 143, increasing utility plant by $288 million, reducing accumulated depreciation by $361 million and recording the related regulatory assets of $422 million. The implementation of SFAS 143 for the portion of River Bend not subject to cost-based ratemaking decreased earnings in the first quarter of 2003 by approximately $21 million net-of-tax ($0.09 per share) as a result of the one-time cumulative e ffect of accounting change. In accordance with ratemaking treatment and as required by SFAS 71, the depreciation provisions for Entergy's utility subsidiaries include a component for removal costs that are not asset retirement obligations under SFAS 143. Approximately 6% of the U.S. Utility's current depreciation rates, on a weighted average basis, represents a component for the net of salvage value and removal costs. Per regulatory accounting requirements, this component is included in accumulated depreciation on the balance sheet. For the Non-Utility Nuclear business, the implementation of SFAS 143 resulted in a decrease in liabilities of approximately $520 million due to reductions in decommissioning liabilities, a decrease in assets of approximately $360 million, including a decrease in electric plant in service of $336 million, and an increase in earnings in the first quarter of 2003 of approximately $160 million net-of-tax ($0.70 per share) as a result of the one-time cumulative effect of accountin g change. If SFAS 143 had been applied by Entergy during all prior periods, the following impacts would have resulted:
As discussed in Note 1 to the consolidated financial statements in the Form 10-K, Entergy applies the provisions of SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," in accounting for investments in decommissioning trust funds. As a result, Entergy records the decommissioning trust funds at their fair value on the consolidated balance sheet. The fair value of the securities held in such funds differs from the amounts deposited plus the earnings on the deposits. In accordance with the regulatory treatment for decommissioning trust funds, the domestic utility companies and System Energy have recorded an offsetting amount of unrealized gains/(losses) on investment securities in other regulatory liabilities. For the nonregulated portion of River Bend, Entergy Gulf States has recorded an offsetting amount of unrealized gains/(losses) on investment securities in other deferred credits. Prior to the implementation of SFAS 143, the offsetting amount of unrealized g ains/(losses) on investment securities was recorded in accumulated depreciation for the rate-regulated business of the domestic utility companies. Decommissioning trust funds for Pilgrim, Indian Point 2, and Vermont Yankee do not receive regulatory treatment. Accordingly, unrealized gains and losses recorded on the assets in these trust funds are recognized as a separate component of shareholders' equity because these assets are classified as available for sale.
SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," was issued in May 2003 and became effective July 1, 2003. This new standard requires mandatorily redeemable financial instruments to be classified and treated as liabilities in the presentation of financial position and results of operations. The only effect of implementing this new standard for Entergy is the inclusion of long-term debt, preferred stock with sinking fund, and company-obligated mandatorily redeemable preferred securities under the liabilities caption in Entergy's balance sheet. Entergy's results of operations and cash flows were not affected by this new standard.
NOTE 8. STOCK-BASED COMPENSATION PLANS
Entergy has two plans that grant stock options, which are described more fully in Note 5 to the consolidated financial statements in the Form 10-K. Prior to 2003, Entergy applied the recognition and measurement principles of APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for those plans. No stock-based employee compensation expense is reflected in 2002 net income as all options granted under those plans have an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, Entergy prospectively adopted the fair value based method of accounting for stock options prescribed by SFAS 123, "Accounting for Stock-Based Compensation." Awards under Entergy's plans vest over three years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2003 is less than that which would have been recognized if the fair value based me thod had been applied to all awards since the original effective date of SFAS 123. The following table illustrates the effect on net income and earnings per share if Entergy would have historically applied the fair value based method of accounting to stock-based employee compensation.
__________________________________
In the opinion of the management of Entergy Corporation, the accompanying unaudited financial statements contain all adjustments (consisting primarily of normal recurring accruals and reclassification of previously reported amounts to conform to current classifications) necessary for a fair statement of the results for the interim periods presented. The business of the U.S. Utility segment, however, is subject to seasonal fluctuations with the peak periods occurring during the third quarter. The results for the interim periods presented should not be used as a basis for estimating results of operations for a full year.
ENTERGY ARKANSAS, INC.
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
Results of Operations
Net Income
Third Quarter 2003 Compared to Third Quarter 2002
Net income decreased $5.3 million primarily due to an increase in the effective income tax rate for the third quarter of 2003 compared to the third quarter of 2002.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Net income increased $27.3 million primarily due to the following:
- an increase in net base revenue;
- an increase in other net revenue items including transmission revenue, energy cost recovery true-up, and Grand Gulf retained share revenue;
- a decrease in other operation and maintenance expenses, a portion of which is offset by a corresponding decrease in other regulatory credits and has no effect on net income;
- an increase in net wholesale revenue;
- a decrease in other interest charges, a portion of which is offset by a corresponding decrease in other regulatory credits and has no effect on net income;
- a decrease in taxes other than income taxes; and
- the effect of the March 2002 settlement agreement and 2001 earnings review, the net impact of which is an $2.2 million increase in net income.
Net base revenue increased $10.4 million primarily due to increased electricity usage of 239 GWh in the residential and commercial sectors.
Other operation and maintenance expenses decreased $171.2 million primarily due to:
- expenses in 2002 of $159.9 million due to the March 2002 settlement agreement and 2001 earnings review allowing Entergy Arkansas to recover a large majority of 2000 and 2001 ice storm repair expenses through the previously-collected transition cost account amounts (offset in other regulatory credits as discussed above);
- a decrease of $7.5 million due to the 2002 accrual of the estimate of the liability for the future disposal of low-level radioactive waste materials; and
- decreases in administrative and general expenses offset by an increase in benefits cost.
Net wholesale revenue increased $8.2 million primarily due to an increase in sales volume and higher wholesale prices.
Interest charges decreased due to an increase in interest expense in 2002 resulting from a true-up of the annual fuel recovery rider in March 2002 of $4.5 million and interest recorded in 2002 of $4.1 million (offset in other regulatory credits as discussed above) on the transition cost account obligation, which is now terminated as a result of the March 2002 settlement agreement.
Taxes other than income taxes decreased $3.1 million primarily due to decreased sales and ad valorem taxes.
The increase in net income was partially offset by the following:
- a decrease in unbilled revenue of $10.5 million as a result of less favorable sales volume primarily due to the effect of colder winter weather in December 2002; and
- an increase in depreciation and amortization expenses of $10.3 million primarily due to an increase in plant in service.
The March 2002 settlement agreement is discussed further in Note 2 to the domestic utility companies and System Energy financial statements in the Form 10-K.
Income Taxes
The effective income tax rates for the third quarters of 2003 and 2002 were 41.0% and 36.6%, respectively. The effective income tax rates for the nine months ended September 30, 2003 and 2002 were 39.8% and 38.7%, respectively. The difference in the effective income tax rate for the third quarter 2003 versus the federal statutory rate of 35.0% is primarily due to state income taxes net of federal in addition to depreciation book and tax differences. The effective income tax rate was lower in the third quarter of 2002 than in the third quarter of 2003 because of book and tax differences related to the March 2002 settlement agreement. The difference in the effective income tax rate for the nine months ended September 30, 2003 versus the federal statutory rate of 35.0% is primarily due to aforementioned differences, partially offset by the effect of flow-through book and tax differences related to liability reserve accruals and the amortization of investment tax credits.
Other Income Statement Variances
Third Quarter 2003 Compared to Third Quarter 2002
Decommissioning expense increased $9.0 million due to the implementation of SFAS 143, "Accounting for Asset Retirement Obligations." The increase in decommissioning expense is offset by increases in other regulatory credits and interest and dividend income and has no effect on net income.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Decommissioning expense increased $26.9 million due to the implementation of SFAS 143, "Accounting for Asset Retirement Obligations." The increase in decommissioning expense is offset by corresponding increases in other regulatory credits and interest and dividend income and has no effect on net income.
Liquidity and Capital Resources
Cash Flow
Cash flows for the nine months ended September 30, 2003 and 2002 were as follows:
2003 | 2002 | |||
(In Thousands) | ||||
Cash and cash equivalents at beginning of period | $95,513 | $103,466 | ||
Cash flow provided by (used in): | ||||
Operating activities | 345,116 | 318,369 | ||
Investing activities | (228,932) | (166,664) | ||
Financing activities | (179,053) | (176,894) | ||
Net decrease in cash and cash equivalents | (62,869) | (25,189) | ||
Cash and cash equivalents at end of period | $32,644 | $78,277 | ||
Operating Activities
Cash flow from operations increased $26.7 million for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 primarily due to income tax refunds received of $18.1 million during the nine months ended September 30, 2003 versus income taxes paid of $9.4 million during the nine months ended September 30, 2002. Money pool activity also contributed $57.2 million to the increase in cash flow from operations, as did an increase in net income as explained above. The increase in cash flow from operations was partially offset by an increase in deferred fuel costs for the nine months ended September 30, 2003 versus a decrease for the nine months ended September 30, 2002.
Entergy Arkansas' receivables from or (payables) to the money pool were as follows:
September 30, 2003 | December 31, 2002 | September 30, 2002 | December 31, 2001 | |||
(In Thousands) | ||||||
($42,665) | $4,279 | $34,085 | $23,794 | |||
Money pool activity provided $46.9 million of Entergy Arkansas' operating cash flows in the nine months ended September 30, 2003. Money pool activity used $10.3 million of Entergy Arkansas' operating cash flows in the nine months ended September 30, 2002. See Note 4 to the domestic utility companies and System Energy financial statements in the Form 10-K for a description of the money pool.
Recent tax legislation and elections
Due to book/tax timing differences associated with recent income tax legislation and certain income tax elections, Entergy Arkansas could obtain cash flow benefits of $305 million over the years 2003 through 2005. These timing differences will then reverse over the remaining life of Entergy Arkansas' depreciable assets.
Investing Activities
The increase of $62.3 million in net cash used in investing activities for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 was primarily due to the maturity of $38.4 million of other temporary investments in the first quarter of 2002. The increase was also due to an increase in under-recovered fuel and purchased power expenses of $14.7 million that have been deferred and are expected to be collected over a period greater than twelve months. See Note 1 to the domestic utility companies and System Energy financial statements in the Form 10-K for further discussion of the accounting for fuel costs.
Financing Activities
The increase of $2.2 million in net cash used by financing activities for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 was primarily due to the net redemption of $33.6 million more in long-term debt for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, substantially offset by the payment of $30.8 million less in common stock dividends during the same period.
Entergy Arkansas has implemented a planned financing program to address its long-term debt maturities and to restructure its debt portfolio, which will result in extended maturities, lowered rates, and additional flexibility.
The following table lists First Mortgage Bonds issued by Entergy Arkansas in 2003:
Issue Date | Description | Maturity | Amount | |||
(In Thousands) | ||||||
May 2003 | 5.4% Series | May 2018 | $150,000 | |||
June 2003 | 5.9% Series | June 2033 | 100,000 | |||
June 2003 | 5.0% Series | July 2018 | 115,000 | |||
$365,000 |
The following table lists First Mortgage Bonds retired by Entergy Arkansas in 2003:
Retirement Date | Description | Maturity | Amount | |||
(In Thousands) | ||||||
March 2003 | 7.72% Series | March 2003 | $100,000 | |||
August 2003 | 6.65% Series | August 2005 | 115,000 | |||
August 2003 | 7.50% Series | August 2007 | 100,000 | |||
September 2003 | 6.00% Series | October 2003 | 155,000 | |||
$470,000 |
Entergy Arkansas used proceeds from a $100 million November 2002 issuance and the 2003 First Mortgage Bond issuances for the retirements in 2003.
Uses and Sources of Capital
See "Management's Financial Discussion and Analysis - Liquidity and Capital Resources"in the Form 10-K for a discussion of Entergy Arkansas' uses and sources of capital. Following is an update to the information provided in the Form 10-K.
In April 2003, Entergy Arkansas renewed its 364-day credit facility through April 30, 2004. The amount available under the credit facility is $63 million, of which none was drawn at September 30, 2003.
Significant Factors and Known Trends
See "Management's Financial Discussion and Analysis - Significant Factors and Known Trends" in the Form 10-K for a discussion of utility restructuring, System Agreement proceedings, market and credit risks, state and local regulatory risks, nuclear matters, and environmental risks. Following are updates to the information provided in the Form 10-K.
Nuclear Matters
As discussed in the Form 10-K, Entergy issued a Request for Proposal (RFP) to provide replacement steam generators for ANO 1. Two companies submitted bids in response to the RFP. Entergy subsequently entered into a contract with one of the companies for delivery of the replacement steam generators in August 2005 in time for installation during a scheduled refueling outage beginning in September 2005. The other company filed a lawsuit in federal district court in Virginia seeking a temporary and permanent injunction against the winning bidder claiming that the winning bidder was using the other company's proprietary information in the design and fabrication of the replacement generators. The lawsuit has been settled, and the litigation has been dismissed with prejudice. The dispute should not affect the delivery date or the cost of the steam generators.
In January 2003, Entergy Arkansas filed a Petition for Declaratory Order to request a finding by the APSC that replacement of the steam generators and reactor vessel closure head at ANO 1 is in the public interest. The APSC found that the replacement is in the public interest in a declaratory order issued in May 2003.
Critical Accounting Estimates
See"Management's Financial Discussion and Analysis - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy Arkansas' accounting for nuclear decommissioning costs and pension and other retirement costs. Following is an update to the information provided in the Form 10-K.
SFAS 143
As discussed in the Form 10-K, Entergy Arkansas implemented SFAS 143,"Accounting for Asset Retirement Obligations," effective January 1, 2003. The net effect of implementing this standard for Entergy Arkansas was recorded as a regulatory asset, with no resulting impact on Entergy Arkansas' net income. Assets and liabilities increased by approximately $532 million in 2003 as a result of recording the asset retirement obligation at its fair value of $532 million as determined under SFAS 143, increasing total utility plant by $106 million, reducing accumulated depreciation by $252 million, and recording the related regulatory asset of $174 million.
ENTERGY ARKANSAS, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Nine Months Ended
2003 2002 2003 2002
(In Thousands) (In Thousands)
OPERATING REVENUES
Domestic electric $469,925 $474,873 $1,227,558 $1,220,622
-------- -------- ---------- ----------
OPERATING EXPENSES
Operation and Maintenance:
Fuel, fuel-related expenses, and
gas purchased for resale 30,581 76,005 107,669 249,468
Purchased power 139,829 102,485 363,295 262,440
Nuclear refueling outage expenses 5,679 5,877 17,565 18,935
Other operation and maintenance 93,632 94,501 259,445 430,616
Decommissioning 8,971 - 26,915 -
Taxes other than income taxes 8,961 9,481 26,973 30,054
Depreciation and amortization 50,846 47,229 150,733 140,410
Other regulatory charges (credits) - (4,364) 408 (20,896) (175,314)
net
-------- -------- ---------- ----------
TOTAL 334,135 335,986 931,699 956,609
-------- -------- ---------- ----------
OPERATING INCOME 135,790 138,887 295,859 264,013
-------- -------- ---------- ----------
OTHER INCOME
Allowance for equity funds used 2,047 2,243 6,276 5,543
during construction
Interest and dividend income 2,551 498 7,178 2,063
Miscellaneous - net (871) (593) (3,384) (5,121)
-------- -------- ---------- ----------
TOTAL 3,727 2,148 10,070 2,485
-------- -------- ---------- ----------
INTEREST AND OTHER CHARGES
Interest on long-term debt 21,465 22,189 64,093 63,574
Other interest - net 613 1,174 2,743 12,222
Distributions on preferred 1,275 1,275 3,825 3,825
securities of subsidiary
Allowance for borrowed funds used (1,347) (1,413) (3,973) (3,598)
during construction
-------- -------- ---------- ----------
TOTAL 22,006 23,225 66,688 76,023
-------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES 117,511 117,810 239,241 190,475
Income taxes 48,192 43,146 95,240 73,725
-------- -------- ---------- ----------
NET INCOME 69,319 74,664 144,001 116,750
Preferred dividend requirements and 1,944 1,944 5,832 5,832
other
-------- -------- ---------- ----------
EARNINGS APPLICABLE TO
COMMON STOCK $67,375 $72,720 $138,169 $110,918
======== ======== ========== ==========
See Notes to Respective Financial Statements.
ENTERGY ARKANSAS, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
(In Thousands)
OPERATING ACTIVITIES
Net income $144,001 $116,750
Noncash items included in net income:
Other regulatory credits - net (20,896) (175,314)
Depreciation, amortization, and decommissioning 177,648 140,410
Deferred income taxes and investment tax credits (8,501) (46,672)
Allowance for equity funds used during (6,276) (5,543)
construction
Changes in working capital:
Receivables (52,150) (16,899)
Fuel inventory 542 (6,146)
Accounts payable (5,032) 15,750
Taxes accrued 80,441 101,761
Interest accrued (1,514) (4,001)
Deferred fuel costs (34,096) 66,838
Other working capital accounts 7,296 (3,079)
Provision for estimated losses and reserves (559) (4,300)
Changes in other regulatory assets (11,425) 150,309
Other 75,637 (11,495)
--------- --------
Net cash flow provided by operating activities 345,116 318,369
--------- --------
INVESTING ACTIVITIES
Construction expenditures (214,716) (194,349)
Allowance for equity funds used during 6,276 5,543
construction
Nuclear fuel purchases (39,007) (60,075)
Proceeds from sale/leaseback of nuclear fuel 39,007 60,075
Decommissioning trust contributions and realized
change in trust assets (5,753) (16,255)
Changes in other temporary investments - net - 38,397
Other regulatory investments (14,739) -
--------- --------
Net cash flow used in investing activities (228,932) (166,664)
--------- --------
FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt 361,819 94,405
Retirement of long-term debt (471,040) (170,000)
Changes in short-term borrowings - (667)
Dividends paid:
Common stock (64,000) (94,800)
Preferred stock (5,832) (5,832)
--------- --------
Net cash flow used in financing activities (179,053) (176,894)
--------- --------
Net decrease in cash and cash equivalents (62,869) (25,189)
Cash and cash equivalents at beginning of period 95,513 103,466
--------- --------
Cash and cash equivalents at end of period $32,644 $78,277
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid/(received) during the period for:
Interest - net of amount capitalized $67,240 $79,856
Income taxes ($18,078) $9,356
Noncash investing and financing activities:
Change in unrealized appreciation/(depreciation) of
decommissioning trust assets $9,000 ($37,298)
Long-term debt refunded with proceeds from
long-term debt issued in a prior period - ($47,000)
See Notes to Respective Financial Statements.
ENTERGY ARKANSAS, INC.
BALANCE SHEETS
ASSETS
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT ASSETS
Cash and cash equivalents:
Cash $32,644 $28,174
Temporary cash investments - at cost,
which approximates market - 67,339
---------- ----------
Total cash and cash equivalents 32,644 95,513
---------- ----------
Accounts receivable:
Customer 97,922 67,674
Allowance for doubtful accounts (7,826) (8,031)
Associated companies 40,520 32,352
Other 28,089 16,619
Accrued unbilled revenues 69,897 67,838
---------- ----------
Total accounts receivable 228,602 176,452
---------- ----------
Deferred fuel costs 6,232 -
Accumulated deferred income taxes 14,237 5,061
Fuel inventory - at average cost 10,339 10,881
Materials and supplies - at average cost 84,575 78,533
Deferred nuclear refueling outage costs 16,587 25,858
Prepayments and other 6,041 8,335
---------- ----------
TOTAL 399,257 400,633
---------- ----------
OTHER PROPERTY AND INVESTMENTS
Investment in affiliates - at equity 11,215 11,215
Decommissioning trust funds 349,384 334,631
Non-utility property - at cost (less 1,457 1,460
accumulated depreciation)
Other 2,976 2,976
---------- ----------
TOTAL 365,032 350,282
---------- ----------
UTILITY PLANT
Electric 5,850,776 5,644,477
Property under capital lease 27,628 30,354
Construction work in progress 238,499 132,792
Nuclear fuel under capital lease 91,228 88,101
Nuclear fuel 7,264 10,543
---------- ----------
TOTAL UTILITY PLANT 6,215,395 5,906,267
Less - accumulated depreciation and 2,572,839 2,722,342
amortization
---------- ----------
UTILITY PLANT - NET 3,642,556 3,183,925
---------- ----------
DEFERRED DEBITS AND OTHER ASSETS
Regulatory assets:
SFAS 109 regulatory asset - net 117,348 111,748
Unamortized loss on reacquired debt 39,109 39,792
Other regulatory assets 333,176 130,689
Other 47,164 39,899
---------- ----------
TOTAL 536,797 322,128
---------- ----------
TOTAL ASSETS $4,943,642 $4,256,968
========== ==========
See Notes to Respective Financial Statements.
ENTERGY ARKANSAS, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT LIABILITIES
Currently maturing long-term debt $ - $255,000
Accounts payable:
Associated companies 78,587 37,833
Other 75,362 121,148
Customer deposits 37,393 35,886
Taxes accrued 96,703 16,262
Interest accrued 26,258 27,772
Deferred fuel costs - 42,603
Obligations under capital leases 59,069 58,745
System Energy refund 3,465 3,764
Other 18,299 17,734
---------- ----------
TOTAL 395,136 616,747
---------- ----------
NON-CURRENT LIABILITIES
Accumulated deferred income taxes and 867,822 821,829
taxes accrued
Accumulated deferred investment tax 74,518 78,231
credits
Obligations under capital leases 59,788 59,711
Other regulatory liabilities 44,347 -
Decommissioning 558,574 -
Accumulated provisions 30,904 31,463
Long-term debt 1,276,060 1,125,000
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely junior subordinated deferrable 60,000 -
debentures
Other 156,184 117,847
---------- ----------
TOTAL 3,128,197 2,234,081
---------- ----------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely junior subordinated deferrable - 60,000
debentures
SHAREHOLDERS' EQUITY
Preferred stock without sinking fund 116,350 116,350
Common stock, $0.01 par value,
authorized 325,000,000
shares; issued and outstanding
46,980,196 shares in 2003
and 2002 470 470
Paid-in capital 591,127 591,127
Retained earnings 712,362 638,193
---------- ----------
TOTAL 1,420,309 1,346,140
---------- ----------
Commitments and Contingencies
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,943,642 $4,256,968
========== ==========
See Notes to Respective Financial Statements.
ENTERGY ARKANSAS, INC.
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Increase/
Description 2003 2002 (Decrease) %
(In Millions)
Electric Operating Revenues:
Residential $181.8 $193.3 ($11.5) (6)
Commercial 89.6 93.7 (4.1) (4)
Industrial 88.4 97.6 (9.2) (9)
Governmental 4.4 4.1 0.3 7
--------------------------------
Total retail 364.2 388.7 (24.5) (6)
Sales for resale
Associated companies 52.7 33.0 19.7 60
Non-associated companies 51.5 49.5 2.0 4
Other 1.5 3.7 (2.2) (59)
--------------------------------
Total $469.9 $474.9 ($5.0) (1)
================================
Billed Electric Energy
Sales (GWh):
Residential 2,306 2,354 (48) (2)
Commercial 1,609 1,617 (8) -
Industrial 1,875 1,937 (62) (3)
Governmental 77 70 7 10
--------------------------------
Total retail 5,867 5,978 (111) (2)
Sales for resale
Associated companies 1,529 1,436 93 6
Non-associated companies 1,360 1,521 (161) (11)
--------------------------------
Total 8,756 8,935 (179) (2)
================================
Nine Months Ended Increase/
Description 2003 2002 (Decrease) %
(In Millions)
Electric Operating Revenues:
Residential $419.0 $442.8 ($23.8) (5)
Commercial 222.8 237.0 (14.2) (6)
Industrial 232.0 256.1 (24.1) (9)
Governmental 11.4 11.9 (0.5) (4)
--------------------------------
Total retail 885.2 947.8 (62.6) (7)
Sales for resale
Associated companies 168.6 126.1 42.5 34
Non-associated companies 145.8 125.4 20.4 16
Other 28.0 21.3 6.7 31
--------------------------------
Total $1,227.6 $1,220.6 $7.0 1
==================================
Billed Electric Energy
Sales (GWh):
Residential 5,617 5,476 141 3
Commercial 4,065 3,967 98 2
Industrial 5,240 5,217 23 -
Governmental 204 194 10 5
--------------------------------
Total retail 15,126 14,854 272 2
Sales for resale
Associated companies 5,283 5,322 (39) (1)
Non-associated companies 4,153 3,757 396 11
--------------------------------
Total 24,562 23,933 629 3
================================
ENTERGY GULF STATES, INC.
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
Results of Operations
Net Income
Entergy Gulf States experienced a significant decline in net income for the nine months ended September 30, 2003 primarily due to the $107.7 million accrual ($65.6 million net-of-tax) for the loss that would be associated with a final, non-appealable decision disallowing abeyed River Bend plant costs. See Note 2 to the domestic utility companies and System Energy financial statements for more details regarding the River Bend abeyed plant costs. Also, as discussed below in "Critical Accounting Estimates", net income for the nine months ended September 30, 2003 includes a one-time $21.3 million net-of-tax cumulative effect of accounting change due to the implementation of SFAS 143.
Operating Income
Third Quarter 2003 Compared to Third Quarter 2002
Operating income increased $20.5 million primarily due to:
an increase of $12.6 million due to an increase in the price applied to unbilled sales in addition to more favorable volume on unbilled sales, including the effect of weather; and
an increase of $9.9 million due to increased electricity usage of 151 GWh in the residential and commercial sectors.
The increase was partially offset by a decrease of $3.3 million due to the loss of two large industrial customers to cogeneration. The $3.3 million of lost net revenue represents approximately 1% of Entergy Gulf States' net revenue. Entergy Gulf States expects to lose one additional customer to cogeneration in 2005. Current sales to that customer account for approximately $11 million of Entergy Gulf States' net revenue annually. Entergy Gulf States does not currently expect additional significant losses to cogeneration because of the current economics of the electricity markets and Entergy Gulf States' marketing efforts in retaining industrial customers.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Operating income decreased $12.9 million primarily due to:
- a decrease of $15.2 million due to the recognition in income in 2002 of the Louisiana portion of the unamortized deferred gain on the 1988 sale of Nelson Units 1 and 2. The deferred gain was recognized because the LPSC no longer required that the gain reduce Entergy Gulf States' recoverable fuel;
- an increase of $9.1 million in depreciation expense due to an increase in plant in service;
- a decrease of $10.8 million due to the loss of two large industrial customers to cogeneration. The $10.8 million of lost net revenue represents approximately 1% of Entergy Gulf States' net revenue. See the explanation for the third quarter given above for Entergy Gulf States' expectations regarding additional losses to cogeneration; and
- a decrease of $4.6 million due to a base rate decrease effective June 2002.
The decrease in operating income was partially offset by:
- an increase of $17.4 million due to increased electricity usage of 381 GWh in the residential and commercial sectors; and
- an increase of $10.7 million due to an increase in the price applied to unbilled sales.
Income Taxes
The effective income tax rates for the third quarters of 2003 and 2002 were 31.4% and 38.0%, respectively. The difference in the third quarter 2003 effective income tax rate versus the federal statutory rate of 35.0% is primarily due to a downward revision in the estimate of federal income tax expense and flow-through book and tax timing differences. The difference in the third quarter 2002 effective income tax rate versus the federal statutory rate of 35.0% is primarily due to state income taxes.
The effective income tax rates for the nine months ended September 30, 2003 and 2002 were 21.8% and 38.4%, respectively. The difference in the effective income tax rate for the nine months ended September 30, 2003 versus the federal statutory rate of 35.0% is primarily due to the flow-through effect of book and tax timing differences, investment tax credit amortization, and a downward revision in the estimate of federal income tax expense. The difference in the effective income tax rate for the nine months ended September 30, 2002 versus the federal statutory rate of 35.0% is primarily due to state income taxes.
Other Impacts on Earnings
Third Quarter 2003 Compared to Third Quarter 2002
Miscellaneous income - net decreased $5.9 million primarily due to proceeds received in 2002 for the settlement of liability insurance coverage.
Interest expense on long-term debt increased $4.9 million primarily due to the issuance of $340 million of First Mortgage Bonds in November 2002, $600 million of First Mortgage Bonds in June 2003, and $440 million of First Mortgage Bonds in July 2003, partially offset by the retirement of $293 million of First Mortgage Bonds in March 2003 and $745 million of First Mortgage Bonds in the third quarter of 2003.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Miscellaneous income - net decreased $115.5 million primarily due to the $107.7 million accrual for the loss that would be associated with a final, non-appealable decision disallowing abeyed River Bend plant costs. See Note 2 to the domestic utility companies and System Energy financial statements for more details regarding the River Bend abeyed plant costs.
Interest expense on long-term debt increased $10.4 million primarily due to the issuance of $340 million of First Mortgage Bonds in November 2002, $600 million of First Mortgage Bonds in June 2003, and $440 million of First Mortgage Bonds in July 2003, partially offset by the retirement of $293 million of First Mortgage Bonds in March 2003 and $745 million of First Mortgage Bonds in the third quarter of 2003.
Other Income Statement Variances
Third Quarter 2003 Compared to Third Quarter 2002
Operating revenues increased $128.3 million primarily due to:
- an increase of $123.8 million in fuel cost recovery revenues primarily due to higher fuel rates; and
- an increase of $12.6 million due to an increase in the price applied to unbilled sales in addition to more favorable volume on unbilled sales, including the effect of weather.
The increases were partially offset by a decrease in wholesale revenue of $5.3 million primarily due to decreased sales to adjoining utility systems.
Fuel and purchased power expenses increased primarily due to increases in the market prices of natural gas and purchased power.
Decommissioning expense increased $2 million primarily due to the implementation of SFAS 143. The increase in decommissioning expense is offset by increases in other regulatory credits and interest and dividend income and has no effect on net income.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Operating revenues increased $381.9 million primarily due to the following increases:
- $342.7 million in fuel cost recovery revenues primarily due to higher fuel rates;
- $27.7 million in wholesale revenue primarily due to increased volume to municipal and co-op customers and affiliated systems coupled with an increase in the average price of energy;
- $16.3 million in gas revenues primarily due to an increase in the market price of natural gas; and
- $10.7 million due to an increase in the price applied to unbilled sales.
The increases were partially offset by a decrease of $21.1 million due to base rate decreases effective June 2002 and January 2003. The January 2003 base rate decrease has a minimal impact on net income because it is offset by a decrease in depreciation expense associated with the license extension of River Bend as reflected in rates.
Fuel and purchased power expenses increased primarily due to increases in the market prices of natural gas and purchased power.
Decommissioning expense increased $6 million primarily due to the implementation of SFAS 143. The increase in decommissioning expense is offset by increases in other regulatory credits and interest and dividend income and has no effect on net income.
Liquidity and Capital Resources
Cash Flow
Cash flows for the nine months ended September 30, 2003 and 2002 were as follows:
2003 | 2002 | |||
(In Thousands) | ||||
Cash and cash equivalents at beginning of period | $318,404 | $123,728 | ||
Cash flow provided by (used in): | ||||
Operating activities | 219,812 | 425,738 | ||
Investing activities | (331,480) | (229,808) | ||
Financing activities | (79,052) | (228,736) | ||
Net decrease in cash and cash equivalents | (190,720) | (32,806) | ||
Cash and cash equivalents at end of period | $127,684 | $90,922 | ||
Operating Activities
Cash flow from operations decreased $205.9 million for the nine months ended September 30, 2003 compared to the same period in 2002 primarily due to money pool activity and higher working capital needs and increased vendor payments in 2003 relating to storm expense accruals in late-2002.
Entergy Gulf States' receivables from the money pool were as follows:
September 30, 2003 | December 31, 2002 | September 30, 2002 | December 31, 2001 | |||
(In Thousands) | ||||||
$64,773 | $18,131 | $24,155 | $27,665 | |||
Money pool activity used $46.6 million of Entergy Gulf States' operating cash flow in 2003. See Note 4 to the domestic utility companies and System Energy financial statements in the Form 10-K for a description of the money pool.
Recent tax legislation and elections
Due to book/tax timing differences associated with recent income tax legislation and certain income tax elections, Entergy Gulf States could obtain cash flow benefits of $155 million over the years 2003 through 2005. These timing differences will then reverse over the remaining life of Entergy Gulf States' depreciable assets.
Investing Activities
Net cash used in investing activities increased $101.7 million for the nine months ended September 30, compared to the same period of 2002 primarily due to the maturity of $44.6 million of other temporary investments that provided cash in 2002. The increase was also due to an increase in under-recovered fuel and purchased power expenses of $41.6 million in Texas that have been deferred and are expected to be collected over a period greater than twelve months. See Note 1 to the domestic utility companies and System Energy financial statements in the Form 10-K for further discussion of the accounting for fuel costs.
Financing Activities
Net cash used in financing activities decreased $149.7 million for the nine months ended September 30, 2003 compared to the same period of 2002 primarily due to the net retirement of $148 million of long-term debt in 2002 compared to $15.4 million in 2003. Also contributing to the decrease in cash used was a decrease in dividends paid of $18.5 million in 2003 compared to 2002.
Entergy Gulf States has implemented a planned financing program to address its 2004 long-term debt maturities and to restructure its debt portfolio, which resulted in extended maturities, lowered rates, and sufficient flexibility in its portfolio so that Entergy Gulf States can economically manage Texas utility restructuring to the extent it affects Entergy Gulf States' debt portfolio.
The following table lists First Mortgage Bonds issued by Entergy Gulf States in 2003:
Issue Date | Description | Maturity | Amount | |||
(In Thousands) | ||||||
June 2003 | 3.6% Series | June 2008 | $325,000 | |||
June 2003 | Libor + 0.90% Series | June 2007 | 275,000 | |||
July 2003 | 6.2% Series | July 2033 | 240,000 | |||
July 2003 | 5.25% Series | August 2015 | 200,000 | |||
$1,040,000 |
The following table lists First Mortgage Bonds retired by Entergy Gulf States in 2003:
Retirement Date | Description | Maturity | Amount | |||
(In Thousands) | ||||||
March 2003 | 6.75% Series | March 2003 | $33,000 | |||
March 2003 | Libor + 1.2% Series | June 2003 | 260,000 | |||
July 2003 | 8.94% Series | January 2022 | 150,000 | |||
August 2003 | 8.7% Series | April 2024 | 294,950 | |||
September 2003 | Libor + 1.3% Series | September 2004 | 300,000 | |||
$1,037,950 |
Entergy Gulf States plans to retire, at maturity, $292 million of 8.25% Series First Mortgage Bonds due April 1, 2004 using cash on hand and internally generated funds.
Uses and Sources of Capital
See "Management's Financial Discussion and Analysis - Liquidity and Capital Resources"in the Form 10-K for a discussion of Entergy Gulf States' uses and sources of capital. The following is an update to the Form 10-K.
Following are the amounts of Entergy Gulf States' planned construction and other capital investments for 2003 through 2005, which reflect changes in management's estimate from the planned investments presented in the Form 10-K due mainly to the effect of actual spending in 2003 (the figures for 2003 include the effect of actual spending thus far in 2003):
2003 | 2004 | 2005 | ||||
(In Millions) | ||||||
Planned construction and capital investment | $298 | $228 | $233 | |||
See the Form 10-K for further discussion of Entergy Gulf States' capital spending plans for 2003 through 2005.
Significant Factors and Known Trends
See "Management's Financial Discussion and Analysis - Significant Factors and Known Trends" in the Form 10-K for a discussion of transition to retail competition, state and local regulatory risks, System Agreement proceedings, industrial, commercial, and wholesale customers, market and credit risks, nuclear matters, environmental risks, and litigation risks. Following are updates to the information provided in the Form 10-K.
Rate Proceedings
See Note 2 to the domestic utility companies and System Energy's financial statements in this Form 10-Q for a discussion of Entergy Gulf States' ninth and last required post-merger analysis filed with the LPSC in May 2002. In April 2003, the LPSC staff filed testimony in which it recommended that the LPSC require a rate refund of $30.3 million and a prospective rate reduction of $75.9 million, before taking into account the $11.5 million rate reduction that Entergy Gulf States implemented effective June 2002. In July 2003, Entergy Gulf States filed testimony rebutting the LPSC staff's testimony and supporting the filing. During discovery, the LPSC staff requested that Entergy Gulf States provide updated cost of service data to reflect changes in costs, revenues, and rate base through December 31, 2002. In September 2003, Entergy Gulf States supplied the updated data. The LPSC staff has not yet indicated whether the updated data will result in changes to its recommendations. A new pro cedural schedule has been established that requires the LPSC staff to file testimony in December 2003. This testimony will also address new issues presented by the updated 2002 cost of service data. Hearings are scheduled for May 2004. Entergy Gulf States cannot predict the ultimate outcome of this proceeding.
Deferred Fuel Costs
In September 2003, Entergy Gulf States filed an application with the PUCT to implement an $87.3 million interim fuel surcharge, including interest, to collect under-recovered fuel and purchased power expenses incurred from September 2002 through August 2003. Hearings were held in October 2003 and the PUCT is expected to issue an order in December 2003. Entergy Gulf States has requested that the surcharge be collected over a twelve-month period beginning January 2004. The outcome of this proceeding cannot be predicted at this time.
Transition to Retail Competition
See "Management's Financial Discussion and Analysis - Significant Factors and Known Trends" in the Form 10-K for a discussion of the status of retail open access in Entergy Gulf States' Texas service territory, and the proposal that Entergy Gulf States filed for an interim solution (retail open access without a FERC-approved RTO). The PUCT considered the proposal at a March 2003 hearing, and issued an order in April 2003. The order set forth a sequence of proceedings and activities designed to initiate an interim solution in the first half of 2004. These proceedings and activities include ruling on market protocols; initiating a proceeding to certify an independent organization to administer the market protocols and ensure nondiscriminatory access to transmission and distribution systems; resuming business separation proceedings; re-invigorating the pilot project; and initiating a market-readiness proceeding. In June 2003, the PUCT voted 2 to 1 to issue an order on rehearing in the interim solution proceeding. The PUCT issued the written order on rehearing in late-July 2003 in which it identified December 2004 as the target date for the beginning of the interim solution. Also in July 2003, the PUCT directed the parties to continue negotiations on unresolved issues in the market protocols docket. Several of the parties to that proceeding filed a settlement agreement with respect to the market protocols that the PUCT approved, after hearings, in an order issued in September 2003. Consistent with the order, Entergy Services has made a filing at the FERC requesting approval on an expedited basis of the market protocols subject to FERC jurisdiction.
In September 2003, the PUCT issued a written order that approved the Price to Beat (PTB) fuel factor for Entergy Gulf States, which is to be implemented upon the commencement of retail open access in its Texas service territory. This PTB fuel factor is subject to revision based on PUCT rules. The PUCT declined consideration of a request for rehearing sought by certain cities in Texas served by Entergy Gulf States and the Office of Public Utility Counsel. The period for appeal of the order remains open.
Critical Accounting Estimates
See"Management's Financial Discussion and Analysis - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy Gulf States' accounting for nuclear decommissioning costs, pension and other postretirement costs, and the application of SFAS 71. Following is an update to the information provided in the Form 10-K.
SFAS 143
As discussed in the Form 10-K, Entergy Gulf States implemented SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. The net effect of implementing this standard for the portion of River Bend subject to cost-based ratemaking was recorded as a regulatory asset, with no resulting impact on Entergy Gulf States' net income. Assets and liabilities increased in 2003 as a result of increasing the asset retirement obligation by $129 million to its fair value as determined under SFAS 143, reducing accumulated depreciation by $63 million, and recording the related regulatory asset of $32 million. The net effect of implementing SFAS 143 for the portion of River Bend not subject to cost-based ratemaking resulted in an earnings decrease of $21 million net-of-tax as a result of a one-time cumulative effect of accounting change. Applying SFAS 143 is not expected to have a material effect on Entergy Gulf States' earnings on an ongoing basis after its implementation.
ENTERGY GULF STATES, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Nine Months Ended
2003 2002 2003 2002
(In Thousands) (In Thousands)
OPERATING REVENUES
Domestic electric $769,326 $642,940 $2,015,330 $1,649,729
Natural gas 7,856 5,909 46,841 30,587
-------- -------- ---------- ----------
TOTAL 777,182 648,849 2,062,171 1,680,316
-------- -------- ---------- ----------
OPERATING EXPENSES
Operation and Maintenance:
Fuel, fuel-related expenses, and
gas purchased for resale 193,692 233,976 516,656 518,875
Purchased power 251,372 96,037 661,697 270,215
Nuclear refueling outage expenses 3,193 3,056 10,852 9,135
Other operation and maintenance 101,435 103,454 304,008 308,405
Decommissioning 3,567 1,579 10,701 4,731
Taxes other than income taxes 31,612 32,823 90,414 94,134
Depreciation and amortization 50,039 51,154 147,941 151,847
Other regulatory charges (credits) - (3,791) 1,227 (1,004) (10,796)
net
-------- -------- ---------- ----------
TOTAL 631,119 523,306 1,741,265 1,346,546
-------- -------- ---------- ----------
OPERATING INCOME 146,063 125,543 320,906 333,770
-------- -------- ---------- ----------
OTHER INCOME (DEDUCTIONS)
Allowance for equity funds used during 4,084 2,988 10,258 7,971
construction
Interest and dividend income 6,215 2,756 15,182 7,687
Miscellaneous - net 990 6,922 (108,380) 7,147
-------- -------- ---------- ----------
TOTAL 11,289 12,666 (82,940) 22,805
-------- -------- ---------- ----------
INTEREST AND OTHER CHARGES
Interest on long-term debt 37,574 32,694 107,631 97,191
Other interest - net 1,477 2,260 4,785 5,002
Distributions on preferred securities 1,859 1,859 5,578 5,578
of subsidiary
Allowance for borrowed funds used (3,410) (2,540) (8,651) (7,153)
during construction
-------- -------- ---------- ----------
TOTAL 37,500 34,273 109,343 100,618
-------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 119,852 103,936 128,623 255,957
Income taxes 37,569 39,447 33,339 98,194
-------- -------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 82,283 64,489 95,284 157,763
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (net of income taxes of $12,713) - - (21,333) -
-------- -------- ---------- ----------
NET INCOME 82,283 64,489 73,951 157,763
Preferred dividend requirements and 1,170 1,218 3,551 3,678
other
-------- -------- ---------- ----------
EARNINGS APPLICABLE TO
COMMON STOCK $81,113 $63,271 $70,400 $154,085
======== ======== ========== ==========
See Notes to Respective Financial Statements.
ENTEGY GULF STATES, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
(In Thousands)
OPERATING ACTIVITIES
Net income $73,951 $157,763
Noncash items included in net income:
Reserve for regulatory adjustments (9,806) 7,566
Other regulatory credits - net (1,004) (10,796)
Depreciation, amortization, and decommissioning 158,642 156,578
Deferred income taxes and investment tax credits (18,240) (38,938)
Allowance for equity funds used during (10,258) (7,971)
construction
Cumulative effect of accounting change 21,333 -
Changes in working capital:
Receivables (141,817) (37,577)
Fuel inventory (5,058) 1,687
Accounts payable (88,109) (12,319)
Taxes accrued 32,879 131,065
Interest accrued 5,020 1,675
Deferred fuel costs 30,253 43,035
Other working capital accounts 12,353 3,967
Provision for estimated losses and reserves 108,196 (822)
Changes in other regulatory assets 27,253 10,029
Other 24,224 20,796
-------- --------
Net cash flow provided by operating activities 219,812 425,738
-------- --------
INVESTING ACTIVITIES
Construction expenditures (234,689) (228,050)
Allowance for equity funds used during construction 10,258 7,971
Nuclear fuel purchases (39,959) (21,820)
Proceeds from sale/leaseback of nuclear fuel 38,029 21,923
Decommissioning trust contributions and realized
change in trust assets (9,862) (9,213)
Changes in other temporary investments - net (8,403) 44,643
Other regulatory investments (86,854) (45,262)
-------- --------
Net cash flow used in investing activities (331,480) (229,808)
-------- --------
FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt 1,032,778 -
Retirement of long-term debt (1,048,129) (148,000)
Redemption of preferred stock (3,450) (1,858)
Dividends paid:
Common stock (56,700) (75,200)
Preferred stock (3,551) (3,678)
-------- --------
Net cash flow used in financing activities (79,052) (228,736)
-------- --------
Net decrease in cash and cash equivalents (190,720) (32,806)
Cash and cash equivalents at beginning of period 318,404 123,728
-------- --------
Cash and cash equivalents at end of period $127,684 $90,922
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid/(received) during the period for:
Interest - net of amount capitalized $108,423 $102,066
Income taxes ($5,180) $18,900
Noncash investing and financing activities:
Change in unrealized appreciation/(depreciation) of
decommissioning trust assets $6,054 ($17,780)
See Notes to Respective Financial Statements.
ENTERGY GULF STATES, INC.
BALANCE SHEETS
ASSETS
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT ASSETS
Cash and cash equivalents:
Cash $35,116 $25,591
Temporary cash investments - at cost,
which approximates market 92,568 292,813
-------- --------
Total cash and cash equivalents 127,684 318,404
-------- --------
Other temporary investments 8,403 -
Accounts receivable:
Customer 137,898 81,879
Allowance for doubtful accounts (4,878) (5,893)
Associated companies 81,853 21,356
Other 28,019 40,156
Accrued unbilled revenues 131,800 95,377
-------- --------
Total accounts receivable 374,692 232,875
-------- --------
Deferred fuel costs 157,165 100,564
Accumulated deferred income taxes - 1,681
Fuel inventory - at average cost 54,452 49,394
Materials and supplies - at average cost 101,330 99,190
Prepayments and other 31,595 47,206
-------- --------
TOTAL 855,321 849,314
-------- --------
OTHER PROPERTY AND INVESTMENTS
Decommissioning trust funds 256,651 240,735
Non-utility property - at cost (less accumulated 137,045 192,975
depreciation)
Other 19,472 18,108
-------- --------
TOTAL 413,168 451,818
-------- --------
UTILITY PLANT
Electric 8,140,872 7,895,009
Property under capital lease 12,429 19,795
Natural gas 64,430 60,810
Construction work in progress 321,764 306,209
Nuclear fuel under capital lease 64,664 41,447
-------- --------
TOTAL UTILITY PLANT 8,604,159 8,323,270
Less - accumulated depreciation and amortization 3,933,437 3,885,559
-------- --------
UTILITY PLANT - NET 4,670,722 4,437,711
-------- --------
DEFERRED DEBITS AND OTHER ASSETS
Regulatory assets:
SFAS 109 regulatory asset - net 449,052 452,887
Unamortized loss on reacquired debt 48,094 31,186
Other regulatory assets 273,391 226,555
Long-term receivables 20,373 23,192
Other 45,649 35,194
-------- --------
TOTAL 836,559 769,014
-------- --------
TOTAL ASSETS $6,775,770 $6,507,857
========== ==========
See Notes to Respective Financial Statements.
ENTERGY GULF STATES, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT LIABILITIES
Currently maturing long-term debt $292,000 $293,000
Accounts payable:
Associated companies 74,678 51,383
Other 94,392 205,796
Customer deposits 51,283 48,061
Taxes accrued 68,793 35,914
Accumulated deferred income taxes 16,715 -
Nuclear refueling outage costs 4,987 14,244
Interest accrued 43,890 38,870
Obligations under capital leases 36,920 36,157
Other 20,358 15,441
---------- ----------
TOTAL 704,016 738,866
---------- ----------
NON-CURRENT LIABILITIES
Accumulated deferred income taxes and taxes accrued 1,319,925 1,310,028
Accumulated deferred investment tax credits 145,754 156,401
Obligations under capital leases 40,174 25,085
Other regulatory liabilities 9,253 5,557
Decommissioning 293,650 148,728
Transition to competition 79,098 79,098
Regulatory reserves 34,932 44,738
Accumulated provisions 66,974 65,289
Long-term debt 1,964,144 1,959,288
Preferred stock with sinking fund 20,877 -
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely junior subordinated deferrable debentures 85,000 -
Other 226,581 93,396
---------- ----------
TOTAL 4,286,362 3,887,608
---------- ----------
Preferred stock with sinking fund - 24,327
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely junior subordinated deferrable debentures - 85,000
SHAREHOLDERS' EQUITY
Preferred stock without sinking fund 47,327 47,327
Common stock, no par value, authorized 200,000,000
shares; issued and outstanding 100 shares in 2003 114,055 114,055
and 2002
Paid-in capital 1,157,459 1,157,459
Retained earnings 463,629 449,929
Accumulated other comprehensive income 2,922 3,286
---------- ----------
TOTAL 1,785,392 1,772,056
---------- ----------
Commitments and Contingencies
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,775,770 $6,507,857
========== ==========
See Notes to Respective Financial Statements.
ENTERGY GULF STATES, INC.
STATEMENTS OF RETAINED EARNINGS AND COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended
2003 2002
(In Thousands)
RETAINED EARNINGS
Retained Earnings - Beginning of period $422,116 $431,295
Add - Earnings applicable to common 81,113 $81,113 63,271 $63,271
stock
Deduct:
Dividends declared on common stock 39,600 43,800
Capital stock and other expenses - (58)
-------- --------
Total 39,600 43,742
-------- --------
Retained Earnings - End of period $463,629 $450,824
======== ========
ACCUMULATED OTHER COMPREHENSIVE
INCOME (Net of Taxes):
Balance at beginning of period:
Accumulated derivative instrument fair $2,753 $2,078
value changes
Net derivative instrument fair value changes
arising during the period 169 169 1,954 1,954
------- ------- -------- -------
Balance at end of period:
Accumulated derivative instrument fair $2,922 $4,032
value changes ======= ------- ======== -------
Comprehensive Income $81,282 $65,225
======= =======
Nine Months Ended
2003 2002
(In Thousands)
RETAINED EARNINGS
Retained Earnings - Beginning of period $449,929 $371,939
Add - Earnings applicable to common 70,400 $70,400 154,085 $154,085
stock
Deduct:
Dividends declared on common stock 56,700 75,200
-------- --------
Total 56,700 75,200
-------- --------
Retained Earnings - End of period $463,629 $450,824
======== ========
ACCUMULATED OTHER COMPREHENSIVE
INCOME (Net of Taxes):
Balance at beginning of period:
Accumulated derivative instrument fair $3,286 $ -
value changes
Net derivative instrument fair value changes
arising during the period (364) (364) 4,032 4,032
------- ------- -------- -------
Balance at end of period:
Accumulated derivative instrument fair $2,922 $4,032
value changes ======= ------- ======== -------
Comprehensive Income $70,036 $158,117
======= =======
See Notes to Respective Financial Statements.
ENTERGY GULF STATES, INC.
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Increase/
Description 2003 2002 (Decrease) %
(In Millions)
Electric Operating Revenues:
Residential $ 284.4 $ 234.4 $ 50.0 21
Commercial 182.6 146.5 36.1 25
Industrial 228.2 193.6 34.6 18
Governmental 9.9 9.1 0.8 9
------------------------------
Total retail 705.1 583.6 121.5 21
Sales for resale
Associated companies 18.8 11.1 7.7 69
Non-associated companies 35.0 48.0 (13.0) (27)
Other 10.4 0.2 10.2 5,100
------------------------------
Total $ 769.3 $ 642.9 $126.4 20
==============================
Billed Electric Energy
Sales (GWh):
Residential 3,173 3,095 78 3
Commercial 2,333 2,260 73 3
Industrial 3,889 4,157 (268) (6)
Governmental 115 127 (12) (9)
------------------------------
Total retail 9,510 9,639 (129) (1)
Sales for resale
Associated companies 682 357 325 91
Non-associated companies 564 1,214 (650) (54)
------------------------------
Total 10,756 11,210 (454) (4)
==============================
Nine Months Ended Increase/
Description 2003 2002 (Decrease) %
(In Millions)
Electric Operating Revenues:
Residential $ 645.8 $ 543.3 $ 102.5 19
Commercial 461.5 378.6 82.9 22
Industrial 640.0 519.7 120.3 23
Governmental 29.7 25.1 4.6 18
---------------------------------
Total retail 1,777.0 1,466.7 310.3 21
Sales for resale
Associated companies 33.5 16.6 16.9 102
Non-associated companies 122.3 111.5 10.8 10
Other 82.5 54.9 27.6 50
---------------------------------
Total $2,015.3 $ 1,649.7 $ 365.6 22
=================================
Billed Electric Energy
Sales (GWh):
Residential 7,599 7,387 212 3
Commercial 6,147 5,978 169 3
Industrial 11,488 11,877 (389) (3)
Governmental 363 355 8 2
---------------------------------
Total retail 25,597 25,597 - -
Sales for resale
Associated companies 943 486 457 94
Non-associated companies 2,639 3,426 (787) (23)
---------------------------------
Total 29,179 29,509 (330) (1)
=================================
ENTERGY LOUISIANA, INC.
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
Results of Operations
Operating Income
Third Quarter 2003 Compared to Third Quarter 2002
Operating income decreased slightly primarily due to an increase in other operation and maintenance expenses offset by an increase in net revenue. Net revenue increased primarily due to an increase in the volume of unbilled sales, offset by decreased electricity usage of 527 GWh in the industrial sector, including the loss of a large industrial customer to co-generation.
Other operation and maintenance expenses increased primarily due to increased benefit costs.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Operating income decreased $30.3 million primarily due to:
- a decrease of $14.2 million due to the loss of a large industrial customer to cogeneration. The $14.2 million of lost net revenue represents approximately 2% of Entergy Louisiana's net revenue. Entergy Louisiana does not currently expect additional significant losses to cogeneration because of the current economics of the electricity markets and Entergy Louisiana's marketing efforts in retaining industrial customers;
- an increase in other operation and maintenance expenses of $12.9 million primarily due to increased benefit costs;
- a decrease of $8.3 million due to the September 2002 settlement related to the Vidalia contract. See Entergy Louisiana's"Management's Financial Discussion and Analysis" in the Form 10-K for more details regarding the settlement;
- an increase in taxes other than income taxes of $8.1 million primarily due to the franchise tax adjustments recorded in 2002 as a result of a favorable court decision that allowed Entergy Louisiana to receive a refund for certain franchise taxes previously expensed and paid under protest; and
- an increase in depreciation and amortization expenses of $6.0 million primarily due to an increase in plant in service.
The decrease in operating income was partially offset by an increase in net revenue of $17.1 million due to an increase in the price applied to unbilled sales.
Other Impacts on Earnings
Third Quarter 2003 Compared to Third Quarter 2002
Lower interest charges increased pre-tax earnings by $10.7 million primarily due to the redemption of $150 million of First Mortgage Bonds in June 2003 and the redemption of $15.3 million of First Mortgage Bonds in November 2002.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Lower interest charges increased pre-tax earnings by $16.9 million primarily due to decreased interest on long-term debt due to the redemption of $150 million of First Mortgage Bonds in June 2003 and the redemption of $187 million of First Mortgage Bonds from April through December of 2002, partially offset by the issuance of $150 million of First Mortgage Bonds in March 2002.
Income Taxes
The effective income tax rates for the third quarters of 2003 and 2002 were 39.4% and 40.5%, respectively. The effective income tax rates for the nine months ended September 30, 2003 and 2002 were 39.1% and 39.0%, respectively. The differences in the effective income tax rates for the third quarters of 2003 and 2002 and the nine months ended September 30, 2003 and 2002 versus the federal statutory rate of 35.0% are primarily due to state income taxes and depreciation book and tax differences.
Other Income Statement Variances
Third Quarter 2003 Compared to Third Quarter 2002
Operating revenues increased $118.4 million primarily due to:
- an increase of $73.7 million in fuel cost recovery revenues due to higher fuel rates;
- an increase of $45.2 million in wholesale revenue primarily due to increased sales to affiliated systems; and
- an increase of $9.1 million due to an increase in the volume of unbilled sales, including the effect of weather.
The increase was offset by decreased electricity usage in the service territory as discussed above.
Fuel and purchased power expenses increased primarily due to an increase in deferred fuel costs and an increase in the market prices of natural gas and purchased power.
Decommissioning expense increased $2.5 million primarily due to the implementation of SFAS 143, "Accounting for Asset Retirement Obligations," adopted in January 2003. See "Critical Accounting Estimates" for more details on SFAS 143. The increase in decommissioning expense is offset by regulatory credits and interest and dividend income and has no effect on net income.
Other regulatory credits increased $10.0 million primarily due to:
- a decrease of $4.2 million due to deferred capacity charges recorded in the third quarter as allowed by the LPSC related to resource planning;
- the amortization of $2.6 million of deferred capacity charges for the summer of 2001, which began in August 2002; and
- a decrease of $2.6 million due to the change in accounting for asset retirement obligations in compliance with SFAS 143, adopted in January 2003. This decrease has no effect on net income.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Operating revenues increased $297.0 million primarily due to:
- an increase of $226.8 million in fuel cost recovery revenues due to higher fuel rates; and
- an increase of $95.5 million in wholesale revenue primarily due to increased sales to affiliated systems.
The increase was partially offset by a decrease in the volume of unbilled sales and decreased electricity usage in the service territory as discussed above.
Fuel and purchased power expenses increased primarily due to increases in the market prices of natural gas and purchased power.
Decommissioning expense increased $7.6 million primarily due to the implementation of SFAS 143, "Accounting for Asset Retirement Obligations," adopted in January 2003. See "Critical Accounting Estimates" for more details on SFAS 143. The increase in decommissioning expense is offset by other regulatory credits and interest and dividend income and has no effect on net income.
Other regulatory charges decreased by $10.1 million primarily due to:
- a decrease of $6.2 million due to the change in accounting for asset retirement obligations in compliance with SFAS 143, adopted in January 2003. This decrease has no effect on net income; and
- a decrease of $4.3 million due to deferred capacity charges recorded in the third quarter as allowed by the LPSC related to resource planning.
Liquidity and Capital Resources
Cash Flow
Cash flows for the nine months ended September 30, 2003 and 2002 were as follows:
2003 | 2002 | |||
(In Thousands) | ||||
Cash and cash equivalents at beginning of period | $ 311,800 | $42,408 | ||
Cash flow provided by (used in): | ||||
Operating activities | 260,919 | 395,046 | ||
Investing activities | (173,411) | (144,693) | ||
Financing activities | (331,051) | (260,014) | ||
Net decrease in cash and cash equivalents | (243,543) | (9,661) | ||
Cash and cash equivalents at end of period | $68,257 | $32,747 | ||
Operating Activities
Cash flow from operations decreased $134.1 million for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 primarily due to money pool activity which provided $143.5 million of Entergy Louisiana's operating cash flows in the first nine months of 2002 compared to using $15.4 million in 2003. Entergy Louisiana's receivables from or (payables) to the money pool were as follows:
September 30, 2003 | December 31, 2002 | September 30, 2002 | December 31, 2001 | |||
(In Thousands) | ||||||
$34,260 | $18,854 | ($139,666) | $3,812 | |||
See Note 4 to the domestic utility companies and System Energy financial statements in the Form 10-K for a description of the money pool.
Recent tax legislation and elections
As discussed in the Form 10-K, Entergy Louisiana made a change in its method of accounting for tax purposes related to the contract to purchase power from the Vidalia project. This change provided cash flow benefits in 2001 and 2002. In addition, due to book/tax timing differences associated with recent income tax legislation and certain income tax elections, Entergy Louisiana could obtain cash flow benefits of $170 million over the years 2003 through 2005. These timing differences will then reverse over the remaining life of Entergy Louisiana's depreciable assets.
Investing Activities
The increase of $28.7 million in net cash used in investing activities for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 was primarily due to increased spending on customer service and transmission projects.
Financing Activities
The increase of $71.0 million in net cash used in financing activities for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 was primarily due to:
- the retirement, at maturity, of $150 million of 8.5% Series First Mortgage Bonds during the first nine months of 2003 using cash on hand compared to the net retirement of $119 million of First Mortgage Bonds during the same period in 2002;
- principal payments of $35.4 million in 2003 for the Waterford 3 Lease Obligation compared to principal payments of $15.9 million in 2002;
- an increase of $11.3 million in common stock dividends paid; and
- $15 million provided in 2002 by a draw made on Entergy Louisiana's 364-day credit facility in 2002.
On October 1, 2003, Entergy Louisiana purchased its $110.95 million 5.35% Series St. Charles Parish bonds from the holders, pursuant to a mandatory tender provision, and has not remarketed the bonds at this time. Entergy Louisiana used a combination of cash on hand and short-term borrowing to buy-in the bonds.
Uses and Sources of Capital
See "Management's Financial Discussion and Analysis - Liquidity and Capital Resources"in the Form 10-K for a discussion of Entergy Louisiana's uses and sources of capital. Following is an update to the information provided in the Form 10-K.
In May 2003, Entergy Louisiana renewed its 364-day credit facility through May 31, 2004. The amount available under the credit facility is $15 million, of which none was drawn at September 30, 2003.
Following are the amounts of Entergy Louisiana's planned construction and other capital investments for 2003 through 2005, which reflect changes in management's estimate from the planned investments presented in the Form 10-K due mainly to the effect of actual spending in 2003 (the figures for 2003 include the effect of actual spending thus far in 2003):
2003 | 2004 | 2005 | ||||
(In Millions) | ||||||
Planned construction and capital investment | $234 | $186 | $197 | |||
See the Form 10-K for further discussion of Entergy Louisiana's capital spending plans for 2003 through 2005.
Significant Factors and Known Trends
See "Management's Financial Discussion and Analysis - Significant Factors and Known Trends" in the Form 10-K for a discussion of utility restructuring, state rate regulation, System Agreement proceedings, industrial and commercial customers, market and credit risks, nuclear matters, environmental risks, and litigation risks. Following is an update to the Form 10-K.
Rate Proceedings
See Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K for a discussion of the July 2002 settlement between Entergy Louisiana and the LPSC Staff. In accordance with the settlement, Entergy Louisiana filed a revenue requirement analysis in June 2003. The analysis reflected a revenue deficiency, but Entergy Louisiana has not requested a change in rates. Entergy Louisiana is expected to make a rate filing with the LPSC by mid-2004.
Critical Accounting Estimates
See"Management's Financial Discussion and Analysis - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy Louisiana's accounting for nuclear decommissioning costs and pension and other retirement costs. The following is an update to the Form 10-K.
SFAS 143
As discussed in the Form 10-K, Entergy Louisiana implemented SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. The net effect of implementing this standard for Entergy Louisiana was recorded as a regulatory asset, with no resulting impact on Entergy Louisiana's net income. Assets and liabilities increased by approximately $305 million in 2003 as a result of recording the asset retirement obligation at its fair value of $305 million as determined under SFAS 143, increasing total utility plant by $99 million, reducing accumulated depreciation by $82 million, and recording the related regulatory asset of $124 million.
ENTERGY LOUISIANA, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Nine Months Ended
2003 2002 2003 2002
(In Thousands) (In Thousands)
OPERATING REVENUES
Domestic electric $646,503 $528,052 $1,678,444 $1,381,404
-------- -------- ---------- ----------
OPERATING EXPENSES
Operation and Maintenance:
Fuel, fuel-related expenses, and
gas purchased for resale 198,955 125,878 417,953 274,568
Purchased power 184,250 138,548 500,152 340,210
Nuclear refueling outage expenses 2,745 2,745 8,235 8,757
Other operation and maintenance 85,626 77,651 250,198 237,309
Decommissioning 5,142 2,606 15,427 7,817
Taxes other than income taxes 18,240 20,650 52,754 44,629
Depreciation and amortization 48,439 46,268 143,411 137,410
Other regulatory charges (credits) - (5,126) 4,869 1,416 11,499
net
-------- -------- ---------- ----------
TOTAL 538,271 419,215 1,389,546 1,062,199
-------- -------- ---------- ----------
OPERATING INCOME 108,232 108,837 288,898 319,205
-------- -------- ---------- ----------
OTHER INCOME
Allowance for equity funds used 1,962 1,327 5,095 3,760
during construction
Interest and dividend income 1,333 308 6,865 7,126
Miscellaneous - net (871) (491) (2,746) (2,111)
-------- -------- ---------- ----------
TOTAL 2,424 1,144 9,214 8,775
-------- -------- ---------- ----------
INTEREST AND OTHER CHARGES
Interest on long-term debt 14,461 24,948 52,961 70,203
Other interest - net 831 338 2,497 1,017
Distributions on preferred 1,575 1,575 4,725 4,725
securities of subsidiary
Allowance for borrowed funds used (1,629) (967) (3,970) (2,834)
during construction
-------- -------- ---------- ----------
TOTAL 15,238 25,894 56,213 73,111
-------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES 95,418 84,087 241,899 254,869
Income taxes 37,555 34,024 94,516 99,466
-------- -------- ---------- ----------
NET INCOME 57,863 50,063 147,383 155,403
Preferred dividend requirements and 1,678 1,678 5,035 5,035
other
-------- -------- ---------- ----------
EARNINGS APPLICABLE TO
COMMON STOCK $56,185 $48,385 $142,348 $150,368
======== ======== ========== ==========
See Notes to Respective Financial Statements.
ENTERGY LOUISIANA, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
(In Thousands)
OPERATING ACTIVITIES
Net income $147,383 $155,403
Noncash items included in net income:
Other regulatory charges - net 1,416 11,499
Depreciation, amortization, and decommissioning 158,838 145,227
Deferred income taxes and investment tax credits 786,652 36,097
Allowance for equity funds used during construction (5,095) (3,760)
Changes in working capital:
Receivables (84,832) (74,583)
Accounts payable (23,120) 148,727
Taxes accrued (658,113) 100,529
Interest accrued (10,646) (6,175)
Deferred fuel costs (61,672) (88,819)
Other working capital accounts 19,514 (20,319)
Provision for estimated losses and reserves 7,628 1,203
Changes in other regulatory assets 16,174 12,078
Other (33,208) (22,061)
-------- --------
Net cash flow provided by operating activities 260,919 395,046
-------- --------
INVESTING ACTIVITIES
Construction expenditures (162,944) (142,060)
Allowance for equity funds used during construction 5,095 3,760
Nuclear fuel purchases (32,241) (50,473)
Proceeds from sale/leaseback of nuclear fuel 32,241 50,473
Decommissioning trust contributions and realized
change in trust assets (11,118) (12,545)
Changes in other temporary investments - net (4,444) 6,152
-------- --------
Net cash flow used in investing activities (173,411) (144,693)
-------- --------
FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt - 144,679
Retirement of long-term debt (185,416) (285,358)
Changes in short-term borrowings - 15,000
Dividends paid:
Common stock (140,600) (129,300)
Preferred stock (5,035) (5,035)
-------- --------
Net cash flow used in financing activities (331,051) (260,014)
-------- --------
Net decrease in cash and cash equivalents (243,543) (9,661)
Cash and cash equivalents at beginning of period 311,800 42,408
-------- --------
Cash and cash equivalents at end of period $68,257 $32,747
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid/(received) during the period for:
Interest - net of amount capitalized $47,234 $78,238
Income taxes - ($9,983)
Noncash investing and financing activities:
Change in unrealized appreciation/(depreciation) of
decommissioning trust assets $5,011 ($9,270)
See Notes to Respective Financial Statements.
ENTERGY LOUISIANA, INC.
BALANCE SHEETS
ASSETS
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT ASSETS
Cash and cash equivalents:
Cash $21,664 $15,130
Temporary cash investments - at cost,
which approximates market 46,593 296,670
---------- ----------
Total cash and cash equivalents 68,257 311,800
---------- ----------
Other temporary investments 4,444 -
Accounts receivable:
Customer 127,052 95,009
Allowance for doubtful accounts (3,208) (4,090)
Associated companies 46,123 30,722
Other 19,647 17,949
Accrued unbilled revenues 139,278 104,470
---------- ----------
Total accounts receivable 328,892 244,060
---------- ----------
Deferred fuel costs 36,070 -
Accumulated deferred income taxes - 4,400
Materials and supplies - at average cost 77,712 78,327
Deferred nuclear refueling outage costs 2,679 10,017
Prepayments and other 19,672 117,720
---------- ----------
TOTAL 537,726 766,324
---------- ----------
OTHER PROPERTY AND INVESTMENTS
Investment in affiliates - at equity 14,230 14,230
Decommissioning trust funds 141,183 125,054
Non-utility property - at cost (less accumulated 21,351 21,489
depreciation)
---------- ----------
TOTAL 176,764 160,773
---------- ----------
UTILITY PLANT
Electric 5,749,998 5,557,776
Property under capital lease 249,328 241,071
Construction work in progress 186,027 147,122
Nuclear fuel under capital lease 68,564 50,893
---------- ----------
TOTAL UTILITY PLANT 6,253,917 5,996,862
Less - accumulated depreciation and amortization 2,686,291 2,651,336
---------- ----------
UTILITY PLANT - NET 3,567,626 3,345,526
---------- ----------
DEFERRED DEBITS AND OTHER ASSETS
Regulatory assets:
SFAS 109 regulatory asset - net 156,100 157,642
Unamortized loss on reacquired debt 24,427 25,846
Other regulatory assets 234,749 119,359
Long-term receivables 1,511 1,511
Other 32,109 26,007
---------- ----------
TOTAL 448,896 330,365
---------- ----------
TOTAL ASSETS $4,731,012 $4,602,988
========== ==========
See Notes to Respective Financial Statements.
ENTERGY LOUISIANA, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT LIABILITIES
Currently maturing long-term debt $125,759 $296,366
Accounts payable:
Associated companies 58,259 54,622
Other 92,659 119,416
Customer deposits 65,264 63,255
Taxes accrued 108,165 -
Accumulated deferred income taxes 15,298 -
Interest accrued 19,907 30,553
Deferred fuel costs - 25,602
Obligations under capital leases 33,927 33,927
Other 10,487 8,941
---------- ----------
TOTAL 529,725 632,682
---------- ----------
NON-CURRENT LIABILITIES
Accumulated deferred income taxes and taxes 1,609,089 1,695,570
accrued
Accumulated deferred investment tax credits 102,578 106,539
Obligations under capital leases 34,637 16,966
Other regulatory liabilities 4,740 6,601
Decommissioning 320,155 -
Accumulated provisions 81,968 74,340
Long-term debt 815,498 830,188
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely junior subordinated deferrable debentures 70,000 -
Other 86,276 95,504
---------- ----------
TOTAL 3,124,941 2,825,708
---------- ----------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely junior subordinated deferrable debentures - 70,000
SHAREHOLDERS' EQUITY
Preferred stock without sinking fund 100,500 100,500
Common stock, no par value, authorized 250,000,000
shares; issued 165,173,180 shares in 2003 and 1,088,900 1,088,900
2002
Capital stock expense and other (1,718) (1,718)
Retained earnings 8,664 6,916
Less - treasury stock, at cost (18,202,573 shares in 120,000 120,000
2003 and 2002)
---------- ----------
TOTAL 1,076,346 1,074,598
---------- ----------
Commitments and Contingencies
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,731,012 $4,602,988
========== ==========
See Notes to Respective Financial Statements.
ENTERGY LOUISIANA, INC.
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Increase/
Description 2003 2002 (Decrease) %
(In Millions)
Electric Operating Revenues:
Residential $250.9 $220.9 $30.0 14
Commercial 138.4 119.7 18.7 16
Industrial 198.5 179.7 18.8 10
Governmental 11.6 9.6 2.0 21
-------------------------------
Total retail 599.4 529.9 69.5 13
Sales for resale
Associated companies 38.2 (7.2) 45.4 627
Non-associated companies 3.5 3.8 (0.3) (8)
Other 5.4 1.6 3.8 238
-------------------------------
Total $646.5 $528.1 $118.4 22
===============================
Billed Electric Energy
Sales (GWh):
Residential 2,811 2,868 (57) (2)
Commercial 1,611 1,622 (11) (1)
Industrial 3,326 3,853 (527) (14)
Governmental 135 130 5 4
-------------------------------
Total retail 7,883 8,473 (590) (7)
Sales for resale
Associated companies 533 (125) 658 526
Non-associated companies 44 16 28 175
-------------------------------
Total 8,460 8,364 96 1
===============================
Nine Months Ended Increase/
Description 2003 2002 (Decrease) %
(In Millions)
Electric Operating Revenues:
Residential $575.3 $490.9 $84.4 17
Commercial 355.8 301.1 54.7 18
Industrial 541.1 469.4 71.7 15
Governmental 32.2 26.4 5.8 22
-------------------------------
Total retail 1,504.4 1,287.8 216.6 17
Sales for resale
Associated companies 97.9 1.9 96.0 5,053
Non-associated companies 10.0 10.5 (0.5) (5)
Other 66.1 81.2 (15.1) (19)
-------------------------------
Total $1,678.4 $1,381.4 $297.0 22
=================================
Billed Electric Energy
Sales (GWh):
Residential 6,847 6,810 37 1
Commercial 4,230 4,195 35 1
Industrial 9,668 11,223 (1,555) (14)
Governmental 390 380 10 3
-------------------------------
Total retail 21,135 22,608 (1,473) (7)
Sales for resale
Associated companies 1,321 29 1,292 4,455
Non-associated companies 113 108 5 5
-------------------------------
Total 22,569 22,745 (176) (1)
===============================
ENTERGY MISSISSIPPI, INC.
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
Results of Operations
Operating Income
Third Quarter 2003 Compared to Third Quarter 2002
Operating income increased $2.7 million primarily due to an increase of $15 million in operating revenue due to a base rate increase effective January 2003. The rate increase is discussed in Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K.
The increase in operating income was partially offset by the following:
- an increase of $5.2 million in other operation and maintenance expenses due to increased vegetation maintenance, pole inspection costs, and increased benefit costs;
- a decrease of $4 million in net wholesale revenue due to a decrease in volume; and
- an increase of $2.5 million in depreciation and amortization expenses due to an increase in plant in service.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Operating income increased $31.3 million primarily due to:
- an increase of $34.6 million due to a base rate increase effective January 2003; and
- an increase of $4.5 million due to increased electricity usage of 129 GWh for all customer sectors.
The increase in operating income was partially offset by the following:
- an increase of $4.9 million in depreciation and amortization expenses due to an increase in plant in service; and
- a decrease of $4.1 million in wholesale revenue due to decreased net generation and purchases that resulted in less energy available for resale sales.
Other Impacts on Earnings
Interest and dividend income decreased $2.4 million for the nine months ended September 30, 2003 compared to the same period in 2002 primarily due to carrying charges on deferred fuel costs in 2002.
Income Taxes
The effective income tax rates for the third quarters of 2003 and 2002 were 39.5% and 37.9%, respectively. The effective income tax rates for the nine months ended September 30, 2003 and 2002 were 37.3% and 36.9%, respectively. The differences in the effective tax rates for the third quarters of 2003 and 2002 and the nine months ended September 30, 2003 and 2002 versus the federal statutory rate of 35.0% are primarily due to state income taxes and depreciation book and tax differences.
Other Income Statement Variances
Third Quarter 2003 Compared to Third Quarter 2002
Fuel and purchased power expenses decreased primarily due to the under-recovery of fuel and purchased power costs and a decrease in the market price of purchased power. Refer to"Liquidity and Capital Resources" below for further discussion of future recovery of Entergy Mississippi's deferred fuel costs.
Other regulatory charges increased $11.3 million primarily due to the cessation of the GGART, which was suspended in July 2003. Refer to Note 2 to the domestic utility companies and System Energy's financial statements for further discussion of the GGART.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Operating revenues increased primarily due to the base rate increase and increased electricity usage discussed above totaling $39.1 million, as well as the following:
- an increase of $15.9 million in Grand Gulf rate rider revenue due to a higher rate which became effective in October 2002; and
- an increase of $14.7 million in fuel cost recovery revenues due to quarterly changes in the fuel factor resulting from increases in the market prices of natural gas and purchased power.
The increase in operating revenues was partially offset by a decrease of $42.2 million in wholesale revenue as a result of a decrease in net generation and power purchases resulting in less energy available for resale sales.
Fuel and purchased power expenses decreased primarily due to the under-recovery fuel costs and decreased demand, partially offset by increases in the market prices of natural gas and purchased power.
Corresponding to the increase in the Grand Gulf rate rider revenue, other regulatory charges increased $29.8 million primarily due to an over-recovery of deferred capacity costs related to that rider. This increase was partially offset by the impact of the cessation of the GGART as mentioned above.
Liquidity and Capital Resources
Cash Flow
Cash flows for the nine months ended September 30, 2003 and 2002 were as follows:
2003 | 2002 | |||
(In Thousands) | ||||
Cash and cash equivalents at beginning of period | $147,721 | $54,048 | ||
Cash flow provided by (used in): | ||||
Operating activities | 131,932 | 137,296 | ||
Investing activities | (198,306) | (89,097) | ||
Financing activities | (66,701) | (86,827) | ||
Net decrease in cash and cash equivalents | (133,075) | (38,628) | ||
Cash and cash equivalents at end of period | $14,646 | $15,420 | ||
Operating Activities
Cash flow from operations decreased $5.4 million for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 primarily due to decreased recovery of deferred fuel and purchased power costs and money pool activity, partially offset by increased net income.
Entergy Mississippi's receivables from or (payables) to the money pool were as follows:
September 30, 2003 | December 31, 2002 | September 30, 2002 | December 31, 2001 | |||
(In Thousands) | ||||||
($19,277) | $8,702 | ($27,306) | $11,505 | |||
Money pool activity provided $28.0 million of Entergy Mississippi's operating cash flow for the nine months ended September 30, 2003 and provided $38.8 million of operating cash flow for the nine months ended September 30, 2002. See Note 4 to the domestic utility companies and System Energy financial statements in the Form 10-K for a description of the money pool.
Recent tax legislation and elections
Due to book/tax timing differences associated with recent income tax legislation and certain income tax elections, Entergy Mississippi could obtain cash flow benefits of $245 million over the years 2003 through 2005. These timing differences will then reverse over the remaining life of Entergy Mississippi's depreciable assets.
Investing Activities
Net cash used in investing activities increased $109.2 million primarily due to cash used for other regulatory investments of $72.6 million as a result of under-recovered fuel and purchased power costs.
In May 2003, Entergy Mississippi filed and the MPSC approved a change in Entergy Mississippi's energy cost recovery rider. Under the MPSC's order, Entergy Mississippi has deferred until 2004 the collection of fuel under-recoveries for the first and second quarters of 2003 that would have been collected in the third and fourth quarters of 2003. The deferred amount of $77.6 million plus carrying charges will be collected over a six-month period beginning January 2004.
The increase was also due to other temporary cash investments of $18.6 million that provided cash in 2002 upon maturity.
Financing Activities
Net cash flow used in financing activities decreased $20.1 million for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 primarily due to decreased net retirements of $27.4 million of long-term debt during the first nine months of 2003 compared to the same period of 2002, partially offset by an increase of $7.3 million in common stock dividends paid.
Entergy Mississippi has implemented a planned financing program to address its long-term debt maturities and to restructure its debt portfolio, which will result in extended maturities, lowered rates, and additional flexibility.
Entergy Mississippi issued $295 million of First Mortgage Bonds in 2003 as follows:
Issue Date | Description | Maturity | Amount | |||
(In Thousands) | ||||||
January 2003 | 5.15% Series | February 2013 | $100,000 | |||
March 2003 | 4.35% Series | April 2008 | 100,000 | |||
May 2003 | 4.95% Series | June 2018 | 95,000 | |||
$295,000 |
Proceeds from the $100 million issuance in March 2003 were used for general corporate purposes, including the retirement of short-term indebtedness and working capital needs. Higher fuel costs in the first quarter of 2003 contributed to the working capital needs. A portion of the proceeds from the other issuances, together with proceeds from the issuance of First Mortgage Bonds in October and November 2002 were used to redeem the following:
Retirement Date | Description | Maturity | Amount | |||
(In Thousands) | ||||||
February 2003 | 7.75% Series | February 2003 | $120,000 | |||
February 2003 | 6.25% Series | February 2003 | 70,000 | |||
March 2003 | 6.625% Series | November 2003 | 65,000 | |||
March 2003 | 8.25% Series | July 2004 | 25,000 | |||
June 2003 | Libor + 0.65% Series | May 2004 | 50,000 | |||
$330,000 |
Entergy Mississippi also has $75 million of currently maturing long-term debt due May 2004, a portion of which Entergy Mississippi expects to repay at maturity using a portion of the proceeds from the May 2003 issuance.
Uses and Sources of Capital
See "Management's Financial Discussion and Analysis - Liquidity and Capital Resources"in the Form 10-K for a discussion of Entergy Mississippi's uses and sources of capital. Following is an update to the information provided in the Form 10-K.
Entergy Mississippi renewed its 364-day credit facility in the amount of $25 million of which none was drawn at September 30, 2003. The credit facility has an expiration of May 31, 2004.
Following are the amounts of Entergy Mississippi's planned construction and other capital investments for 2003 through 2005, which reflect changes in management's estimate from the planned investments presented in the Form 10-K due mainly to the effect of actual spending in 2003 (the figures for 2003 include the effect of actual spending thus far in 2003):
2003 | 2004 | 2005 | ||||
(In Millions) | ||||||
Planned construction and capital investment | $155 | $137 | $139 | |||
See the Form 10-K for further discussion of Entergy Mississippi's capital spending plans for 2003 through 2005.
Significant Factors and Known Trends
See "Management's Financial Discussion and Analysis - Significant Factors and Known Trends" in the Form 10-K for a discussion of utility restructuring, System Agreement proceedings, market and credit risks, state and local regulatory risks, and litigation risks.
Critical Accounting Estimates
See"Management's Financial Discussion and Analysis - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy Mississippi's accounting for pension and other retirement costs.
ENTERGY MISSISSIPPI, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Nine Months Ended
2003 2002 2003 2002
(In Thousands) (In Thousands)
OPERATING REVENUES
Domestic electric $309,739 $316,745 $799,007 $770,178
-------- -------- -------- --------
OPERATING EXPENSES
Operation and Maintenance:
Fuel, fuel-related expenses, and
gas purchased for resale 36,565 127,647 98,954 271,345
Purchased power 135,781 72,699 357,654 222,181
Other operation and maintenance 42,108 36,900 119,669 118,564
Taxes other than income taxes 12,704 13,430 35,686 36,937
Depreciation and amortization 16,619 14,101 46,230 41,352
Other regulatory charges (credits) - 12,789 1,517 12,920 (16,832)
net
-------- -------- -------- --------
TOTAL 256,566 266,294 671,113 673,547
-------- -------- -------- --------
OPERATING INCOME 53,173 50,451 127,894 96,631
-------- -------- -------- --------
OTHER INCOME
Allowance for equity funds used 978 899 2,785 3,044
during construction
Interest and dividend income 70 777 641 3,004
Miscellaneous - net (610) (363) (1,962) (1,466)
-------- -------- -------- --------
TOTAL 438 1,313 1,464 4,582
-------- -------- -------- --------
INTEREST AND OTHER CHARGES
Interest on long-term debt 10,984 9,545 32,940 30,757
Other interest - net 791 859 2,425 2,215
Allowance for borrowed funds used (832) (828) (2,435) (2,748)
during construction
-------- -------- -------- --------
TOTAL 10,943 9,576 32,930 30,224
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 42,668 42,188 96,428 70,989
Income taxes 16,864 15,975 35,958 26,195
-------- -------- -------- --------
NET INCOME 25,804 26,213 60,470 44,794
Preferred dividend requirements and 842 842 2,527 2,527
other
-------- -------- -------- --------
EARNINGS APPLICABLE TO
COMMON STOCK $24,962 $25,371 $57,943 $42,267
======== ======== ======== ========
See Notes to Respective Financial Statements.
ENTERGY MISSISSIPPI, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
(In Thousands)
OPERATING ACTIVITIES
Net income $60,469 $44,794
Noncash items included in net income:
Other regulatory charges (credits) - net 12,920 (16,832)
Depreciation and amortization 46,230 41,352
Deferred income taxes and investment tax 31,035 (25,149)
credits
Allowance for equity funds used during (2,785) (3,044)
construction
Changes in working capital:
Receivables (31,242) (31,595)
Fuel inventory 79 (261)
Accounts payable (3,003) 13,488
Taxes accrued (9,340) 43,330
Interest accrued (3,933) (1,351)
Deferred fuel costs 9,856 63,091
Other working capital accounts 17,992 (8,446)
Provision for estimated losses and reserves 1,251 924
Changes in other regulatory assets 8,388 (3,492)
Other (5,985) 20,487
-------- --------
Net cash flow provided by operating activities 131,932 137,296
-------- --------
INVESTING ACTIVITIES
Construction expenditures (128,521) (110,707)
Allowance for equity funds used during 2,785 3,044
construction
Changes in other temporary investments - net - 18,566
Other regulatory investments (72,570) -
-------- --------
Net cash flow used in investing activities (198,306) (89,097)
-------- --------
FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt 292,426 -
Retirement of long-term debt (330,000) (65,000)
Dividends paid:
Common stock (26,600) (19,300)
Preferred stock (2,527) (2,527)
-------- --------
Net cash flow used in financing activities (66,701) (86,827)
-------- --------
Net decrease in cash and cash equivalents (133,075) (38,628)
Cash and cash equivalents at beginning of period 147,721 54,048
-------- --------
Cash and cash equivalents at end of period $14,646 $15,420
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid/(received) during the period for:
Interest - net of amount capitalized $37,534 $32,344
Income taxes ($2,169) -
See Notes to Financial Statements.
ENTERGY MISSISSIPPI, INC.
BALANCE SHEETS
ASSETS
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT ASSETS
Cash and cash equivalents:
Cash $14,646 $10,782
Temporary cash investments - at cost,
which approximates market - 136,939
---------- ----------
Total cash and cash equivalents 14,646 147,721
---------- ----------
Accounts receivable:
Customer 88,166 52,480
Allowance for doubtful accounts (1,373) (1,633)
Associated companies 4,947 11,978
Other 3,200 6,434
Accrued unbilled revenues 35,023 29,460
---------- ----------
Total accounts receivable 129,963 98,719
---------- ----------
Deferred fuel costs 100,891 38,177
Accumulated deferred income taxes - 7,822
Fuel inventory - at average cost 5,573 5,652
Materials and supplies - at average cost 17,892 18,650
Prepayments and other 4,094 18,777
---------- ----------
TOTAL 273,059 335,518
---------- ----------
OTHER PROPERTY AND INVESTMENTS
Investment in affiliates - at equity 5,531 5,531
Non-utility property - at cost (less accumulated 6,498 6,594
depreciation)
---------- ----------
TOTAL 12,029 12,125
---------- ----------
UTILITY PLANT
Electric 2,173,200 2,076,828
Property under capital lease 146 175
Construction work in progress 127,444 102,783
---------- ----------
TOTAL UTILITY PLANT 2,300,790 2,179,786
Less - accumulated depreciation and amortization 805,388 768,609
---------- ----------
UTILITY PLANT - NET 1,495,402 1,411,177
---------- ----------
DEFERRED DEBITS AND OTHER ASSETS
Regulatory assets:
SFAS 109 regulatory asset - net 9,958 18,250
Unamortized loss on reacquired debt 12,088 12,756
Other regulatory assets 23,572 23,668
Other 23,983 18,878
---------- ----------
TOTAL 69,601 73,552
---------- ----------
TOTAL ASSETS $1,850,091 $1,832,372
========== ==========
See Notes to Respective Financial Statements.
ENTERGY MISSISSIPPI, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT LIABILITIES
Currently maturing long-term debt $75,000 $255,000
Accounts payable:
Associated companies 77,693 50,973
Other 8,977 38,700
Customer deposits 33,356 33,264
Taxes accrued 11,568 20,908
Accumulated deferred income taxes 13,734 -
Interest accrued 15,761 19,694
Co-owner advances 900 -
Obligations under capital leases 41 39
Other 3,628 2,070
---------- ----------
TOTAL 240,658 420,648
---------- ----------
NON-CURRENT LIABILITIES
Accumulated deferred income taxes and taxes 304,501 292,809
accrued
Accumulated deferred investment tax credits 15,677 16,497
Obligations under capital leases 105 136
Accumulated provisions 9,264 8,013
Long-term debt 654,916 510,104
Other 61,132 51,670
---------- ----------
TOTAL 1,045,595 879,229
---------- ----------
SHAREHOLDERS' EQUITY
Preferred stock without sinking fund 50,381 50,381
Common stock, no par value, authorized 15,000,000
shares; issued and outstanding 8,666,357 shares 199,326 199,326
in 2002 and 2003
Capital stock expense and other (59) (59)
Retained earnings 314,190 282,847
---------- ----------
TOTAL 563,838 532,495
---------- ----------
Commitments and Contingencies
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,850,091 $1,832,372
========== ==========
See Notes to Respective Financial Statements.
ENTERGY MISSISSIPPI, INC.
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Increase/
Description 2003 2002 (Decrease) %
(In Millions)
Electric Operating Revenues:
Residential $ 143.3 $ 133.7 $ 9.6 7
Commercial 100.5 94.4 6.1 6
Industrial 43.1 44.7 (1.6) (4)
Governmental 8.6 7.8 0.8 10
------------------------------
Total retail 295.5 280.6 14.9 5
Sales for resale
Associated companies 3.0 25.9 (22.9) (88)
Non-associated companies 6.7 5.1 1.6 31
Other 4.5 5.1 (0.6) (12)
------------------------------
Total $ 309.7 $ 316.7 ($7.0) (2)
==============================
Billed Electric Energy
Sales (GWh):
Residential 1,731 1,748 (17) (1)
Commercial 1,341 1,358 (17) (1)
Industrial 779 774 5 1
Governmental 112 106 6 6
------------------------------
Total retail 3,963 3,986 (23) (1)
Sales for resale
Associated companies - 483 (483) (100)
Non-associated companies 117 66 51 77
------------------------------
Total 4,080 4,535 (455) (10)
==============================
Nine Months Ended Increase/
Description 2003 2002 (Decrease) %
(In Millions)
Electric Operating Revenues:
Residential $ 327.0 $ 292.3 $ 34.7 12
Commercial 259.6 234.6 25.0 11
Industrial 128.3 122.3 6.0 5
Governmental 24.4 21.5 2.9 13
------------------------------
Total retail 739.3 670.7 68.6 10
Sales for resale
Associated companies 12.0 58.2 (46.2) (79)
Non-associated companies 16.6 12.6 4.0 32
Other 31.1 28.7 2.4 8
------------------------------
Total $ 799.0 $ 770.2 $ 28.8 4
==============================
Billed Electric Energy
Sales (GWh):
Residential 4,047 3,960 87 2
Commercial 3,385 3,368 17 1
Industrial 2,159 2,151 8 -
Governmental 302 285 17 6
------------------------------
Total retail 9,893 9,764 129 1
Sales for resale
Associated companies 24 1,091 (1,067) (98)
Non-associated companies 269 163 106 65
------------------------------
Total 10,186 11,018 (832) (8)
==============================
ENTERGY NEW ORLEANS, INC.
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
Results of Operations
Operating Income
Third Quarter 2003 Compared to Third Quarter 2002
Operating income increased $8.9 million primarily due to:
- an increase of $7.4 million as a result of an increase in base rates effective June 1, 2003. The base rate increase is discussed further in Note 2 to the domestic utility companies and System Energy's financial statements; and
- an increase of $9.2 million primarily due to the increase in the volume of unbilled sales, including the effect of weather.
The increase in operating income was partially offset by:
- an increase of $2.0 million in other operation and maintenance expenses due to increased billing, customer inquiry, and collection costs; and
- a decrease of $1.8 million due to decreased electricity usage of 32 GWh in the residential and industrial sectors.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Operating income increased $12.9 million primarily due to:
- an increase of $10.0 million as a result of an increase in base rates effective June 1, 2003;
- lower accruals for potential rate actions and refunds of $7.2 million; and
- an increase of $5.4 million due to an increase in the volume of unbilled sales, including the effect of weather.
The increase in operating income was partially offset by increased other operation and maintenance expenses of $7.3 million primarily due to increases in maintenance outage costs at a fossil plant in 2003, increased benefits costs, and increased billing, customer inquiry, and collection costs.
Other Impacts on Earnings
Interest charges decreased $4.2 million for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 primarily due to interest accrued in 2002 for potential rate actions and refunds and a true-up of those accruals in May 2003.
Income Taxes
The effective income tax rate for the third quarters of 2003 and 2002 was 41.0% for both periods. The effective income tax rates for the nine months ended September 30, 2003 and 2002 were 41.4% and 45.1%, respectively. The difference in the effective income tax rates for the third quarters of 2003 and 2002 and the nine months ended September 30, 2003 and 2002 versus the federal statutory rate of 35.0% is primarily due to state income taxes and depreciation book and tax differences.
Other Income Statement Variances
Third Quarter 2003 Compared to Third Quarter 2002
Operating revenues increased $46.3 million primarily due to the following increases:
- $25.8 million in wholesale revenue due to increased sales to affiliated systems;
- $9.2 million primarily due to an increase in volume of unbilled sales, including the effect of weather;
- $8.0 million due to an increase in base rates; and
- $5.0 million in gas revenues primarily due to an increase in the market price of natural gas and an increase in base rates.
Fuel and purchased power expenses increased primarily due to increases in the market prices of natural gas and purchased power.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Operating revenues increased $116.9 million primarily due to the following increases:
- $34.8 million in wholesale revenue due to increased sales to affiliated systems;
- $33.2 million in gas revenue due to an increase in the market price of natural gas and an increase in base rates;
- $30.4 million in fuel cost recovery revenues due to higher fuel rates;
- $6.2 million due to an increase in base rates;
- $5.4 million primarily due to an increase in volume of unbilled sales, including the effect of weather; and
- $3.6 million in regulatory credits related to the deferral of uncollectible accounts. The City Council approved the collection over five years beginning June 2003.
Fuel and purchased power expenses increased primarily due to increases in the market prices of natural gas and purchased power.
Liquidity and Capital Resources
Cash Flow
Cash flows for the nine months ended September 30, 2003 and 2002 were as follows:
2003 | 2002 | |||
(In Thousands) | ||||
Cash and cash equivalents at beginning of period | $66,247 | $38,184 | ||
Cash flow used in: | ||||
Operating activities | (7,663) | (1,931) | ||
Investing activities | (44,256) | (26,583) | ||
Financing activities | (3,725) | (1,424) | ||
Net decrease in cash and cash equivalents | (55,644) | (29,938) | ||
Cash and cash equivalents at end of period | $10,603 | $8,246 | ||
Operating Activities
The increase of $5.7 million in net cash used in operating activities for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 was primarily due to increased customer receivables as a result of increased billed revenues and the timing of collections of those receivables. The increase in net cash used was partially offset by money pool activity and the payment to customers of a portion of the System Energy refund in the first quarter of 2002.
Entergy New Orleans' receivables from or (payables) to the money pool were as follows:
September 30, 2003 | December 31, 2002 | September 30, 2002 | December 31, 2001 | |||
(In Thousands) | ||||||
($21,859) | $3,500 | ($2,693) | $9,208 | |||
Money pool activity provided $25.4 million of Entergy New Orleans' operating cash flows for the nine months ended September 30, 2003 and provided $11.9 million of Entergy New Orleans' operating cash flows for the nine months ended September 30, 2002. See Note 4 to the domestic utility companies and System Energy financial statements in the Form 10-K for a description of the money pool.
Recent tax legislation and elections
Due to book/tax timing differences associated with recent income tax legislation and certain income tax elections, Entergy New Orleans could obtain cash flow benefits of $115 million over the years 2003 through 2005. These timing differences will then reverse over the remaining life of Entergy New Orleans' depreciable assets.
Investing Activities
The increase of $17.7 million in net cash used in investing activities for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 was primarily due to the maturity of $14.9 million of other temporary investments in 2002.
Financing Activities
The increase of $2.3 million used in financing activities is due to the increase in common stock dividends paid.
In July 2003, Entergy New Orleans issued $30 million of 3.875% Series First Mortgage Bonds due August 2008 and $70 million of 5.25% Series First Mortgage Bonds due August 2013. The proceeds from these issuances were used to redeem, prior to maturity, $30 million of 7% Series First Mortgage Bonds due July 2008, $40 million of 8% Series First Mortgage Bonds due March 2006, and $30 million of 6.65% Series First Mortgage Bonds due March 2004. The issuances and redemptions are not shown on the cash flow statement because the proceeds from the issuances were placed in a trust and never held as cash by Entergy New Orleans.
Uses and Sources of Capital
See "Management's Financial Discussion and Analysis - Liquidity and Capital Resources"in the Form 10-K for a discussion of Entergy New Orleans' uses and sources of capital. The following is an update to the Form 10-K.
Following are the amounts of Entergy New Orleans' planned construction and other capital investments for 2003 through 2005, which reflect changes in management's estimate from the planned investments presented in the Form 10-K due mainly to the effect of actual spending in 2003 (the figures for 2003 include the effect of actual spending thus far in 2003):
2003 | 2004 | 2005 | ||||
(In Millions) | ||||||
Planned construction and capital investment | $60 | $54 | $55 | |||
See the Form 10-K for further discussion of Entergy New Orleans' capital spending plans for 2003 through 2005.
Significant Factors and Known Trends
See "Management's Financial Discussion and Analysis - Significant Factors and Known Trends" in the Form 10-K for a discussion of System Agreement proceedings, market and credit risks, state and local regulatory risks, environmental risks, and litigation risks. Following are updates to the information provided in the Form 10-K.
In May 2003, the City Council approved an agreement in principle entered into by Entergy New Orleans and the Advisors to the City Council that provides for a $30.2 million base rate increase effective June 2003. Refer to Note 2 to the domestic utility companies and System Energy financial statements in the Form 10-K and in this report for further discussion of this proceeding.The City Council also approved implementation of formula rate plans for electric and gas service that will be evaluated annually until 2005. The midpoint return on equity of both plans is 11.25%, with a target equity component of 42%. The electric plan provides for a bandwidth of 10.25% to 12.25% and the gas plan provides for a bandwidth of 11% to 11.5%, with earnings within those ranges not resulting in a change in rates. In addition, the City Council approved implementation of a generation performance-based rate calculation in the fuel adjustment clause under which Entergy New Orleans will receive 10 % of fuel and purchased power cost savings in excess of $20 million, subject to a 13.25% return on equity limitation for electric operations as provided for in the electric formula rate plan. Entergy New Orleans will bear 10% of any "negative" fuel and purchased power cost savings. Certain intervenors in the proceeding have appealed the City Council's approval to the Civil District Court for the Parish of Orleans. Entergy New Orleans and the City Council will oppose the appeal, but the outcome cannot be predicted.
In approving the agreement in principle, the City Council indicated that if it decides in favor of the plaintiffs in either of the lawsuits described in Part I, Item 1 of the Form 10-K in the paragraphs entitled "Entergy New Orleans Fuel Clause Lawsuit" and "Entergy New Orleans Rate of Return Lawsuit, " the effect of that decision on the rate agreement would have to be determined. The City Council also indicated that the Entergy New Orleans power agreements described in Part II, Item 5, "Generation" in this report are fundamental to the rate agreement, and a FERC decision or order requiring a material change in the power agreements may result in a City Council investigation to determine what prospective action, if any, would be warranted by any such FERC decision or order to preserve the benefits that were otherwise projected to accrue to customers under the rate settlement.
Critical Accounting Estimates
See"Management's Financial Discussion and Analysis - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy New Orleans' accounting for pension and other retirement costs.
ENTERGY NEW ORLEANS, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Nine Months Ended
2003 2002 2003 2002
(In Thousands) (In Thousands)
OPERATING REVENUES
Domestic electric $185,741 $144,373 $405,761 $322,061
Natural gas 18,010 13,044 92,961 59,725
-------- -------- -------- --------
TOTAL 203,751 157,417 498,722 381,786
-------- -------- -------- --------
OPERATING EXPENSES
Operation and Maintenance:
Fuel, fuel-related expenses, and
gas purchased for resale 65,182 61,002 158,025 111,470
Purchased power 65,687 37,811 169,428 118,632
Other operation and maintenance 24,251 22,224 74,687 67,336
Taxes other than income taxes 12,115 11,902 32,496 30,329
Depreciation and amortization 7,578 7,088 21,985 20,822
Other regulatory charges (credits) - 708 (1,893) (1,551) 2,438
net
-------- -------- -------- --------
TOTAL 175,521 138,134 455,070 351,027
-------- -------- -------- --------
OPERATING INCOME 28,230 19,283 43,652 30,759
-------- -------- -------- --------
OTHER INCOME
Allowance for equity funds used 554 529 1,706 1,421
during construction
Interest and dividend income 152 58 506 421
Miscellaneous - net (522) (195) (1,071) (1,031)
-------- -------- -------- --------
TOTAL 184 392 1,141 811
-------- -------- -------- --------
INTEREST AND OTHER CHARGES
Interest on long-term debt 4,621 4,469 13,571 13,405
Other interest - net 447 (26) (95) 3,974
Allowance for borrowed funds used (564) (539) (1,745) (1,406)
during construction
-------- -------- -------- --------
TOTAL 4,504 3,904 11,731 15,973
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 23,910 15,771 33,062 15,597
Income taxes 9,792 6,464 13,691 7,031
-------- -------- -------- --------
NET INCOME 14,118 9,307 19,371 8,566
Preferred dividend requirements and 241 241 724 724
other
-------- -------- -------- --------
EARNINGS APPLICABLE TO
COMMON STOCK $13,877 $9,066 $18,647 $7,842
======== ======== ======== ========
See Notes to Respective Financial Statements.
ENTERGY NEW ORLEANS, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
(In Thousands)
OPERATING ACTIVITIES
Net income $19,370 $8,566
Noncash items included in net income:
Other regulatory charges (credits) - net (1,551) 2,438
Depreciation and amortization 21,985 20,822
Deferred income taxes and investment tax credits 9,371 (2,295)
Allowance for equity funds used during construction (1,706) (1,421)
Changes in working capital:
Receivables (56,400) (5,998)
Fuel inventory (2,243) (265)
Accounts payable 16,709 (585)
Taxes accrued 964 -
Interest accrued (3,754) (4,004)
Deferred fuel costs (2,845) 1,854
Other working capital accounts (3,658) (24,275)
Provision for estimated losses and reserves (2,163) (1,268)
Changes in other regulatory assets (4,524) 12
Other 2,782 4,488
------- -------
Net cash flow used in operating activities (7,663) (1,931)
------- -------
INVESTING ACTIVITIES
Construction expenditures (45,962) (42,863)
Allowance for equity funds used during construction 1,706 1,421
Changes in other temporary investments - net - 14,859
------- -------
Net cash flow used in investing activities (44,256) (26,583)
------- -------
FINANCING ACTIVITIES
Dividends paid:
Common stock (3,001) (700)
Preferred stock (724) (724)
------- -------
Net cash flow used in financing activities (3,725) (1,424)
------- -------
Net decrease in cash and cash equivalents (55,644) (29,938)
Cash and cash equivalents at beginning of period 66,247 38,184
------- -------
Cash and cash equivalents at end of period $10,603 $8,246
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest - net of amount capitalized $16,753 $20,987
See Notes to Respective Financial Statements.
ENTERGY NEW ORLEANS, INC.
BALANCE SHEETS
ASSETS
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT ASSETS
Cash and cash equivalents:
Cash $10,603 $11,175
Temporary cash investments - at cost,
which approximates market - 55,072
-------- --------
Total cash and cash equivalents 10,603 66,247
-------- --------
Accounts receivable:
Customer 66,816 24,901
Allowance for doubtful accounts (2,978) (4,774)
Associated companies 7,458 4,901
Other 8,707 10,133
Accrued unbilled revenues 32,515 20,957
-------- --------
Total accounts receivable 112,518 56,118
-------- --------
Accumulated deferred income taxes - 1,230
Fuel inventory - at average cost 5,527 3,284
Materials and supplies - at average cost 8,665 7,785
Prepayments and other 6,943 4,689
-------- --------
TOTAL 144,256 139,353
-------- --------
OTHER PROPERTY AND INVESTMENTS
Investment in affiliates - at equity 3,259 3,259
-------- --------
UTILITY PLANT
Electric 648,954 627,249
Natural gas 154,655 149,102
Construction work in progress 63,248 48,345
-------- --------
TOTAL UTILITY PLANT 866,857 824,696
Less - accumulated depreciation and amortization 420,047 403,379
-------- --------
UTILITY PLANT - NET 446,810 421,317
-------- --------
DEFERRED DEBITS AND OTHER ASSETS
Regulatory assets:
Unamortized loss on reacquired debt 1,812 556
Other regulatory assets 18,428 13,904
Other 6,791 4,855
-------- --------
TOTAL 27,031 19,315
-------- --------
TOTAL ASSETS $621,356 $583,244
======== ========
See Notes to Respective Financial Statements.
ENTERGY NEW ORLEANS, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT LIABILITIES
Accounts payable:
Associated companies $48,731 $23,228
Other 27,887 36,681
Customer deposits 15,708 17,634
Taxes accrued 2,963 1,999
Accumulated deferred income taxes 315 -
Interest accrued 2,734 6,488
Deferred fuel costs 12,037 14,882
Other 11,104 9,702
-------- --------
TOTAL 121,479 110,614
-------- --------
NON-CURRENT LIABILITIES
Accumulated deferred income taxes and taxes accrued 28,488 22,245
Accumulated deferred investment tax credits 4,554 4,893
SFAS 109 regulatory liability - net 37,604 31,318
Other regulatory liabilities - 1,311
Accumulated provisions 291 2,454
Long-term debt 229,199 229,191
Other 35,653 32,776
-------- --------
TOTAL 335,789 324,188
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock without sinking fund 19,780 19,780
Common stock, $4 par value, authorized 10,000,000
shares; issued and outstanding 8,435,900 shares 33,744 33,744
in 2003 and 2002
Paid-in capital 36,294 36,294
Retained earnings 74,270 58,624
-------- --------
TOTAL 164,088 148,442
-------- --------
Commitments and Contingencies
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $621,356 $583,244
======== ========
See Notes to Respective Financial Statements.
ENTERGY NEW ORLEANS, INC.
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Increase/
Description 2003 2002 (Decrease) %
(In Millions)
Electric Operating Revenues:
Residential $68.0 $65.3 $2.7 4
Commercial 50.3 47.5 2.8 6
Industrial 7.5 7.7 (0.2) (3)
Governmental 21.7 20.0 1.7 9
-----------------------------
Total retail 147.5 140.5 7.0 5
Sales for resale
Associated companies 28.2 2.0 26.2 1,310
Non-associated companies 0.5 0.9 (0.4) (44)
Other 9.5 1.0 8.5 850
-----------------------------
Total $185.7 $144.4 $41.3 29
=============================
Billed Electric Energy
Sales (GWh):
Residential 742 762 (20) (3)
Commercial 646 651 (5) (1)
Industrial 106 118 (12) (10)
Governmental 298 298 - -
-----------------------------
Total retail 1,792 1,829 (37) (2)
Sales for resale
Associated companies 403 46 357 776
Non-associated companies 9 7 2 29
-----------------------------
Total 2,204 1,882 322 17
============================
Nine Months Ended Increase/
Description 2003 2002 (Decrease) %
(In Millions)
Electric Operating Revenues:
Residential $144.3 $129.5 $14.8 11
Commercial 127.1 113.0 14.1 12
Industrial 20.5 17.6 2.9 16
Governmental 53.8 47.4 6.4 14
-----------------------------
Total retail 345.7 307.5 38.2 12
Sales for resale
Associated companies 38.4 3.2 35.2 1,100
Non-associated companies 1.4 1.9 (0.5) (26)
Other 20.3 9.5 10.8 114
-----------------------------
Total $405.8 $322.1 $83.7 26
=============================
Billed Electric Energy
Sales (GWh):
Residential 1,665 1,669 (4) -
Commercial 1,698 1,710 (12) (1)
Industrial 299 303 (4) (1)
Governmental 775 788 (13) (2)
-----------------------------
Total retail 4,437 4,470 (33) (1)
Sales for resale
Associated companies 527 77 450 584
Non-associated companies 23 27 (4) (15)
-----------------------------
Total 4,987 4,574 413 9
=============================
SYSTEM ENERGY RESOURCES, INC.
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
Results of Operations
Net income increased $2.9 million for the third quarter 2003 compared to the same period in 2002 due to decreased interest charges primarily resulting from decreased interest expense associated with the Grand Gulf 1 sale-leaseback. Net income decreased $2.5 million for the nine months ended September 30, 2003 compared to the same period in 2002 primarily due to adecrease in rate base in 2003 resulting in lower operating income. The decrease in rate base was due to the normal depreciation of Grand Gulf 1. The decreased net income for the nine months ended September 30, 2003 was partially offset by the decreased interest charges, as discussed above.
The effective income tax rates for the third quarters of 2003 and 2002 were 43.4% and 43.0%, respectively. The effective income tax rates for the nine months ended September 30, 2003 and 2002 were 43.8% and 42.2%, respectively. The differences in the effective income tax rates in 2003 and 2002 versus the federal statutory rate of 35.0% are primarily due to state income taxes and book and tax timing differences related to depreciation.
Liquidity and Capital Resources
Cash Flow
Cash flows for the nine months ended September 30, 2003 and 2002 were as follows:
2003 | 2002 | |||
(In Thousands) | ||||
Cash and cash equivalents at beginning of period | $113,159 | $49,579 | ||
Cash flow provided by (used in): | ||||
Operating activities | 226,485 | 194,340 | ||
Investing activities | (222,267) | (14,784) | ||
Financing activities | (83,475) | (106,386) | ||
Net increase (decrease) in cash and cash equivalents | (79,257) | 73,170 | ||
Cash and cash equivalents at end of period | $33,902 | $122,749 | ||
Operating Activities
Cash flow from operations increased $32.1 million for the nine months ended September 30, 2003 compared to the same period in 2002 primarily due to money pool activity. Partially offsetting the increase was a decrease in operating cash flows due to the cessation of the Entergy Mississippi GGART as discussed below.
System Energy's receivables from the money pool were as follows:
September 30, 2003 | December 31, 2002 | September 30, 2002 | December 31, 2001 | |||
(In Thousands) | ||||||
$24,791 | $7,046 | $92,140 | $13,853 | |||
Money pool activity used $17.7 million of System Energy's operating cash flows in the nine months ended September 30, 2003. For the nine months ended September 30, 2002, money pool activity used $78.3 million of System Energy's operating cash flows. See Note 4 to the domestic utility companies and System Energy financial statements in the Form 10-K for a description of the money pool.
Cessation of the Entergy Mississippi GGART
System Energy collected $40.8 million in 2002 and $21.7 million thus far in 2003 from Entergy Mississippi in conjunction with the GGART, which provided for the acceleration of Entergy Mississippi's Grand Gulf purchased power obligation. The MPSC authorized the cessation of the GGART effective July 1, 2003. See Note 2 to the domestic utility companies and System Energy financial statements for further discussion of the GGART.
Recent tax legislation and elections
Due to book/tax timing differences associated with recent income tax legislation and certain income tax elections, System Energy could obtain cash flow benefits of $10 million over the years 2003 through 2005. These timing differences will then reverse over the remaining life of System Energy's depreciable assets.
Investing Activities
The increase of $207.5 million in net cash used in investing activities for the nine months ended September 30, 2003 compared to the same period in 2002 was primarily due to cash collateral of $194 million provided in 2003. System Energy had three-year letters of credit in place that were scheduled to expire in March 2003 securing certain of its obligations related to the sale-leaseback of a portion of Grand Gulf 1. System Energy replaced the letters of credit with new three-year letters of credit totaling approximately $198 million that are backed by cash collateral.
Financing Activities
The decrease of $22.9 million in net cash used by financing activities for the nine months ended September 30, 2003 compared to the same period in 2002 was primarily due to a decrease of $19.5 million in the January 2003 principal payment made on the Grand Gulf 1 sale-leaseback compared to the January 2002 principal payment.
Uses and Sources of Capital
See "Management's Financial Discussion and Analysis - Liquidity and Capital Resources"in the Form 10-K for a discussion of System Energy's uses and sources of capital.
Significant Factors and Known Trends
See "Management's Financial Discussion and Analysis - Significant Factors and Known Trends" in the Form 10-K for a discussion of market and credit risks, nuclear matters, litigation risks, and environmental risks.
Critical Accounting Estimates
See"Management's Financial Discussion and Analysis - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in System Energy's accounting for nuclear decommissioning costs and pension and other retirement costs. Following is an update to the information provided in the Form 10-K.
SFAS 143
As discussed in the Form 10-K, System Energy implemented SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. The net effect of implementing this standard for System Energy was recorded as a regulatory asset, with no resulting impact on System Energy's net income. Assets and liabilities increased by approximately $138 million in 2003 as a result of recording the asset retirement obligation at its fair value of $292 million as determined under SFAS 143, reversing the previously recorded decommissioning liability of $154 million, increasing utility plant by $82 million, increasing accumulated depreciation by $36 million, and recording the related regulatory asset of $92 million.
SYSTEM ENERGY RESOURCES, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Nine Months Ended
2003 2002 2003 2002
(In Thousands) (In Thousands)
OPERATING REVENUES
Domestic electric $141,239 $156,930 $427,988 $442,152
-------- -------- -------- --------
OPERATING EXPENSES
Operation and Maintenance:
Fuel, fuel-related expenses, and
gas purchased for resale 11,180 7,839 31,364 26,805
Nuclear refueling outage expenses 3,264 2,617 9,430 7,855
Other operation and maintenance 22,196 27,253 68,140 69,508
Decommissioning 5,450 4,013 16,350 12,041
Taxes other than income taxes 6,203 7,082 18,887 20,659
Depreciation and amortization 28,317 29,502 80,563 81,544
Other regulatory charges (credits) - (1,162) 13,610 27,695 39,664
net
-------- -------- -------- --------
TOTAL 75,448 91,916 252,429 258,076
-------- -------- -------- --------
OPERATING INCOME 65,791 65,014 175,559 184,076
-------- -------- -------- --------
OTHER INCOME
Allowance for equity funds used 310 741 842 1,991
during construction
Interest and dividend income 1,505 889 5,123 1,978
Miscellaneous - net (210) (45) (952) (435)
-------- -------- -------- --------
TOTAL 1,605 1,585 5,013 3,534
-------- -------- -------- --------
INTEREST AND OTHER CHARGES
Interest on long-term debt 16,799 21,223 45,873 51,874
Other interest - net 371 662 1,481 2,165
Allowance for borrowed funds used (184) (261) (361) (740)
during construction
-------- -------- -------- --------
TOTAL 16,986 21,624 46,993 53,299
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 50,410 44,975 133,579 134,311
Income taxes 21,895 19,335 58,509 56,694
-------- -------- -------- --------
NET INCOME $28,515 $25,640 $75,070 $77,617
======== ======== ======== ========
See Notes to Respective Financial Statements.
SYSTEM ENERGY RESOURCES, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
(In Thousands)
OPERATING ACTIVITIES
Net income $75,070 $77,617
Noncash items included in net income:
Other regulatory charges - net 27,695 39,664
Depreciation, amortization, and decommissioning 96,913 93,585
Deferred income taxes and investment tax credits (24,557) (30,746)
Allowance for equity funds used during construction (842) (1,991)
Changes in working capital:
Receivables (7,870) (89,802)
Accounts payable (9,038) 20,718
Taxes accrued 72,972 82,240
Interest accrued (20,608) (20,640)
Other working capital accounts (2,676) 4,645
Provision for estimated losses and reserves 72 (55)
Changes in other regulatory assets 29,382 28,961
Other (10,028) (9,856)
-------- --------
Net cash flow provided by operating activities 226,485 194,340
-------- --------
INVESTING ACTIVITIES
Construction expenditures (9,705) (31,262)
Allowance for equity funds used during construction 842 1,991
Nuclear fuel purchases - (27,590)
Proceeds from sale/leaseback of nuclear fuel - 27,590
Decommissioning trust contributions and realized
change in trust assets (15,852) (7,867)
Changes in other temporary investments - net (3,216) 22,354
Increase in other cash investments (194,336) -
-------- --------
Net cash flow used in investing activities (222,267) (14,784)
-------- --------
FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt - 69,505
Retirement of long-term debt (11,375) (100,891)
Dividends paid:
Common stock (72,100) (75,000)
-------- --------
Net cash flow used in financing activities (83,475) (106,386)
-------- --------
Net increase (decrease) in cash and cash equivalents (79,257) 73,170
Cash and cash equivalents at beginning of period 113,159 49,579
-------- --------
Cash and cash equivalents at end of period $33,902 $122,749
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest - net of amount capitalized $65,053 $71,626
Noncash investing and financing activities:
Change in unrealized appreciation/(depreciation) of
decommissioning trust assets $6,933 ($13,808)
See Notes to Respective Financial Statements.
SYSTEM ENERGY RESOURCES, INC.
BALANCE SHEETS
ASSETS
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT ASSETS
Cash and cash equivalents:
Cash $186 $2,282
Temporary cash investments - at cost,
which approximates market 33,716 110,877
---------- ----------
Total cash and cash equivalents 33,902 113,159
---------- ----------
Other temporary investments 3,216 -
Accounts receivable:
Associated companies 70,903 64,852
Other 3,196 1,377
---------- ----------
Total accounts receivable 74,099 66,229
---------- ----------
Materials and supplies - at average cost 63,461 51,492
Deferred nuclear refueling outage costs 6,180 15,666
Prepayments and other 1,382 1,319
---------- ----------
TOTAL 182,240 247,865
---------- ----------
OTHER PROPERTY AND INVESTMENTS
Decommissioning trust funds 161,770 138,985
Other cash investments 194,336 -
---------- ----------
TOTAL 356,106 138,985
---------- ----------
UTILITY PLANT
Electric 3,199,028 3,131,945
Property under capital lease 465,659 455,229
Construction work in progress 32,520 28,128
Nuclear fuel under capital lease 55,763 78,991
---------- ----------
TOTAL UTILITY PLANT 3,752,970 3,694,293
Less - accumulated depreciation and amortization 1,632,084 1,514,921
---------- ----------
UTILITY PLANT - NET 2,120,886 2,179,372
---------- ----------
DEFERRED DEBITS AND OTHER ASSETS
Regulatory assets:
SFAS 109 regulatory asset - net 110,997 134,895
Unamortized loss on reacquired debt 42,676 45,026
Other regulatory assets 245,480 158,564
Other 12,370 11,191
---------- ----------
TOTAL 411,523 349,676
---------- ----------
TOTAL ASSETS $3,070,755 $2,915,898
========== ==========
See Notes to Respective Financial Statements.
SYSTEM ENERGY RESOURCES, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
September 30, 2003 and December 31, 2002
(Unaudited)
2003 2002
(In Thousands)
CURRENT LIABILITIES
Currently maturing long-term debt $6,348 $11,375
Accounts payable:
Associated companies 1,460 4,851
Other 20,989 26,636
Taxes accrued 141,372 68,400
Accumulated deferred income taxes 3,967 5,322
Interest accrued 21,919 42,527
Obligations under capital leases 24,954 24,954
Other 1,798 1,928
---------- ----------
TOTAL 222,807 185,993
---------- ----------
NON-CURRENT LIABILITIES
Accumulated deferred income taxes and taxes 408,003 439,540
accrued
Accumulated deferred investment tax credits 79,957 82,564
Obligations under capital leases 30,808 54,036
Other regulatory liabilities 216,790 186,599
Decommissioning 307,009 153,473
Accumulated provisions 940 868
Long-term debt 882,379 888,665
Other 26,859 31,927
---------- ----------
TOTAL 1,952,745 1,837,672
---------- ----------
SHAREHOLDER'S EQUITY
Common stock, no par value, authorized 1,000,000 shares;
issued and outstanding 789,350 shares in 2003 789,350 789,350
and 2002
Retained earnings 105,853 102,883
---------- ----------
TOTAL 895,203 892,233
---------- ----------
Commitments and Contingencies
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $3,070,755 $2,915,898
========== ==========
See Notes to Respective Financial Statements.
ENTERGY ARKANSAS, ENTERGY GULF STATES, ENTERGY LOUISIANA, ENTERGY MISSISSIPPI, ENTERGY NEW ORLEANS, AND SYSTEM ENERGY
NOTES TO RESPECTIVE FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. COMMITMENTS AND CONTINGENCIES
Nuclear Insurance and Spent Nuclear Fuel(Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)
See Note 9 to the domestic utility companies and System Energy financial statements in the Form 10-K for information on nuclear liability, property and replacement power insurance, related NRC regulations, and the disposal of spent nuclear fuel and other high-level radioactive waste associated with Entergy Arkansas', Entergy Gulf States', Entergy Louisiana's, and System Energy's nuclear power plants.
Third Party Liability Insurance
The Price-Anderson Act provides insurance for the public in the event of a nuclear power plant accident. The costs of this insurance are borne by the nuclear power industry. Originally passed by Congress in 1957 and most recently amended in 1988, the Price-Anderson Act requires nuclear power plants to show evidence of financial protection in the event of a nuclear accident. This protection must consist of two levels:
- The primary level is private insurance underwritten by American Nuclear Insurers and provides liability insurance coverage of $300 million. If this amount is not sufficient to cover claims arising from the accident, the second level, Secondary Financial Protection, applies. An industry-wide aggregate limitation of $300 million exists for domestically-sponsored terrorist acts. There is no limitation for foreign-sponsored terrorist acts.
- Within the Secondary Financial Protection level, each nuclear plant must pay a retrospective premium, equal to its proportionate share of the loss in excess of the primary level, up to a maximum of $100.6 million per reactor per incident. This consists of a $95.8 million maximum retrospective premium plus a five percent surcharge that may be applied, if needed, at a rate that is presently set at $10 million per year per nuclear power reactor. There are no domestically- or foreign-sponsored terrorism limitations.
Currently, 105 nuclear reactors are participating in the Secondary Financial Protection program - 103 operating reactors and two closed units that still store used nuclear fuel on site. The product of the maximum retrospective premium assessment to the nuclear power industry and the number of nuclear power reactors provides over $10 billion in insurance coverage to compensate the public in the event of a nuclear power reactor accident.
Entergy Arkansas has two licensed reactors and Entergy Gulf States, Entergy Louisiana, and System Energy each have one licensed reactor (10% of Grand Gulf 1 is owned by a non-affiliated company which would share on a pro-rata basis in any retrospective premium assessment under the Act).
An additional but temporary contingent liability exists for all nuclear power reactor owners because of a previous Nuclear Worker Tort (long-term bodily injury caused by exposure to nuclear radiation while employed at a nuclear power plant) insurance program that was in place from 1988 to 1998. The maximum premium assessment exposure to each reactor is $3 million and will only be applied if such claims exceed the program's accumulated reserve funds. This contingent premium assessment feature will expire with the Nuclear Worker Tort program's expiration, which is scheduled for 2008.
Property Insurance
Entergy's nuclear owner/licensee subsidiaries are members of certain mutual insurance companies that provide property damage coverage, including decontamination and premature decommissioning expense, to the members' nuclear generating plants. These programs are underwritten by Nuclear Electric Insurance Limited (NEIL). As of September 30, 2003, the domestic utility companies and System Energy were insured against such losses per the following structures:
ANO 1 and 2, Grand Gulf 1, River Bend, and Waterford 3
- Primary Layer (per plant) - $500 million per occurrence
- Excess Layer (per plant) - $100 million per occurrence
- Blanket Layer (shared among all plants) - $1.0 billion per occurrence
- Total limit - $1.6 billion per occurrence
- Deductibles:
$1.0 million per occurrence - Equipment breakdown/failure
$2.5 million per occurrence - Other than equipment breakdown/failure
Note: ANO 1 and 2 share in the Primary Layer with one policy in common.
In addition, Waterford 3 and Grand Gulf 1 are also covered under NEIL's Accidental Outage Coverage program. This coverage provides certain fixed indemnities in the event of an unplanned outage that results from a covered NEIL property damage loss, subject to a deductible. The following summarizes this coverage as of September 30, 2003:
- Waterford 3
$2.95 million weekly indemnity
$413 million maximum indemnity
Deductible: 12 week waiting period
- Grand Gulf 1
$100,000 weekly indemnity
$14 million maximum indemnity
Deductible: 26 week waiting period
Under the property damage and accidental outage insurance programs, Entergy nuclear plants could be subject to assessments should losses exceed the accumulated funds available from NEIL. As of September 30, 2003, the maximum amount of such possible assessments per occurrence were $22.0 million for Entergy Arkansas, $18.8 million for Entergy Gulf States, $20.7 million for Entergy Louisiana, $.06 million for Entergy Mississippi, $.06 million for Entergy New Orleans, and $17.7 million for System Energy.
Entergy maintains property insurance for its nuclear units in excess of the NRC's minimum requirement of $1.06 billion per site for nuclear power plant licensees. NRC regulations provide that the proceeds of this insurance must be used, first, to render the reactor safe and stable, and second, to complete decontamination operations. Only after proceeds are dedicated for such use and regulatory approval is secured would any remaining proceeds be made available for the benefit of plant owners or their creditors.
In the event that one or more acts of domestically-sponsored terrorism causes property damage under one or more or all nuclear insurance policies issued by NEIL (including, but not limited to, those described above) within 12 months from the date the first property damage occurs, the maximum recovery under all such nuclear insurance policies shall be an aggregate of $3.24 billion plus the additional amounts recovered for such losses from reinsurance, indemnity, and any other sources applicable to such losses. There is no aggregate limit involving one or more acts of foreign-sponsored terrorism.
Spent Nuclear Fuel
Regarding the spent nuclear fuel storage capacity reported in the Form 10-K, current on-site spent nuclear fuel storage capacity at Grand Gulf 1 is now estimated to be sufficient until approximately 2007, at which time dry cask storage facilities will be placed into service. Higher density storage racks at Waterford 3 are now expected to provide sufficient storage until after 2015.
Nuclear Decommissioning Costs (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy)
See Note 9 to the domestic utility companies and System Energy's financial statements in the Form 10-K for information on nuclear decommissioning costs. As discussed in Note 4, Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy implemented SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. The implementation of this new accounting standard resulted in a reevaluation of these companies' decommissioning liabilities. Additionally, future decommissioning expense under this new standard will represent the accretion of this liability at the applicable discount rate, and will no longer be equal to the amounts collected in rates for decommissioning for the rate-regulated portion of the domestic utility companies and System Energy's nuclear plants, as was the case before the implementation of SFAS 143. The net difference between the accretion expense and depreciation expense under SFAS 143 and the earnings on the decommissioning trust funds and collections in rates will be recorded as a regulatory charge or credit, except for the non-rate-regulated portion of River Bend. The following table summarizes the activity in the decommissioning liabilities during the first nine months of 2003:
Environmental Issues
(Entergy Gulf States)
See Note 9 to the domestic utility companies and System Energy's financial statements in the Form 10-K for information related to the designation of Entergy Gulf States as a PRP for the cleanup of certain hazardous waste disposal sites. As of September 30, 2003, a remaining recorded liability of approximately $11.7 million existed related to the cleanup of the remaining sites at which the EPA has designated Entergy Gulf States as a PRP.
(Entergy Louisiana and Entergy New Orleans)
During 1993, the LDEQ issued new rules for solid waste regulation, including regulation of wastewater impoundments. Entergy Louisiana and Entergy New Orleans have determined that certain of their power plant wastewater impoundments were affected by these regulations and have chosen to upgrade or close them. Recorded liabilities in the amounts of $5.8 million for Entergy Louisiana and $0.5 million for Entergy New Orleans existed at September 30, 2003 for wastewater upgrades and closures. Completion of this work is awaiting LDEQ approval.
City Franchise Ordinances (Entergy New Orleans)
Entergy New Orleans provides electric and gas service in the City of New Orleans pursuant to franchise ordinances. These ordinances contain a continuing option for the City of New Orleans to purchase Entergy New Orleans' electric and gas utility properties.
Street Lighting Lawsuit (Entergy New Orleans)
See Note 9 to the domestic utility companies and System Energy's financial statements in the Form 10-K for information on the lawsuit filed by the City of New Orleans against Entergy New Orleans relating to street lighting maintenance services.
Employment Litigation(Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)
Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy are defendants in numerous lawsuits filed by former employees asserting that they were wrongfully terminated and/or discriminated against on the basis of age, race, sex, or other protected characteristics. The defendant companies are vigorously defending these suits and deny any liability to the plaintiffs.
Asbestos and Hazardous Material Litigation (Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans)
Numerous lawsuits have been filed in federal and state courts in Texas, Louisiana, and Mississippi primarily by contractor employees in the 1950-1980 timeframe against Entergy Gulf States, Entergy Louisiana, Entergy New Orleans, and Entergy Mississippi, as premises owners of power plants, for damages caused by alleged exposure to asbestos or other hazardous material. Many other defendants are named in these lawsuits as well. Presently there are approximately 320 lawsuits involving just over 7,000 claims. Reserves have been established that are expected to be adequate to cover any exposure. Additionally, negotiations continue with insurers for reimbursement of losses, while new coverage is being secured to minimize anticipated future potential exposures. Management believes that loss exposure has been and will continue to be handled successfully so that the ultimate resolution of these matters will not be material, in the aggregate, to the financial position or results of operation of the domestic utility companies involved in these lawsuits.
NOTE 2. RATE AND REGULATORY MATTERS
Electric Industry Restructuring and the Continued Application of SFAS 71
Previous developments and information related to electric industry restructuring are presented in Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K.
Texas (Entergy Gulf States)
See Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K for a discussion of the status of retail open access in Entergy Gulf States' Texas service territory, and the proposal that Entergy Gulf States filed for an interim solution (retail open access without a FERC-approved RTO). The PUCT considered the proposal at a March 2003 hearing, and issued an order in April 2003. The order set forth a sequence of proceedings and activities designed to initiate an interim solution in the first half of 2004. These proceedings and activities include ruling on market protocols; initiating a proceeding to certify an independent organization to administer the market protocols and ensure nondiscriminatory access to transmission and distribution systems; resuming business separation proceedings; re-invigorating the pilot project; and initiating a market-readiness proceeding. In June 2003, the PUCT voted 2 to 1 to issue an order on rehearing in the inter im solution proceeding. The PUCT issued the written order on rehearing in late-July 2003 in which it identified December 2004 as the target date for the beginning of the interim solution. Also in July 2003, the PUCT directed the parties to continue negotiations on unresolved issues in the market protocols docket. Several of the parties to that proceeding filed a settlement agreement with respect to the market protocols that the PUCT approved, after hearings, in an order issued in September 2003. Consistent with the order, Entergy Services has made a filing at the FERC requesting approval on an expedited basis of the market protocols subject to FERC jurisdiction.
In September 2003, the PUCT issued a written order that approved the Price to Beat (PTB) fuel factor for Entergy Gulf States, which is to be implemented upon the commencement of retail open access in its Texas service territory. This PTB fuel factor is subject to revision based on PUCT rules. The PUCT declined consideration of a request for rehearing sought by certain cities in Texas served by Entergy Gulf States and the Office of Public Utility Counsel. The period for appeal of the order remains open. Management cannot predict the ultimate outcome of the proceeding at this time.
Deferred Fuel Costs
(Entergy Gulf States)
See Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K for a discussion of Entergy Gulf States' January 2001 fuel reconciliation filing with the PUCT covering the period from March 1999 through August 2000 and requested surcharge. The case was argued before the Travis County Texas District Court in August 2003 challenging the PUCT's disallowance of approximately $4.2 million related to imputed capacity costs and its disallowance related to costs for energy delivered from the 30% non-regulated share of River Bend. The Travis County District Court judge affirmed the PUCT's order. In October 2003, Entergy Gulf States appealed this decision to the Court of Appeals.
In September 2003, Entergy Gulf States filed an application with the PUCT to implement an $87.3 million interim fuel surcharge, including interest, to collect under-recovered fuel and purchased power expenses incurred from September 2002 through August 2003. Hearings were held in October 2003 and the PUCT is expected to issue an order in December 2003. Entergy Gulf States has requested that the surcharge be collected over a twelve-month period beginning January 2004. The outcome of this proceeding cannot be predicted at this time.
In February 2003, Entergy Gulf States implemented a $54 million interim fuel surcharge authorized by the PUCT to collect under-recovered fuel costs from March through August 2002. The surcharge will be collected through December 2003.
In January 2003, the LPSC authorized its staff to initiate a proceeding to audit the fuel adjustment clause filings of Entergy Gulf States and its affiliates pursuant to a November 1997 LPSC general order. The audit will include a review of the reasonableness of charges flowed by Entergy Gulf States through its fuel adjustment clause in Louisiana for the period January 1, 1995 through December 1, 2002. Discovery is underway, but a detailed procedural schedule extending beyond the discovery stage has not yet been established and the LPSC staff has not yet issued its audit report.
(Entergy Louisiana)
In August 2000, the LPSC authorized its staff to initiate a proceeding to audit the fuel adjustment clause filings of Entergy Louisiana pursuant to a November 1997 LPSC general order. The time period that is the subject of the audit is January 1, 2000 through December 31, 2001. In September 2003, the LPSC staff issued its audit report and only recommended one material issue as disallowable. The issue, which was previously raised in the summer 2001 purchased power docket, relates to the alleged failure to uprate Waterford 3 in a timely manner. The LPSC staff has quantified the possible disallowance as between $7.6 and $14 million. Entergy Louisiana is currently evaluating the LPSC staff report and expects to contest the recommendation.
(Entergy Mississippi)
In May 2003, Entergy Mississippi filed and the MPSC approved a change in Entergy Mississippi's energy cost recovery rider. Under the MPSC's order, Entergy Mississippi has deferred until 2004 the collection of fuel under-recoveries for the first and second quarters of 2003 that would have been collected in the third and fourth quarters of 2003, respectively. The deferred amount of $77.6 million plus carrying charges will be collected over a six-month period beginning January 2004 through the energy cost recovery rider.
Retail Rate Proceedings
Filings with the APSC (Entergy Arkansas)
Decommissioning Cost Recovery
As discussed in Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K, the APSC ordered Entergy Arkansas to use a 20-year life extension assumption for ANO 1 and 2 which resulted in the cessation of the collection of funds to decommission ANO 1 and 2 effective with the calendar year 2001. Entergy Arkansas' projections show that with the assumption of 20 years of extended operational life for both units, the current fund balance with earnings over the extended life will be sufficient to decommission both units. Every five years, Entergy Arkansas is required by the APSC to update the estimated costs to decommission ANO. In March 2003, Entergy Arkansas filed with the APSC its third five-year estimate of ANO decommissioning costs. The updated estimate indicated the current cost to decommission the two ANO units would be $936 million compared to $813 million in the 1997 estimate. In September 2003, the APSC approved a stipulation between the APSC Staff and Entergy Arkansas resolving issues in the decommissioning cost estimate proceeding. Entergy Arkansas and the APSC Staff agreed to exclude, at this time, certain spent fuel management costs because of uncertainty associated with the responsibility of the DOE for all or a portion of those costs as a result of Entergy Arkansas' contract with the DOE to start taking spent fuel from ANO beginning in 1998. Entergy Arkansas reserves the right to seek a decision from the APSC on this issue prior to the next required decommissioning cost filing should significant changes in relevant facts and circumstances warrant.
Filings with the PUCT and Texas Cities (Entergy Gulf States)
Recovery of River Bend Costs
See Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K for a discussion of the March 1998 PUCT disallowance of recovery of River Bend plant costs that had been held in abeyance since 1988, and subsequent proceedings. On July 11, 2003, the Third District Court of Appeals unanimously affirmed the judgment of the Travis County District Court that had affirmed the PUCT disallowance. In August 2003, Entergy Gulf States filed a petition for review by the Texas Supreme Court. Nevertheless, after considering the progress of the proceeding in light of the decision of the Court of Appeals, management has concluded that it is prudent to accrue for the loss that would be associated with a final, non-appealable decision disallowing the abeyed plant costs. The net carrying value of the abeyed plant costs was $107.7 million as of June 30, 2003, and after this accrual Entergy Gulf States provided for all potential loss related to current or past contested costs of construction of the River Bend plant. Accrual of the loss was recorded in the second quarter 2003 and reduced net income by $65.6 million.
Filings with the LPSC
Annual Earnings Reviews (Entergy Gulf States)
See Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K for a discussion of Entergy Gulf States' ninth and last required post-merger analysis filed with the LPSC in May 2002. In April 2003 the LPSC staff filed testimony in which it recommended that the LPSC require a rate refund of $30.3 million and a prospective rate reduction of $75.9 million, before taking into account the $11.5 million rate reduction that Entergy Gulf States implemented effective June 2002. In July 2003, Entergy Gulf States filed testimony rebutting the LPSC staff's testimony and supporting the filing. During discovery, the LPSC staff requested that Entergy Gulf States provide updated cost of service data to reflect changes in costs, revenues, and rate base through December 31, 2002. In September 2003, Entergy Gulf States supplied the updated data. The LPSC staff has not yet indicated whether the updated data will result in changes to its recommendations. A new procedural schedule has been established that requires the LPSC staff to file testimony in December 2003. This testimony will also address new issues presented by the updated 2002 cost of service data. Hearings are scheduled for May 2004. Entergy Gulf States cannot predict the ultimate outcome of this proceeding.
Formula Rate Plan Filings (Entergy Louisiana)
See Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K for a discussion of proceedings in Entergy Louisiana's second annual performance-based formula rate plan filing made with the LPSC for the 1996 test year. The case was argued before the U.S. Supreme Court in April 2003. The U.S. Supreme Court ruled in favor of Entergy Louisiana and reversed the LPSC's decision requiring an additional rate reduction and refund.
See Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K for a discussion of the July 2002 settlement between Entergy Louisiana and the LPSC Staff. In accordance with the settlement, Entergy Louisiana filed a revenue requirement analysis on June 27, 2003. The analysis reflected a deficiency, but Entergy Louisiana has not requested a change in rates. Entergy Louisiana is expected to make a rate filing with the LPSC by mid-2004.
Filings with the MPSC (Entergy Mississippi)
Grand Gulf Accelerated Recovery Tariff (GGART)
As discussed in Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K, FERC approved the GGART that provided for the acceleration of Entergy Mississippi's Grand Gulf purchased power obligation in an amount totaling $221.3 million over the period October 1, 1998 through June 30, 2004. In May 2003, the MPSC authorized the cessation of the GGART effective July 1, 2003. Entergy Mississippi filed notice of the change with the FERC and the FERC approved the filing on July 30, 2003.
Filings with the City Council(Entergy New Orleans)
Rate Proceedings
See Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K for a discussion of Entergy New Orleans' cost of service study and revenue requirement filed in May 2002 with the City Council for the 2001 test year, and the agreement in principle presented to the City Council in March 2003. In May 2003, the City Council approved the agreement in principle allowing for the $30.2 million increase in base rates effective June 1, 2003. Certain intervenors have appealed the City Council's approval to Civil District Court for the Parish of Orleans. Entergy New Orleans and the City Council will oppose the appeal, but the outcome cannot be predicted.
Natural Gas
See Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K for a discussion of a resolution adopted in August 2001 by the City Council that ordered Entergy New Orleans to account for $36 million of certain natural gas costs charged to its gas distribution customers from July 1997 through May 2001.In May 2003, the City Council approved a settlement that resolved all matters relating to this proceeding. Pursuant to the resolution of the matter, effective with the first billing cycle in June 2003, Entergy New Orleans credited $14.6 million to the purchased gas adjustment clause account, decreasing the cost responsibility of the gas customers, and debited $6.7 million to the electric fuel adjustment clause account, which increased the cost responsibility of Entergy New Orleans' retail electric customers. Resolution of the matter also required that Entergy New Orleans forego recovery from its gas customers of approximately $3.6 million of gas costs, reflecting an adjustment that had been made in the purchased gas adjustment clause account as of January 2002.
Fuel Adjustment Clause Litigation
See "Fuel Adjustment Clause Litigation" in Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K for a discussion of the complaint filed by a group of ratepayers in state court in Orleans Parish and with the City Council regarding certain costs passed on to ratepayers in Entergy New Orleans' fuel adjustment filings with the City Council.
Purchased Power for Summer 2003(Entergy Gulf States and Entergy Louisiana)
See Note 2 to the domestic utility companies and System Energy's financial statements in the Form 10-K for a discussion of proceedings related to power purchases for the summers of 2000, 2001, and 2002. In March 2003, Entergy Louisiana and Entergy Gulf States filed an application with the LPSC for the approval of capacity and energy purchases for the summer of 2003 similar to the applications filed for previous summers. In July 2003, the LPSC approved the LPSC Staff's recommendation that 11% of Entergy Louisiana's and Entergy Gulf States' costs relating to those summer 2003 power purchases whose price was stated on the basis of $/MWh be categorized as capacity charges. The LPSC did not allow the capacity charges to be set up as a regulatory asset, but authorized Entergy Louisiana and Entergy Gulf States to include these costs in any base rate case that has a 2003 test year. The prudence issues relating to summer 2003 purchases have not been litigated and no procedural schedule has been established.
NOTE 3. LINES OF CREDIT, RELATED SHORT-TERM BORROWINGS, AND LONG-TERM DEBT
The short-term borrowings of the domestic utility companies and System Energy are limited to amounts authorized by the SEC. The current limits authorized are effective through November 30, 2004. In addition to borrowing from commercial banks, the domestic utility companies and System Energy are authorized to borrow from the Entergy System Money Pool (money pool). The money pool is an inter-company borrowing arrangement designed to reduce the domestic utility companies' dependence on external short-term borrowings. Borrowings from the money pool and external borrowings combined may not exceed the SEC authorized limits. The following are the short-term borrowings from the money pool and the SEC-authorized limits for short-term borrowings for the domestic utility companies and System Energy as of September 30, 2003:
| Borrowings | Authorized | ||
(In Millions) | (In Millions) | |||
Entergy Arkansas | $42.7 | $235 | ||
Entergy Gulf States | - | 340 | ||
Entergy Louisiana | - | 225 | ||
Entergy Mississippi | 19.3 | 160 | ||
Entergy New Orleans | 21.9 | 100 | ||
System Energy | - | 140 |
Entergy Arkansas, Entergy Louisiana, and Entergy Mississippi each have 364-day credit facilities available as follows:
|
| Amount of Facility | Amount Drawn as of September 30, 2003 | |||
Entergy Arkansas | April 2004 | $63 million | - | |||
Entergy Louisiana | May 2004 | $15 million | - | |||
Entergy Mississippi | May 2004 | $25 million | - |
The facilities have variable interest rates and the average commitment fee is 0.14%.
The following long-term debt has been issued by the domestic utility companies and System Energy in 2003:
Mortgage Bonds: | Issue Date | (In Thousands) | |
Entergy Arkansas | |||
5.4% Series due May 2018 | May 2003 | $150,000 | |
5.9% Series due June 2033 | June 2003 | 100,000 | |
5.0% Series due July 2018 | June 2003 | 115,000 | |
$365,000 | |||
Entergy Gulf States | |||
3.6% Series due June 2008 | June 2003 | $325,000 | |
Libor + 0.90% Series due June 2007 | June 2003 | 275,000 | |
6.2% Series due July 2033 | July 2003 | 240,000 | |
5.25% Series due August 2015 | July 2003 | 200,000 | |
$1,040,000 | |||
Entergy Mississippi | |||
5.15% Series due February 2013 | January 2003 | $100,000 | |
4.35% Series due April 2008 | March 2003 | 100,000 | |
4.95% Series due June 2018 | May 2003 | 95,000 | |
$295,000 | |||
Entergy New Orleans | |||
3.875% Series due August 2008 | July 2003 | $30,000 | |
5.25% Series due August 2013 | July 2003 | 70,000 | |
$100,000 |
The following long-term debt has been retired by the domestic utility companies and System Energy in 2003:
Mortgage Bonds and Certain Lease Obligation Payments: | Retirement Date | (In Thousands) | |
Entergy Arkansas | |||
7.72% Series due March 2003 | March 2003 | $100,000 | |
6.65% Series due August 2005 | August 2003 | 115,000 | |
7.5% Series due August 2007 | August 2003 | 100,000 | |
6.0% Series due October 2003 | September 2003 | 155,000 | |
$470,000 | |||
Entergy Gulf States | |||
6.75% Series due March 2003 | March 2003 | $33,000 | |
Libor + 1.2% Series due June 2003 | March 2003 | 260,000 | |
8.94% Series due January 2022 | July 2003 | 150,000 | |
8.7% Series due April 2024 | August 2003 | 294,950 | |
Libor + 1.3% Series due September 2004 | September 2003 | 300,000 | |
$1,037,950 | |||
Entergy Louisiana | |||
Waterford 3 Lease Obligation payments | - | $35,416 | |
8.5% Series due June 2003 | June 2003 | 150,000 | |
$185,416 | |||
Entergy Mississippi | |||
7.75% Series due February 2003 | February 2003 | $120,000 | |
6.25% Series due February 2003 | February 2003 | 70,000 | |
6.625% Series due November 2003 | March 2003 | 65,000 | |
8.25% Series due July 2004 | March 2003 | 25,000 | |
Libor + 0.65% Series due May 2004 | June 2003 | 50,000 | |
$330,000 | |||
Entergy New Orleans | |||
6.65% Series due March 2004 | September 2003 | $30,000 | |
8.0% Series due March 2006 | September 2003 | 40,000 | |
7.0% Series due July 2008 | September 2003 | 30,000 | |
$100,000 | |||
System Energy | |||
Grand Gulf Lease Obligation payment | - | $11,375 |
On October 1, 2003, Entergy Louisiana purchased its $110.95 million 5.35% Series St. Charles Parish bonds from the holders, pursuant to a mandatory tender provision, and has not remarketed the bonds at this time. Entergy Louisiana used a combination of cash on hand and short-term borrowing to buy-in the bonds.
NOTE 4. NEW ACCOUNTING PRONOUNCEMENTS (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy)
SFAS 143, "Accounting for Asset Retirement Obligations," which was implemented effective January 1, 2003, requires the recording of liabilities for all legal obligations associated with the retirement of long-lived assets that result from the normal operation of those assets. These liabilities are recorded at their fair values (which are likely to be the present values of the estimated future cash outflows) in the period in which they are incurred, with an accompanying addition to the recorded cost of the long-lived asset. The asset retirement obligation is accreted each year through a charge to expense, to reflect the time value of money for this present value obligation. The amounts added to the carrying amounts of the long-lived assets are depreciated over the useful lives of the assets. The net effect of implementing this standard for the rate-regulated business of the domestic utility companies and System Energy was recorded as a regulatory asset, with no resulting impact on E ntergy's net income. Entergy recorded these regulatory assets because existing rate mechanisms in each jurisdiction are based on the principle that Entergy will recover all ultimate costs of decommissioning from customers. As a result of this treatment, SFAS 143 is expected to be earnings neutral to the rate-regulated business of the domestic utility companies and System Energy. Assets and liabilities increased approximately $1.1 billion for the domestic utility companies and System Energy as a result of recording the asset retirement obligations at their fair values of $1.1 billion as determined under SFAS 143, increasing utility plant by $288 million, reducing accumulated depreciation by $361 million and recording the related regulatory assets of $422 million. The implementation of SFAS 143 for the portion of River Bend not subject to cost-based ratemaking decreased earnings in the first quarter of 2003 by approximately $21 million net-of-tax ($0.09 per share) as a result of a one-time cumulative effect of accounting change. In accordance with ratemaking treatment and as required by SFAS 71, the depreciation provisions for Entergy's utility subsidiaries include a component for removal costs that are not asset retirement obligations under SFAS 143. Of the current depreciation rates for the domestic utility companies, on a weighted average basis, approximately 7% for Entergy Arkansas, approximately 7% for Entergy Gulf States, approximately 6% for Entergy Louisiana, approximately 14% for Entergy Mississippi, and approximately 4% for Entergy New Orleans represents a component for the net of salvage value and removal costs. Per regulatory accounting requirements, this component is included in accumulated depreciation on the balance sheet. If SFAS 143 had been applied by Entergy's regulated utilities during all prior periods, the following impacts would have resulted:
As discussed in Note 1 to the domestic utility companies and System Energy financial statements in the Form 10-K, Entergy applies the provisions of SFAS 115, "Accounting for Investments for Certain Debt and Equity Securities," in accounting for investments in decommissioning trust funds. As a result, Entergy records the decommissioning trust funds at their fair value on the consolidated balance sheet. The fair value of the securities held in such funds differs from the amounts deposited plus the earnings on the deposits. In accordance with the regulatory treatment for decommissioning trust funds, Entergy Arkansas, Entergy Gulf States (for the regulated portion of River Bend), Entergy Louisiana, and System Energy have recorded an offsetting amount of unrealized gains/(losses) on investment securities in other regulatory liabilities. For the nonregulated portion of River Bend, Entergy Gulf States has recorded an offsetting amount of unrealized gains/(losses) on invest ment securities in other deferred credits. Prior to the implementation of SFAS 143, the offsetting amount of unrealized gains/(losses) on investment securities was recorded in accumulated depreciation for Entergy Arkansas, Entergy Gulf States (for the regulated portion of River Bend), and Entergy Louisiana.
SFAS 150,"Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," was issued in May 2003 and became effective July 1, 2003. This new standard requires mandatorily redeemable financial instruments to be classified and treated as liabilities in the presentation of financial position and results of operations. The only effect of implementing this new standard for the domestic utility companies and System Energy is the inclusion of long-term debt, preferred stock with sinking fund, and company-obligated mandatorily redeemable preferred securities under the liabilities caption in the domestic utility companies' and System Energy's balance sheets. The domestic utility companies' and System Energy's results of operations and cash flows were not affected by this new standard.
__________________________________
In the opinion of the management of Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy, the accompanying unaudited financial statements contain all adjustments (consisting primarily of normal recurring accruals and reclassification of previously reported amounts to conform to current classifications) necessary for a fair statement of the results for the interim periods presented. The business of the domestic utility companies and System Energy is subject to seasonal fluctuations, however, with the peak periods occurring during the third quarter. The results for the interim periods presented should not be used as a basis for estimating results of operations for a full year.
Item 4. Controls and Procedures
As of September 30, 2003, evaluations were performed under the supervision and with the participation of Entergy Corporation, Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy Resources (individually "Registrant" and collectively the "Registrants") management, including their respective Chief Executive Officers (CEO) and Chief Financial Officers (CFO). The evaluations assessed the effectiveness of the Registrants' disclosure controls and procedures. Based on the evaluations, each CEO and CFO has concluded that, as to the Registrant or Registrants for which they serve as CEO or CFO, the Registrants' disclosure controls and procedures are effective to ensure that information required to be disclosed by each Registrant in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
ENTERGY CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See "PART I, Item 1 (for both "Entergy Corporation, Domestic utility companies, and System Energy" and "Entergy Corporation"), Litigation" in the Form 10-K for a discussion of legal proceedings affecting Entergy.
Entergy Gulf States Merger Savings Lawsuit (Entergy Corporation and Entergy Gulf States)
See "PART I, Item 1,Entergy Gulf States Merger Savings Lawsuit" in the Form 10-K for a discussion of the lawsuit filed against Entergy Corporation and Entergy Gulf States by plaintiffs claiming to be customers of Entergy Gulf States in Texas and class representatives for all other similarly situated customers. The Texas Supreme Court has requested full briefing from the parties on the merits of the petition for mandamus relief filed in January 2003 with the court by Entergy Corporation and Entergy Gulf States. The PUCT has filed an amicus brief concurring in Entergy Gulf States' position that the matters at issue in the lawsuit fall within the PUCT's exclusive jurisdiction. Oral argument before the Texas Supreme Court is scheduled in November 2003.
Fiber Optic Cable Litigation (Entergy Mississippi)
See "PART I, Item 1, Fiber Optic Cable Litigation" in the Form 10-K for a discussion of the fiber optic cable litigation filed against Entergy Mississippi. The plaintiff agreed to a dismissal of the lawsuit and the case has been closed.
Texas Power Price Lawsuit (Entergy Corporation, Entergy Arkansas, and Entergy Gulf States)
In August 2003, a lawsuit was filed in the district court of Chambers County, Texas by Texas residents on behalf of a purported class apparently of the Texas retail customers of Entergy Gulf States who were billed and paid for electric power from January 1, 1994 to the present. The named defendants are Entergy Corporation, Entergy Services, Entergy Power, Entergy Power Marketing Corp., Arkansas Electric Cooperative Corporation and Entergy Arkansas. Entergy Gulf States is not a named defendant, but is alleged to be a co-conspirator.
Plaintiffs allege that the defendants implemented a "price gouging accounting scheme" to sell to plaintiffs and similarly situated utility customers higher priced power generated by the defendants while rejecting and/or reselling to off-system utilities, less expensive power offered and/or purchased from off-system suppliers and/or generated by the Entergy system. In particular, plaintiffs allege that the defendants manipulated and continue to manipulate the dispatch of generation so that power is purchased from affiliated expensive resources instead of buying cheaper off-system power.
Plaintiffs estimate that customers in Texas were charged at least $57 million above prevailing market prices for power. Plaintiffs seek actual, consequential and exemplary damages, costs and attorneys' fees, and disgorgement of profits. In September 2003, the Entergy defendants removed the lawsuit to the federal court in Galveston, and in October 2003, filed a pleading seeking dismissal of the plaintiffs' claims. In October 2003, the plaintiffs filed a motion to remand the case to state court. Entergy intends to defend this action vigorously.
Futures and Options Trading Lawsuit (Entergy Corporation)
On August 18, 2003, Cornerstone Propane Partners, L.P. filed a lawsuit in the United States District Court for the Southern District of New York against 40 named defendants, including Entergy-Koch Trading and Entergy Corporation. The lawsuit was filed on behalf of a purported class of all persons who purchased and/or sold natural gas futures and options contracts traded on the New York Mercantile Exchange (NYMEX) between January 1, 2000 and December 31, 2002 and who suffered losses by reason of the defendants' alleged manipulation of the natural gas market.
Cornerstone alleges that the defendants manipulated the prices of natural gas futures and option contracts traded on the NYMEX by deliberately reporting inaccurate, misleading and false trading information, including inflated volume and price information, to trade publications that compile and publish indices of natural gas prices. In addition, Cornerstone alleges that certain defendants, including Entergy-Koch Trading and Entergy Corporation, engaged in trades, including wash trades, whose sole purpose was to create the perception of increased liquidity and demand for natural gas, and thus to artificially inflate the price of natural gas. Cornerstone alleges that the defendants' conduct produced illegal profits and caused actual damages (unspecified in amount) to it and others similarly situated in violation of the Commodity Exchange Act, and that the defendants aided and abetted each other in the commission of violations under the Commodity Exchange Act. Entergy Corporation and Enterg y-Koch Trading intend to vigorously defend the lawsuit but cannot predict its outcome.
Item 5. Other Information
Regulatory Investigations Relating to Trading Business
In March 2003, the FERC Staff issued its Final Report on Price Manipulation in Western Markets that identified and raised questions about 61 pairs of gas trades completed by Entergy-Koch Trading. Based on information currently available, these 61 pairs of trades represent less than one-half of one percent of Entergy-Koch Trading's volume and less than one-tenth of one percent of Entergy-Koch Trading's revenues for the period under review by FERC had Entergy-Koch recorded revenues for the year ended 2001 on a gross basis. Entergy-Koch adopted the net method of reporting for trading revenues in December 2001.
In April 2003, Entergy-Koch Trading received a subpoena from the Commodity Futures Trading Commission (CFTC) seeking information on gas and power trading activities of Entergy-Koch Trading and affiliated companies, which would include Entergy Power Marketing Corp. (in operation prior to the launch of Entergy-Koch on February 1, 2001), including information about trading activities relating to "wash trades" as well as information furnished to energy industry publications in 2001 and 2002.
Entergy intends to cooperate fully with the CFTC. Both Entergy and Entergy-Koch Trading are conducting internal reviews and responding to information requests from the CFTC. During reviews in connection with the CFTC investigation, Entergy-Koch Trading has become aware that some of its employees may have misreported prices and volumes to energy industry publications. Entergy-Koch Trading, however, is not aware that any employee participated in manipulation or attempted manipulation of energy price indices. Because this investigation is ongoing and the data are voluminous, Entergy cannot predict when these reviews will be completed or what the outcome will be.
Generation
See "PART I, Item 1,Generating Stations" in the Form 10-K for discussion of the request for proposal for supply-side resources issued by Entergy Services in November 2002, and the filings with their respective retail regulators made by Entergy Louisiana, Entergy New Orleans, and Entergy Arkansas as a result of the proposal process. In the filings with their retail regulators, Entergy Louisiana, Entergy New Orleans, and Entergy Arkansas sought approval to enter into transactions with affiliates as shown in the following table:
Company | Proposed Transactions | Status of Approval in | ||
Entergy Louisiana |
| The LPSC has found contracts 1) and 2) to be prudent and has authorized Entergy Louisiana to execute these contracts. An LPSC decision on proposals 3) and 4) is expected by March 2004. | ||
Entergy New Orleans |
| In May 2003, in connection with the settlement relating to Entergy New Orleans' cost-of-service study and revenue requirement, the City Council authorized Entergy New Orleans to enter into contracts for the proposed transactions. See Management's Financial Discussion and Analysis for additional discussion of the rate settlement. | ||
Entergy Arkansas |
| In May 2003 the APSC found the PPAs involving Entergy Arkansas in the public interest. |
Entergy has also filed with the FERC the agreements described above. In May 2003, the FERC accepted the agreements for filing, subject to refund, with the contracts becoming effective on June 1, 2003. The FERC also established a hearing process to review the justness and reasonableness of the agreements. Several parties have intervened or filed protests regarding the request-for-proposals process and the agreements filed with the FERC, and the proceeding is set for hearing in April 2004.
On May 2, 2003, Entergy Services signed a letter of intent to purchase a 725MW generating plant located near Monroe, Louisiana. The plant is owned by a subsidiary of Cleco Corporation, which submitted a bid in response to Entergy Services' request for proposals for supply-side resources. Entergy Services did not execute a purchase agreement before the letter of intent expired on August 15, 2003, but continues negotiations toward the purchase of the plant.
Entergy Services also issued a spring 2003 Request for Proposals in April 2003. Approximately 530MW of short-term resource proposals from non-affiliates were selected for contract negotiation and agreements for approximately 380MW were finalized. In addition, Entergy Services continues to evaluate five short-listed long-term resource proposals received in response to the spring 2003 Request for Proposals and is currently pursuing due diligence efforts and additional discussions with these bidders.
Entergy Services also issued on October 1, 2003 a draft fall 2003 Request for Proposals for limited term (1 to 3 year) resources only and plans to issue a final Request for Proposal in mid-November 2003.
In October 2003, the LPSC approved on an interim basis a method of calculating the payments for energy that Entergy Gulf States and Entergy Louisiana make to qualified facilities pursuant to the PURPA. Up to 2,220MW of qualified facility power is now being put to Entergy in Louisiana, much of it during off-peak periods when wholesale power prices are typically lower than the calculated avoided energy cost for that same hour. On an interim basis, the LPSC approved calculating the payments based on a formula that more accurately reflects the market price of energy. The payments were being calculated based on the cost avoided by Entergy not having to generate the power from one of its plants. The LPSC-approved calculation is expected to reduce the amount that Entergy Gulf States and Entergy Louisiana customers pay for fuel and purchased power. Entergy's RS Cogen joint venture operates a qualified facility, and management expects its results to be negatively affected by the LPSC-approved c alculation. During the interim period, the LPSC will require Entergy to keep records of the required payments calculated under both the interim method and the previous method, and if the LPSC decides to go back to the previous methodology, additional payments to the qualified facilities will be required. If such additional payments are required to be made, they will be recoverable through the fuel adjustment charges billed by Entergy Gulf States and Entergy Louisiana to their retail customers. Several of the qualified facilities have filed a joint motion requesting that the LPSC reconsider its October 2003 order.
Transmission
See "PART I, Item 1,Transmission" in the Form 10-K for discussion of the proposed SeTrans RTO. At this time, management does not expect the proposed SeTrans RTO to become operational before mid-2005.
FERC Notice of Proposed Rulemaking - Standard Market Design
See "PART I, Item 1,FERC Notice of Proposed Rulemaking - Standard Market Design" in the Form 10-K for discussion of FERC's proposed rulemaking to establish a standardized transmission service and wholesale electric market design. In a letter responding to the letters from the retail regulators, the FERC indicated its desire to continue to work with the retail regulators to craft a rule that will address their concerns while at the same time providing the benefits of a fully competitive wholesale market. To further this effort, the FERC has requested a series of meetings with regulators in the Southeast United States to provide a more organized process for working through these issues. Also, on April 28, 2003, the FERC issued its anticipated white paper on Standard Market Design issues that was mentioned in the Form 10-K. Entergy believes that the white paper responded to many of the concerns raised by members of the industry as well as the retail regulators. While there ar e still some areas that require further clarification, Entergy believes that this clarification can best be obtained through the proposed SeTrans process.
Interconnection Orders
See "PART I, Item 1,Interconnection Orders" in the Form 10-K for discussion of the orders issued by the FERC in proceedings involving interconnection agreements with certain generators interconnecting to the domestic utility companies' transmission system. In July 2003, the FERC issued its final rule on the standardization of generation interconnection agreements and procedures. Among other things, the final rule incorporates pricing policies that require the transmission provider's other customers to bear the vast majority of costs required when a new generator interconnects to its transmission system. The FERC has issued an order delaying the effective date of the final rule until January 20, 2004. Entergy continues to evaluate its alternatives with respect to implementation of the final rule.
FERC's Market Power Screen
See "PART I, Item 1,FERC's Market Power Screen" in the Form 10-K for discussion of FERC's order establishing a new generation market power screen for purposes of evaluating a utility's request for market-based rate authority, the application of that order to the Entergy System, and Entergy's request for rehearing. In June 2003, the FERC proposed new market behavior rules and tariff provisions that would be applied to any market-based sale. Entergy submitted comments on the proposed rules and tariff provisions, and is currently awaiting further FERC action.
Generator Operating Limits proceeding
See "PART I, Item 1,Generator Operating Limits (GOL) proceeding" in the Form 10-K for discussion of Entergy's proposed Generator Operating Limit procedures filed with FERC. Certain intervenors in the proceeding requested a stay and a rehearing of FERC's March 13, 2003 order. In a June 2003 order on rehearing, the FERC denied the request for a stay and clarified its prior order approving the GOL procedures for exports off the Entergy transmission system. Also in June 2003, the FERC approved, with certain modifications, Entergy's proposed procedures for transactions internal to the Entergy control area.
System Agreement
See "PART I, Item 1,System Agreement" in the Form 10-K for discussion of the proceeding commenced at FERC by the LPSC and the City Council regarding production cost equalization under the System Agreement.On April 4, 2003, witnesses on behalf of the FERC staff filed testimony in the proceeding suggesting that full production cost equalization should not be adopted by the FERC in this case, and that when measured over a suitably long period, the total production costs of the domestic utility companies were roughly equal and were likely to remain so, given the Entergy System's proposed resource plan. Pursuant to the settlement agreement approved by the City Council in May 2003, the City Council withdrew as a complainant from the proceeding, but continues to participate as an intervenor. Hearings in the proceeding ended in late-August 2003. An ALJ decision is expected in February 2004.
Environmental Regulation
See "PART I, Item 1,Clean Water Act" in the Form 10-K for information related to EPA proposed regulations for existing power plants employing once-through cooling technology. The EPA plans to finalize regulations in 2004. Regarding intake water and discharge water controls likely to be required by the Clean Water Act at power plants, the EPA, in coordination with the states of Massachusetts and Rhode Island, recently has issued a permit to a large non-nuclear facility in Massachusetts requiring the facility to reduce substantially its intake of water, impingement and entrainment of aquatic species, and discharge of heated water. The flow reductions required by the new permit likely will require the facility to expend significant funds in retrofitting the plant to use a new closed-loop cooling water structure instead of its current once-through cooling system, or be required to take "forced outages" during the fish spawning times to effectively reach the same result s as installing new equipment. The development of reissued Clean Water Act permits for Entergy's Pilgrim and Indian Point facilities likely will include discussion and negotiation with the EPA and the New York Department of Environmental Conservation (NYDEC) of similar water intake and discharge issues, as will subsequent permit reissuance procedures for other nuclear and non-nuclear facilities. The availability of approvable technical options is expected to vary from facility to facility according to the facility's location, the water body from which it draws and into which it discharges cooling water, and the sensitivity of the species and ecosystems in that area. Entergy continues to monitor the regulatory developments in this area and to assess available options.
See "PART I, Item 1,Clean Water Act" in the Form 10-K for information related to renewal of the Indian Point discharge permit issued by New York. As a result of a recent legal settlement, the NYDEC has agreed to issue a new draft State Pollutant Discharge Elimination System (SPDES) permit for the Indian Point plants by November 14, 2003. There will then be public meetings and negotiations which should result in a renewal SPDES permit issued by the NYDEC sometime in 2004.
(Entergy Gulf States)
See "PART I, Item 1,Other Environmental Matters" in the Form 10-K for information related to the proposed ten-year groundwater monitoring program that was to begin in 2003. A ten-year groundwater monitoring study will commence upon the EPA's issuance of an Administrative Consent Order in early 2004.
See "PART I, Item 1,Clean Air Act Amendments of 1990" in the Form 10-K for information related to the State of Louisiana's emission control strategy to address continued ozone non-attainment status of areas in and around Baton Rouge, Louisiana. In December 2002, the U.S. 5th Circuit Court of Appeals invalidated an ozone attainment date extension approved by the EPA for the Beaumont/Port Arthur area. The Court specifically rejected EPA's use of an extension policy based on ozone transport. Consequently, in April 2003, in light of the Beaumont/Port Arthur ruling, the EPA withdrew the October 2002 attainment date extension for the Baton Rouge ozone non-attainment area, issued a finding of continued non-attainment, and reclassified the Baton Rouge area from serious to severe effective June 2003. The EPA also established a schedule for LDEQ to submit State Implementation Plan (SIP) revisions to address pollution control requirements for a severe area under the Act wit hin 12 months of the effective date. Entergy Gulf States is monitoring agency action and will continue to evaluate draft rules as they are published, including considering options and costs for complying with any future rules.
See "PART I, Item 1,Clean Air Act Amendments of 1990" in the Form 10-K for information related to the State of Texas' emission control strategy to address continued ozone non-attainment status of areas in and around Beaumont, Texas. The strategy for the Beaumont area included an ozone level attainment date extension based on the transport of ozone precursor emissions from the Houston area. In December 2002, the U.S. 5th Circuit Court of Appeals invalidated the attainment date extension. In June 2003, the EPA issued a supplemental proposed rule in response to the Court's action. The EPA withdrew its final action extending the Beaumont attainment date. Further, the EPA is proposing to issue a finding that the Beaumont area has failed to attain the standard as a moderate area, and is proposing alternatives for reclassifying the area as either a serious or a severe non-attainment area. Entergy Gulf States is monitoring agency action and will con tinue to evaluate draft rules as they are published, including considering options and costs for complying with any future rules.
Low-Level Radioactive Waste Policy Act of 1980
See "PART I, Item 1,Low-Level Radioactive Waste Policy Act of 1980" in the Form 10-K for information related to the disposal of low-level radioactive waste.
(Entergy Corporation)
As discussed in the Form 10-K, the state of Vermont, where Vermont Yankee is located, participates in a regional compact with Maine and Texas. In 2003, the Texas legislature passed a bill providing for the private development of a low-level radioactive waste disposal facility in the state of Texas.
(Entergy Mississippi)
In June 2002, the Southeast Compact Commission joined the member states of Alabama, Florida, Tennessee, and Virginia in filing a lawsuit in the U.S. Supreme Court against the state of North Carolina to enforce sanctions against North Carolina for the state's failure to comply with the provisions of the Southeast Compact. In June 2003, the Supreme Court decided to hear the case.
(Entergy Arkansas, Entergy Gulf States, Entergy Louisiana)
The state of Nebraska has appealed the U.S. District Court's decision that found that the state of Nebraska violated its federal obligation to the United States and the states of Arkansas, Kansas, Louisiana, and Oklahoma when it considered, delayed, and then denied a license to build a low-level radioactive waste disposal facility that was to be used by the citizens of those states.
Non-Utility Nuclear Business
As discussed in "PART I, Item 1, Non-Utility Nuclear" in the Form 10-K, Entergy's Non-Utility Nuclear business provides operations and management services to nuclear power plants owned by other utilities in the United States. In September 2003, the Non-Utility Nuclear business agreed to provide administrative support services for the 800MW Cooper Nuclear Station located near Brownville, Nebraska. The contract is for 10 years, the remaining term of the plant's operating license. Entergy will receive $12 million in 2004, $13 million in 2005, and $14 million in 2006 and each of the remaining years of the contract. Entergy can also receive up to $6 million more per year beginning in 2007 if top decile in the industry safety and regulatory goals are met. In addition, Entergy will be reimbursed for all employee-related expenses.
Earnings Ratios (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)
The domestic utility companies and System Energy have calculated ratios of earnings to fixed charges and ratios of earnings to combined fixed charges and preferred dividends pursuant to Item 503 of Regulation S-K of the SEC as follows:
Ratios of Earnings to Fixed Charges | |||||||||||
Twelve Months Ended | |||||||||||
December 31, | September 30, | ||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | ||||||
Entergy Arkansas | 2.63 | 2.08 | 3.01 | 3.29 | 2.79 | 3.35 | |||||
Entergy Gulf States | 1.40 | 2.18 | 2.60 | 2.36 | 2.49 | 1.66 | |||||
Entergy Louisiana | 3.18 | 3.48 | 3.33 | 2.76 | 3.14 | 3.38 | |||||
Entergy Mississippi | 3.12 | 2.44 | 2.33 | 2.14 | 2.48 | 2.92 | |||||
Entergy New Orleans | 2.65 | 3.00 | 2.66 | (b) | (c) | 1.67 | |||||
System Energy | 2.52 | 1.90 | 2.41 | 2.12 | 3.25 | 3.44 | |||||
| Ratios of Earnings to Combined Fixed Charges | ||||||||||
Twelve Months Ended | |||||||||||
December 31, | September 30, | ||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | ||||||
Entergy Arkansas | 2.28 | 1.80 | 2.70 | 2.99 | 2.53 | 3.01 | |||||
Entergy Gulf States (a) | 1.20 | 1.86 | 2.39 | 2.21 | 2.40 | 1.61 | |||||
Entergy Louisiana | 2.75 | 3.09 | 2.93 | 2.51 | 2.86 | 3.02 | |||||
Entergy Mississippi | 2.80 | 2.18 | 2.09 | 1.96 | 2.27 | 2.68 | |||||
Entergy New Orleans | 2.41 | 2.74 | 2.43 | (b) | (c) | 1.51 | |||||
(a) | "Preferred Dividends" in the case of Entergy Gulf States also include dividends on preference stock for the twelve months ended December 31, 1998 and 1999. |
(b) | Earnings for the twelve months ended December 31, 2001, for Entergy New Orleans were not adequate to cover fixed charges and combined fixed charges and preferred dividends by $6.6 million and $9.5 million, respectively. |
(c) | Earnings for the twelve months ended December 31, 2002, for Entergy New Orleans were not adequate to cover fixed charges and combined fixed charges and preferred dividends by $0.7 million and $3.4 million, respectively. |
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits*
4(a) - | Officer's Certificate for Entergy Corporation. | |
31(a) - | Rule 13a-14(a)/15d-14(a) Certification for Entergy Corporation. | |
31(b) - | Rule 13a-14(a)/15d-14(a) Certification for Entergy Corporation and System Energy. | |
31(c) - | Rule 13a-14(a)/15d-14(a) Certification for Entergy Arkansas. | |
31(d) - | Rule 13a-14(a)/15d-14(a) Certification for Entergy Gulf States. | |
31(e) - | Rule 13a-14(a)/15d-14(a) Certification for Entergy Gulf States and Entergy Louisiana. | |
31(f) - | Rule 13a-14(a)/15d-14(a) Certification for Entergy Mississippi. | |
31(g) - | Rule 13a-14(a)/15d-14(a) Certification for Entergy New Orleans. | |
31(h) - | Rule 13a-14(a)/15d-14(a) Certification for System Energy. | |
31(i) - | Rule 13a-14(a)/15d-14(a) Certification for Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans. | |
32(a) - | Section 1350 Certification for Entergy Corporation. | |
32(b) - | Section 1350 Certification for Entergy Corporation and System Energy. | |
32(c) - | Section 1350 Certification for Entergy Arkansas. | |
32(d) - | Section 1350 Certification for Entergy Gulf States. | |
32(e) - | Section 1350 Certification for Entergy Gulf States and Entergy Louisiana. | |
32(f) - | Section 1350 Certification for Entergy Mississippi. | |
32(g) - | Section 1350 Certification for Entergy New Orleans. | |
32(h) - | Section 1350 Certification for System Energy. | |
32(i) - | Section 1350 Certification for Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans. | |
99(a) - | Entergy Arkansas' Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Dividends, as defined. | |
99(b) - | Entergy Gulf States' Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Dividends, as defined. | |
99(c) - | Entergy Louisiana's Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Dividends, as defined. | |
99(d) - | Entergy Mississippi's Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Dividends, as defined. | |
99(e) - | Entergy New Orleans' Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Dividends, as defined. | |
99(f) - | System Energy's Computation of Ratios of Earnings to Fixed Charges, as defined. |
___________________________
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, Entergy Corporation agrees to furnish to the Commission upon request any instrument with respect to long-term debt that is not registered or listed herein as an Exhibit because the total amount of securities authorized under such agreement does not exceed ten percent of Entergy Corporation and its subsidiaries on a consolidated basis.
* | Reference is made to a duplicate list of exhibits being filed as a part of this report on Form 10-Q for the quarter ended September 30, 2003, which list, prepared in accordance with Item 102 of Regulation S-T of the SEC, immediately precedes the exhibits being filed with this report on Form 10-Q for the quarter ended September 30, 2003. |
** | Incorporated herein by reference as indicated. |
(b) | Reports on Form 8-K | |
Entergy Corporation | ||
A Current Report on Form 8-K, dated July 10, 2003, was submitted to the SEC on July 10, 2003, reporting information under Item 7. "Financial Statements, Pro Forma Financial Statements and Exhibits" and Item 9. "Regulation FD Disclosure". | ||
Entergy Corporation | ||
A Current Report on Form 8-K/A, dated July 10, 2003, was submitted to the SEC on July 14, 2003, reporting information under Item 7. "Financial Statements, Pro Forma Financial Statements and Exhibits," Item 9. "Regulation FD Disclosure", and Item 12. "Results of Operations and Financial Condition". | ||
Entergy Corporation and Entergy Gulf States | ||
A Current Report on Form 8-K, dated July 11, 2003, was submitted to the SEC on July 15, 2003, reporting information Item 5. "Other Events and Regulation FD Disclosure" and Item 12. "Results of Operations and Financial Condition". | ||
Entergy Corporation and Entergy Gulf States | ||
A Current Report on Form 8-K, dated July 21, 2003, was submitted to the SEC on July 22, 2003, reporting information Item 5. "Other Events and Regulation FD Disclosure" and Item 12. "Results of Operations and Financial Condition". | ||
Entergy Corporation | ||
A Current Report on Form 8-K, dated July 28, 2003, was submitted to the SEC on July 28, 2003, reporting information under Item 7. "Financial Statements, Pro Forma Financial Statements and Exhibits," Item 9. "Regulation FD Disclosure", and Item 12. "Results of Operations and Financial Condition". | ||
Entergy Corporation | ||
A Current Report on Form 8-K, dated September 3, 2003, was submitted to the SEC on September 3, 2003, reporting information under Item 7. "Financial Statements, Pro Forma Financial Statements and Exhibits" and Item 9. "Regulation FD Disclosure". | ||
Entergy Corporation | ||
A Current Report on Form 8-K, dated September 17, 2003, was submitted to the SEC on September 17, 2003, reporting information under Item 7. "Financial Statements, Pro Forma Financial Statements and Exhibits" and Item 9. "Regulation FD Disclosure". | ||
Entergy Corporation | ||
A Current Report on Form 8-K, dated October 9, 2003, was submitted to the SEC on October 9, 2003, reporting information under Item 7. "Financial Statements, Pro Forma Financial Statements and Exhibits," Item 9. "Regulation FD Disclosure", and Item 12. "Results of Operations and Financial Condition". | ||
Entergy Corporation | ||
A Current Report on Form 8-K, dated October 23, 2003, was submitted to the SEC on October 23, 2003, reporting information under Item 7. "Financial Statements, Pro Forma Financial Statements and Exhibits," Item 9. "Regulation FD Disclosure", and Item 12. "Results of Operations and Financial Condition". | ||
Entergy Corporation | ||
A Current Report on Form 8-K, dated October 24, 2003, was submitted to the SEC on October 24, 2003, reporting information under Item 7. "Financial Statements, Pro Forma Financial Statements and Exhibits," and Item 9. "Regulation FD Disclosure". | ||
Entergy Corporation | ||
A Current Report on Form 8-K, dated October 28, 2003, was submitted to the SEC on October 28, 2003, reporting information under Item 7. "Financial Statements, Pro Forma Financial Statements and Exhibits," and Item 9. "Regulation FD Disclosure". | ||
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiaries.
ENTERGY CORPORATION |
/s/ Nathan E. Langston |
Date: November 7, 2003