Entergy (ETR)

 

As discussed in more detail in Note 11 to the financial statements, first quarter 2012 results of operations include a $355.5 million ($223.5 million after-tax) impairment charge to write down the carrying values of Vermont Yankee and related assets to their fair values.

Net Revenue

Utility

Following is an analysis of the change in net revenue comparing the first quarter 2012 to the first quarter 2011.

		Amount
		(In Millions)
2011 net revenue		$1,148
Volume/weather		(48)
Net gas revenue		(8)
Retail electric price		12
Other		2
2012 net revenue		$1,106

           The volume/weather variance is primarily due to the effect of milder weather on residential and commercial sales.  This was partially offset by an increase of 748 GWh in weather-adjusted usage, primarily in the industrial sector.  Industrial sales growth was largely due to expansions.  This sector had growth from both large and small industrial customers.  Improvements in chemicals were partially offset by declines in refineries and pipelines.

The net gas revenue variance is primarily due to milder weather compared to the same period in the prior year.

The retail electric price variance is primarily due to:

·	a special formula rate plan rate increase at Entergy Louisiana effective May 2011 in accordance with a previous LPSC order relating to the acquisition of Unit 2 of the Acadia Energy Center; and

·	a base rate increase at Entergy Texas beginning May 2011 as a result of the settlement of the December 2009 rate case.

These increases were partially offset by a formula rate plan decrease at Entergy New Orleans effective October 2011.  See Note 2 to the financial statements in the Form 10-K for further discussion of these proceedings.

 

2

---

Entergy Corporation and Subsidiaries

Management's Financial Discussion and Analysis

Table of Contents

Entergy Wholesale Commodities

Following is an analysis of the change in net revenue comparing the first quarter 2012 to the first quarter 2011.

		Amount
		(In Millions)
2011 net revenue		$525
Realized price changes		(63)
Volume		(7)
Other		(3)
2012 net revenue		$452

As shown in the table above, net revenue for Entergy Wholesale Commodities decreased by $73 million, or 14%, in the first quarter 2012 compared to the first quarter 2011 primarily due to lower pricing in its contracts to sell power and lower volume in its nuclear fleet resulting from more planned and unplanned outage days in 2012 compared to the same period in 2011.

Following are key performance measures for Entergy Wholesale Commodities for the first quarter 2012 and 2011:

		2012		2011
Owned capacity		6,612		6,016
GWh billed		11,193		10,519
Average realized price per MWh		$49.68		$56.98
Entergy Wholesale Commodities Nuclear Fleet
Capacity factor		88%		91%
GWh billed		9,838		9,913
Average realized revenue per MWh		$50.32		$57.46
Refueling Outage Days:
Indian Point 2		27		-
Indian Point 3		-		23

Realized Revenue per MWh for Entergy Wholesale Commodities Nuclear Plants

See the Form 10-K for a discussion of Entergy Wholesale Commodities nuclear business’s average realized price per MWh, including the factors that influence it and the decrease in the annual average realized price per MWh to $54.73 in 2011 from $59.16 in 2010.  Entergy Wholesale Commodities’ nuclear business is likely to continue to experience a decrease again in 2012 from 2011 because, as shown in the contracted sale of energy table in "Market and Credit Risk Sensitive Instruments," Entergy Wholesale Commodities has sold forward 89% of its planned nuclear energy output for the remainder of 2012 for an average contracted energy price of $48 per MWh.  In addition, Entergy Wholesale Commodities has sold forward 84% of its planned nuclear energy output for 2013 for an average contracted energy price of $45-50 per MWh.

 

 

3

---

Entergy Corporation and Subsidiaries

Management's Financial Discussion and Analysis

Table of Contents

Other Income Statement Items

Utility

Other operation and maintenance expenses increased from $448 million for the first quarter 2011 to $490 million for the first quarter 2012 primarily due to:

 

·

an increase of $14 million in compensation and benefits costs primarily due to decreasing discount rates and changes in certain actuarial assumptions resulting from a recent experience study.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for further discussion of benefits costs;

·	an increase of $13 million in fossil-fueled generation expenses resulting from higher outage costs primarily because the scope of outages was greater than the same period in the prior year and the timing of the outages;

·	$6 million of costs incurred in 2012 related to the planned spin-off and merger of the Utility’s transmission business;

·	an increase of $6 million in nuclear generation expenses primarily due to higher labor costs, including higher contract labor;

·	nuclear insurance refunds of $5 million received in 2011; and

·	an increase of $4 million in contract costs due to the transition and implementation of joining the MISO RTO.

Depreciation and amortization expense increased primarily due to an increase in plant in service.

Other income increased primarily due to an increase of $6 million in realized earnings on decommissioning trust fund investments and AFUDC accrued on projects under construction, primarily from the Grand Gulf uprate project.

Interest expense increased primarily due to net debt issuances by certain of the Utility operating companies.

Entergy Wholesale Commodities

           Other operation and maintenance expenses increased from $209 million for the first quarter 2011 to $233 million for the first quarter 2012 primarily due to:

·

an increase of $12 million in compensation and benefits costs primarily due to decreasing discount rates and changes in certain actuarial assumptions resulting from a recent experience study.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for further discussion of benefits costs;

·	an increase of $4 million due to the operations of the Rhode Island State Energy Center, which was acquired in December 2011; and

·	several individually insignificant items.

The asset impairment variance is due to a $355.5 million ($223.5 million after-tax) impairment charge to write down the carrying values of Vermont Yankee and related assets to their fair values.  See Note 11 to the financial statements for further discussion of this charge.

Taxes other than income taxes increased primarily due to increased property taxes at FitzPatrick.  Previously, Fitzpatrick was granted an exemption from property taxation and paid taxes according to a payment in lieu of property taxes agreement.  This agreement expired on June 30, 2011 and FitzPatrick is now being taxed under the current property tax system.

 

 

4

---

Entergy Corporation and Subsidiaries

Management's Financial Discussion and Analysis

Table of Contents

Depreciation expense increased primarily due to an increase in plant in service, including the acquisition of the Rhode Island State Energy Center in December 2011.

Income Taxes

The effective income tax rates for the first quarters 2012 and 2011 were 0.11% and 39.3%, respectively.  The difference in the effective income tax rate versus the statutory rate of 35% for the first quarter 2012 was primarily because the expected tax benefit of the pre-tax loss that Entergy incurred in the first quarter 2012 was partially offset by the write-off of a portion of the regulatory asset for income taxes that is discussed in Note 2 to the financial statements.  The difference in the effective income tax rate versus the statutory rate of 35% for the first quarter 2011 was primarily due to state income taxes and certain book and tax differences for utility plant items.

 

Plan to Spin Off the Utility’s Transmission Business

See the Form 10-K for a discussion of Entergy’s plan to spin off its transmission business and merge it with a newly formed subsidiary of ITC Holdings Corp.

Entergy Wholesale Commodities Authorizations to Operate Its Nuclear Power Plants

The NRC operating licenses for Pilgrim, Indian Point 2, and Indian Point 3 expire in June 2012, September 2013, and December 2015, respectively.  NRC license renewal applications are pending for each plant.  Under federal law, nuclear power plants may continue to operate beyond their license expiration dates while their renewal applications are pending NRC approval.  In addition, in March 2011 the NRC renewed Vermont Yankee’s operating license for an additional 20 years, as a result of which the license now expires in 2032.  For additional discussion regarding activity in Vermont and the continued operation of the Vermont Yankee plant, see “Impairment of Long-Lived Assets>” in Note 11 to the financial statements herein.

In the Pilgrim license renewal proceeding, there remain pending two matters that could present an obstacle to the NRC staff’s issuance of a renewed license.  First, the NRC referred to the Atomic Safety and Licensing Board (ASLB) an intervenor request to reopen the record to admit a new contention with a request for decision on admissibility by May 29, 2012.  Second, while four intervenor appeals of ASLB decisions were denied by the NRC during the first quarter 2012, one such appeal remains pending.  On April 23, 2012, the NRC staff issued a request to the NRC Commissioner asking for authorization to issue a renewed Pilgrim license notwithstanding the pendency of these matters.  The NRC Staff asked that the NRC act by May 8, 2012.  Outside of the NRC license renewal process, intervenors have taken steps to slow or block license renewal.  Such steps include the Commonwealth of Massachusetts’s appeal to the U.S. Court of Appeals for the First Circuit of an NRC decision affirming the ASLB’s decision not to admit a late-filed contention and an April 2012 letter sent by certain parties to the Massachusetts Office of Coastal Zone Management (OCZM) requesting that OCZM suspend its 2006 consistency determination issued for Pilgrim license renewal.

In April 2007, Entergy submitted an application to the NRC to renew the operating licenses for Indian Point 2 and 3 for an additional 20 years.  The ASLB has admitted 21 contentions raised by the State of New York or other parties, which were combined into 16 discrete issues.  Two of the issues have been resolved, leaving 14 issues that are currently subject to ASLB hearings.  In July 2011, the ASLB granted the State of New York’s motion for summary disposition of an admitted contention challenging the adequacy of a section of Indian Point’s environmental analysis as incorporated in the Final Supplemental Environmental Impact Statement (FSEIS) (discussed below).  That section provided cost estimates for Severe Accident Mitigation Alternatives (SAMAs), which are hardware and procedural changes that could be implemented to mitigate estimated impacts of off-site radiological releases in case of a hypothesized severe accident.  In addition to finding that the SAMA cost analysis was insufficient, the ASLB directed the NRC staff to explain why cost-beneficial SAMAs should not be required to be implemented.  Entergy appealed the ASLB’s decision to the NRC and the NRC staff supported Entergy’s appeal, while the State of New York opposed it.  In December 2011 the NRC denied Entergy’s appeal as premature, stating that the appeal could be renewed at the conclusion of the ASLB proceedings.

 

 

5

---

Entergy Corporation and Subsidiaries

Management's Financial Discussion and Analysis

Table of Contents

 In November 2011 the ASLB issued an order establishing deadlines for the submission of several rounds of testimony on most of the contentions pending before the ASLB and for the filing of motions to limit or exclude testimony.  Most of the testimony on those contentions has now been completed and filed, and the ASLB has scheduled the commencement of hearings for October 15, 2012.  Hearings on the remaining issues will follow the submission of testimony on dates yet to be set.

The NRC staff currently is also performing its technical and environmental reviews of the application.  The NRC staff issued a Final Safety Evaluation Report (FSER) in August 2009, a supplement to the FSER in August 2011, and a FSEIS in December 2010.  The NRC staff has stated its intent to issue a draft supplemental FSEIS in May 2012 and, following an opportunity for comment, to issue a final supplement FSEIS later in 2012.  The NRC staff also plans to issue a supplemental SER in August 2012.

 

The New York State Department of Environmental Conservation has taken the position that Indian Point must obtain a new state-issued Clean Water Act Section 401 water quality certification as part of the license renewal process.  In addition, the consistency of Indian Point’s operations with New York State’s coastal management policies must be resolved as required by the Coastal Zone Management Act.  Entergy Wholesale Commodities’ efforts to obtain these certifications and determinations continue in 2012.

The hearing process is an integral component of the NRC’s regulatory framework, and evidentiary hearings on license renewal applications are not uncommon.  Entergy intends to participate fully in the hearing process as permitted by the NRC’s hearing rules.  As noted in Entergy’s responses to the various intervenor filings, Entergy believes the contentions proposed by the intervenors are unsupported and without merit.  Entergy will continue to work with the NRC staff as it completes its technical and environmental reviews of the license renewal application.

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 discussion.

Capital Structure

Entergy’s capitalization is balanced between equity and debt, as shown in the following table.

		March 31, 2012		December 31, 2011
Debt to capital		57.8 %		57.3 %
Effect of excluding the securitization bonds		(2.1)%		(2.3)%
Debt to capital, excluding securitization bonds (1)		55.7 %		55.0 %
Effect of subtracting cash		(1.5)%		(1.5)%
Net debt to net capital, excluding securitization bonds (1)		54.2 %		53.5 %

(1)	Calculation excludes the Arkansas, Louisiana, and Texas securitization bonds, which are non-recourse to Entergy Arkansas, Entergy Louisiana, and Entergy Texas, respectively.

Net debt consists of debt less cash and cash equivalents.  Debt consists of notes payable, capital lease obligations, and long-term debt, including the currently maturing portion.  Capital consists of debt, common shareholders’ equity, and subsidiaries’ preferred stock without sinking fund.  Net capital consists of capital less cash and cash equivalents.  Entergy uses the net debt to net capital ratio and the ratios excluding securitization bonds in analyzing its financial condition and believes they provide useful information to its investors and creditors in evaluating Entergy’s financial condition.

 

 

6

---

Entergy Corporation and Subsidiaries

Management's Financial Discussion and Analysis

Table of Contents

Entergy Corporation has in place a credit facility that has a borrowing capacity of $3.5 billion and expires in March 2017.  Entergy Corporation has the ability to issue letters of credit against 50% of the total borrowing capacity of the facility.  Following is a summary of the borrowings outstanding and capacity available under the facility as of March 31, 2012.

Capacity		Borrowings		Letters of Credit		Capacity Available
(In Millions)
$3,500		$1,465		$8		$2,027

 

A covenant in Entergy Corporation’s credit facility requires Entergy to maintain a consolidated debt ratio of 65% or less of its total capitalization.  The calculation of this debt ratio under Entergy Corporation’s credit facility is different than the calculation of the debt to capital ratio above.  Entergy is currently in compliance with the covenant.  If Entergy fails to meet this ratio, or if Entergy or one of the Utility operating companies (except Entergy New Orleans) defaults on other indebtedness or is in bankruptcy or insolvency proceedings, an acceleration of the facility’s maturity date may occur.

See Note 4 to the financial statements herein for additional discussion of the Entergy Corporation credit facility and discussion of the Registrant Subsidiaries’ credit facilities.

Capital Expenditure Plans and Other Uses of Capital

See the table and discussion in the Form 10-K under "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources - Capital Expenditure Plans and Other Uses of Capital,"> that sets forth the amounts of planned construction and other capital investments by operating segment for 2012 through 2014.  Following are updates to the discussion in the Form 10-K.

Grand Gulf Uprate

As discussed in more detail in the Form 10-K, the estimated capital investments for 2012-2014 include System Energy’s planned approximate 178 MW uprate of the Grand Gulf nuclear plant.  Considering the progress of the uprate project during Grand Gulf’s spring 2012 refueling outage, including additional work scope that has emerged during the outage; additional information from the project's engineering, procurement and construction contractor; the costs required to install instrumentation in the steam dryer in response to evolving guidance from the NRC staff; and delays in obtaining NRC approval; System Energy now estimates the total capital investment to be made in the course of the implementation of the Grand Gulf uprate project is approximately $874 million, including SMEPA’s share.  Implementation of the uprate and the NRC’s review continues.  System Energy expects to complete the project during the summer of 2012.

Ninemile Point Unit 6 Self-Build Project

See the Form 10-K for a discussion of Entergy Louisiana’s Ninemile Point Unit 6 self-build project.  The Ninemile 6 capacity and energy is proposed to be allocated 55% to Entergy Louisiana, 25% to Entergy Gulf States Louisiana, and 20% to Entergy New Orleans.  In February 2012 the City Council passed a resolution authorizing Entergy New Orleans to purchase 20% of the Ninemile 6 energy and capacity.  In June 2011, Entergy Louisiana filed with the LPSC an application seeking certification that the public necessity and convenience would be served by Entergy Louisiana’s construction of the facility.  Entergy Gulf States Louisiana joined in the application, seeking certification of its purchase under a life-of-unit power purchase agreement of its allocated share of the capacity and energy generated by Ninemile 6.  In March 2012 the LPSC unanimously voted to grant the certifications requested by Entergy Louisiana and Entergy Gulf States Louisiana, and Entergy Louisiana has given the contractor a full notice to proceed with the construction. Under the terms approved by the LPSC, costs may be recovered through Entergy Louisiana’s and Entergy Gulf States Louisiana’s formula rate plans, if one is in effect when the project is placed in service; alternatively, Entergy Louisiana and Entergy Gulf States Louisiana’s must file rate cases approximately 12 months prior to the expected in-service date.

 

 

7

---

Entergy Corporation and Subsidiaries

Management's Financial Discussion and Analysis

Table of Contents

Hot Spring Energy Facility Purchase Agreement

See the Form 10-K for a discussion of Entergy Arkansas’s agreement to acquire the Hot Spring Energy Facility.  The parties have satisfied their obligations under the Hart-Scott-Rodino Act, and the U.S. Department of Justice’s review of the transaction is ongoing.

In July 2011, Entergy Arkansas filed its application with the APSC requesting approval of the acquisition and full cost recovery.  In January 2012, Entergy Arkansas, the APSC General Staff, and the Arkansas Attorney General filed a Motion to Suspend the Procedural Schedule and Joint Stipulation and Settlement for consideration by the APSC.  Under the settlement, the parties agreed that the acquisition costs may be recovered through a capacity acquisition rider and agreed that the level of the return on equity reflected in the rider would be submitted to the APSC for resolution.  Because the transmission upgrade costs remained uncertain, the parties requested that the APSC suspend the procedural schedule and cancel the hearing scheduled for January 24, 2012, pending resolution of the transmission costs.  The APSC issued an order accepting the settlement as part of the record and directing Entergy Arkansas to file the transmission studies when available and directing the parties to propose a procedural schedule to address the results of those studies.

On April 6, 2012, facilities studies were issued indicating that long-term transmission service is available for the Hot Spring facility provided that supplemental transmission upgrades estimated at approximately $440,000 are made.  In addition, the studies noted that surveys of two lines should be conducted, which may result in additional upgrade requirements not expected to exceed $25 million.  On April 16, 2012, Entergy Arkansas filed the facilities studies with the APSC and reiterated its request for a public interest finding and timely cost recovery.  Assuming timely regulatory approvals and the satisfaction of all other closing conditions, closing is targeted for around mid-2012.

Hinds Energy Facility Purchase Agreement

See the Form 10-K for a discussion of Entergy Mississippi’s agreement to acquire the Hinds Energy Facility.  In July 2011, Entergy Mississippi filed with the MPSC requesting approval of the acquisition and full cost recovery.  The parties have satisfied their obligations under the Hart-Scott-Rodino Act, and the U.S. Department of Justice’s review of the transaction is ongoing.  In February 2012 the MPSC granted a certificate of public convenience and necessity and approved the estimated acquisition cost.  In April 2012, facilities studies were issued indicating that long-term transmission service is available for the Hinds facility provided that supplemental transmission upgrades estimated at approximately $580,000 are made and assuming that various projects already included in the transmission construction plan are completed.  The retail cost recovery proceeding remains pending before the MPSC.  Assuming timely regulatory approvals and the satisfaction of all other closing conditions, closing is targeted for around mid-2012.

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 April 2012 meeting, the Board declared a dividend of $0.83 per share, which is the same quarterly dividend per share that Entergy has paid since second quarter 2010.

 

 

8

---

Entergy Corporation and Subsidiaries

Management's Financial Discussion and Analysis

Table of Contents

Cash Flow Activity

As shown in Entergy’s Consolidated Statements of Cash Flows, cash flows for the three months ended March 31, 2012 and 2011 were as follows:

		2012		2011
		(In Millions)
Cash and cash equivalents at beginning of period		$694		$1,294
Cash flow provided by (used in):
Operating activities		601		323
Investing activities		(749)		(897)
Financing activities		139		6
Net decrease in cash and cash equivalents		(9)		(568)
Cash and cash equivalents at end of period		$685		$726

 

Operating Activities

Entergy's cash flow provided by operating activities increased by $278 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 primarily due to a decrease of $172 million in pension contributions and an increase in deferred fuel cost collections.  Partially offsetting these factors were the decreases in net revenue that are discussed above.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – >Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for a discussion of qualified pension and other postretirement benefits funding.

Investing Activities

Net cash used in investing activities decreased by $148 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 primarily due to:

·	a decrease in nuclear fuel purchases because of variations from year to year in the timing and pricing of fuel reload requirements, material and services deliveries, and the timing of cash payments during the nuclear fuel cycle;

·

a change in collateral deposit activity, reflected in the “Decrease (increase) in other investments” line on the Consolidated Statements of Cash Flows, as Entergy received $95 million in net deposits from Entergy Wholesale Commodities’ counterparties during 2012 and returned net deposits of $21 million in 2011.  Entergy Wholesale Commodities’ forward sales contracts are discussed in the Market and Credit Risk Sensitive Instruments section below; and

·

an increase in construction expenditures, primarily in the Utility business resulting from spending on the power uprate project at Grand Gulf.  Entergy’s construction spending plans for 2012 through 2014 are discussed in the Form 10-K and are updated in the Capital Expenditure Plans and Other Uses of Capital section in this report.

Financing Activities

Net cash provided by financing activities increased by $133 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 primarily due to the following:

·	Entergy repurchased $54 million of its common stock in the three months ended March 31, 2011.  Entergy’s share repurchase programs are discussed in the Form 10-K.

·	$51 million in proceeds from the sale in 2012 of a portion of Entergy Gulf States Louisiana’s investment in Entergy Holdings Company’s Class A preferred membership interests to a third party.

 

 

 

9

---

Entergy Corporation and Subsidiaries

Management's Financial Discussion and Analysis

Table of Contents

·	Long-term debt activity provided approximately $175 million of cash in 2012 compared to $133 million of cash in 2011.  For details of Entergy's long-term debt activity in 2012 see Note 4 to the financial statements herein.

Rate, Cost-recovery, and Other Regulation

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - >Rate, Cost-recovery, and Other Regulation" in the Form 10-K for discussions of rate regulation, federal regulation, and related regulatory proceedings.

State and Local Rate Regulation and Fuel-Cost Recovery

See Note 2 to the financial statements herein for updates to the discussion in the Form 10-K regarding these proceedings.

Federal Regulation

Entergy’s Proposal to Join the MISO RTO

See the Form 10-K for a discussion of the Utility operating companies proposal to join the MISO RTO.  Following are updates to that discussion.

On March 14, 2012, the LPSC Staff and intervenors filed direct testimony in Entergy Louisiana’s and Entergy Gulf States Louisiana’s joint change of control proceeding.  In Entergy Arkansas’s proceeding, the APSC Staff and intervenors filed direct testimony on March 16, 2012.  Intervenors began filing direct testimony in the Entergy New Orleans and Entergy Mississippi proceedings on March 23, 2012 and April 23, 2012, respectively.  Most parties were conditionally supportive of or did not oppose certifying the move to MISO as in the public interest.  Several parties, including the LPSC Staff, proposed various conditions.  The APSC Staff argued Entergy Arkansas has not proven that it is in the public interest to join MISO and noted that Entergy Arkansas should maintain the option to join SPP.  On April 13, 2012, Entergy Arkansas filed rebuttal testimony addressing the claims made by parties challenging the MISO proposal, and on April 19, 2012, Entergy Gulf States Louisiana and Entergy Louisiana filed responsive testimony to the prefiled testimony of the LPSC Staff and intervenors.  The LPSC hearing on the merits was completed on May 2, 2012.  The APSC has established a procedural schedule with hearing the hearing on the merits commencing May 30, 2012.  The MPSC has scheduled a hearing in July 2012.  The City Council has scheduled a hearing in September 2012.  Entergy Texas submitted its change of control filing on April 30, 2012.

In June 2011, MISO filed with the FERC a request for a transitional waiver of provisions of its open access transmission, energy, and operating reserve markets tariff regarding allocation of transmission network upgrade costs, in order to establish a transition for the integration of the Utility operating companies.  In September 2011 the FERC issued an order denying on procedural grounds MISO’s request, further advising MISO that submitting modified tariff sheets is the appropriate method for implementing the transition that MISO seeks for the Utility operating companies.  The FERC did not address the merits of any transition arrangements that may be appropriate to integrate the Utility operating companies into MISO.  MISO worked with its stakeholders to prepare the appropriate changes to its tariff and filed the proposed tariff changes with the FERC in November 2011.  On April 19, 2012, the FERC conditionally accepted MISO’s proposal related to the allocation of transmission upgrade costs in connection with the transition and integration of the Utility operating companies into MISO.

 

 

10

---

Entergy Corporation and Subsidiaries

Management's Financial Discussion and Analysis

Table of Contents

In addition, the Utility operating companies have agreed to give authority to the Entergy Regional State Committee (E-RSC), upon unanimous vote and within the first five years after the Utility operating companies join the MISO RTO, (i) to direct the allocation of certain transmission upgrade costs among the Utility operating companies’ transmission pricing zones in a manner that differs from the allocation that would occur under the MISO OATT and (ii) to direct the Utility operating companies as transmission owners to add projects to MISO’s transmission expansion plan.

Market and Credit Risk Sensitive Instruments

Commodity Price Risk

Power Generation

As a wholesale generator, Entergy Wholesale Commodities’ core business is selling energy, measured in MWh, to its customers.  Entergy Wholesale Commodities enters into forward contracts with its customers and sells energy in the day ahead or spot markets.  In addition to selling the energy produced by its plants, Entergy Wholesale Commodities sells unforced capacity, which allows load-serving entities to meet specified reserve and related requirements placed on them by the ISOs in their respective areas.  Entergy Wholesale Commodities’ forward fixed price physical power contracts consist of contracts to sell energy only, contracts to sell capacity only, and bundled contracts in which it sells both capacity and energy.  While the terminology and payment mechanics vary in these contracts, each of these types of contracts requires Entergy Wholesale Commodities to deliver MWh of energy, make capacity available, or both.  In addition to its forward fixed price physical power contracts, Entergy Wholesale Commodities also uses financial contracts to hedge a portion of its commodity price risk.  The following is a summary of the amount of Entergy Wholesale Commodities’ planned energy output that is currently sold forward under physical or financial contracts (2012 represents the remainder of the year):

 

Entergy Wholesale Commodities Nuclear Portfolio
		2012		2013		2014		2015		2016
Energy
Percent of planned generation sold forward (a):
Unit-contingent (b)		60%		41%		14%		12%		12%
Unit-contingent with guarantee of availability (c)		18%		19%		15%		13%		13%
Firm LD (d)		24%		24%		20%		-%		-%
Offsetting positions (e)		(13)%		-%		-%		-%		-%
Total energy sold forward		89%		84%		49%		25%		25%
Planned generation (TWh) (f) (g)		31		40		41		41		40
Average revenue under contract per MWh (h)		$48		$45-50		$47-51		$49-57		$50-59

Capacity
Percent of capacity sold forward (i):
Bundled capacity and energy contracts (j)		16%		16%		16%		16%		16%
Capacity contracts (k)		43%		31%		25%		17%		5%
Total capacity sold forward		59%		47%		41%		33%		21%
Planned net MW in operation (g) (l)		5,011		5,011		5,011		5,011		5,011
Average revenue under contract per kW per month (applies to capacity contracts only) (h)		$2.3		$2.9		$3.1		$3.2		$3.4
Blended Capacity and Energy Recap (based on revenues)
% of planned generation and capacity sold forward		92%		85%		54%		31%		30%
Average revenue under contract per MWh (h)		$50		$46		$48		$52		$51

 

 

11

---

Entergy Corporation and Subsidiaries

Management's Financial Discussion and Analysis

Table of Contents

Entergy Wholesale Commodities Non-Nuclear Portfolio
		2012		2013		2014		2015		2016
Energy
Percent of planned generation sold forward (a):
Cost-based contracts (m)		41%		36%		30%		35%		32%
Firm LD (d)		5%		5%		5%		6%		6%
Total energy sold forward		46%		41%		35%		41%		38%
Planned generation (TWh) (f) (n)		5		7		7		6		6

 

Capacity
Percent of capacity sold forward (i):
Cost-based contracts (m)		35%		29%		24%		24%		24%
Bundled capacity and energy contracts (j)		8%		8%		8%		8%		8%
Capacity contracts (k)		52%		47%		47%		48%		20%
Total capacity sold forward		95%		84%		79%		80%		52%
Planned net MW in operation (l) (n)		1,052		1,052		1,052		1,052		1,052

 

(a)	Percent of planned generation output sold or purchased forward under contracts, forward physical contracts, forward financial contracts or options that mitigate price uncertainty that may require regulatory approval or approval of transmission rights
(b)	Transaction under which power is supplied from a specific generation asset; if the asset is not operating, seller is generally not liable to buyer for any damages
(c)	A sale of power on a unit-contingent basis coupled with a guarantee of availability provides for the payment to the power purchaser of contract damages, if incurred, in the event the seller fails to deliver power as a result of the failure of the specified generation unit to generate power at or above a specified availability threshold.  All of Entergy’s outstanding guarantees of availability provide for dollar limits on Entergy’s maximum liability under such guarantees.
(d)	Transaction that requires receipt or delivery of energy at a specified delivery point (usually at a market hub not associated with a specific asset) or settles financially on notional quantities; if a party fails to deliver or receive energy, defaulting party must compensate the other party as specified in the contract; a portion of which may be capped through the use of risk management products
(e)	Transactions for the purchase of energy, generally to offset a Firm LD transaction
(f)	Amount of output expected to be generated by Entergy Wholesale Commodities resources considering plant operating characteristics, outage schedules, and expected market conditions that effect dispatch
(g)	Assumes NRC license renewal for plants whose current licenses expire within five years and uninterrupted normal operation at all plants.  NRC license renewal applications are in process for three units, as follows (with current license expirations in parentheses): Pilgrim (June 2012), Indian Point 2 (September 2013), and Indian Point 3 (December 2015).  For a discussion regarding the continued operation of the Vermont Yankee plant, see “Impairment of Long-Lived Assets” in Note 1 to the financial statements in the Form 10-K and “Vermont Yankee” in Note 11 to the financial statements herein.
(h)	Revenue on a per unit basis at which generation output, capacity, or a combination of both is expected to be sold to third parties (including offsetting positions), given existing contract or option exercise prices based on expected dispatch or capacity, excluding the revenue associated with the amortization of the below-market PPA for Palisades.  Revenue may fluctuate due to factors including positive or negative basis differentials, option premiums and market prices at time of option expiration, costs to convert firm LD to unit-contingent, and other risk management costs.  Also, average revenue under contract excludes payments owed under the value sharing agreement with NYPA.

 

 

 

12

---

Entergy Corporation and Subsidiaries

Management's Financial Discussion and Analysis

Table of Contents

(i)	Percent of planned qualified capacity sold to mitigate price uncertainty under physical or financial transactions.
(j)	A contract for the sale of installed capacity and related energy, priced per megawatt-hour sold
(k)	A contract for the sale of an installed capacity product in a regional market
(l)	Amount of capacity to be available to generate power and/or sell capacity considering uprates planned to be completed during the year.  The increased capacity figure for the nuclear portfolio from the 10-K reflects the final testing and confirmation of a small incremental increase in output associated with equipment replacements at Palisades.
(m)	Contracts priced in accordance with cost-based rates, a ratemaking concept used for the design and development of rate schedules to ensure that the filed rate schedules recover only the cost of providing the service; these contracts are on owned non-utility resources located within Entergy’s service territory, which do not operate under market-based rate authority.  The percentage sold assumes approval of long-term transmission rights.  Includes sales to the Utility through 2013 of 121 MW of capacity and energy from Entergy Power sourced from Independence Steam Electric Station Unit 2.
(n)	Non-nuclear planned generation and net MW in operation include purchases from affiliated and non-affiliated counterparties under long-term contracts and exclude energy and capacity from Entergy Wholesale Commodities’ wind investment accounted for under the equity method of accounting and from the 544 MW Ritchie plant that is not planned to operate.

Entergy estimates that a $10 per MWh change in the annual average energy price in the markets in which the Entergy Wholesale Commodities nuclear business sells power, based on March 31, 2012 market conditions, planned generation volumes, and hedged positions, would have a corresponding effect on pre-tax net income of $41 million in 2012.

Some of the agreements to sell the power produced by Entergy Wholesale Commodities’ power plants contain provisions that require an Entergy subsidiary to provide collateral to secure its obligations under the agreements.  The Entergy subsidiary is required to provide collateral based upon the difference between the current market and contracted power prices in the regions where Entergy Wholesale Commodities sells power.  The primary form of collateral to satisfy these requirements is an Entergy Corporation guaranty.  Cash and letters of credit are also acceptable forms of collateral.  At March 31, 2012, based on power prices at that time, Entergy had liquidity exposure of $271 million under the guarantees in place supporting Entergy Wholesale Commodities transactions, $20 million of guarantees that support letters of credit, and $6 million of posted cash collateral to the ISOs.  As of March 31, 2012, the liquidity exposure associated with Entergy Wholesale Commodities assurance requirements would increase by $71 million for a $1 per MMBtu increase in gas prices in both the short-and long-term markets.  In the event of a decrease in Entergy Corporation’s credit rating to below investment grade, based on power prices as of March 31, 2012, Entergy would have been required to provide approximately $45 million of additional cash or letters of credit under some of the agreements.

As of March 31, 2012, substantially all of the counterparties or their guarantors for 100% of the planned energy output under contract for Entergy Wholesale Commodities nuclear plants through 2016 have public investment grade credit ratings.

Nuclear Matters

After the nuclear incident in Japan resulting from the March 2011 earthquake and tsunami, the NRC established a task force to conduct a review of processes and regulations relating to nuclear facilities in the United States.  The task force issued a near term (90-day) report in July 2011 that made initial recommendations, which were subsequently refined and prioritized after input from stakeholders.  The task force then issued a second report in September 2011.  Based upon the task force’s recommendations, the NRC issued three orders effective on March 12, 2012.  The three orders require U.S. nuclear operators, including Entergy, to undertake plant modifications or perform additional analyses that will, among other things, result in increased operating and capital costs associated with operating Entergy’s nuclear plants.  The orders are being analyzed and an estimate of the increased costs cannot be made at this time.

 

 

13

---

Entergy Corporation and Subsidiaries

Management's Financial Discussion and Analysis

Table of Contents

With the issuance of the three orders, the NRC also provided members of the public an opportunity to request a hearing.  Two established anti-nuclear groups, Pilgrim Watch and Beyond Nuclear, have filed hearing requests, focused on Pilgrim, regarding two of the three orders.  These requests seek to have the NRC impose expanded remedial requirements to address the issues raised by the NRC’s orders.  Entergy has filed oppositions to these hearing requests.

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, unbilled revenue, impairment of long-lived assets and trust fund investments, qualified pension and other postretirement benefits, and other contingencies.  For updates of the impairment of long-lived assets discussion regarding Vermont Yankee see Note 11 to the financial statements herein.

New Accounting Pronouncements

The accounting standard-setting process, including projects between the FASB and the International Accounting Standards Board (IASB) to converge U.S. GAAP and International Financial Reporting Standards, is ongoing and the FASB and the IASB are each currently working on several projects that have not yet resulted in final pronouncements.  Final pronouncements that result from these projects could have a material effect on Entergy’s future net income or financial position.

 

14

---

Table of Contents