ML061530419

Enclosure 1, 2005 Annual Report, and, Securities and Exchange Commission Form 10-K Submittal for All Entergy Nuclear Operations, Inc. Plants

ML061530419
Person / Time
Site:	Indian Point, Pilgrim, Vermont Yankee, FitzPatrick
Issue date:	05/25/2006
From:	Entergy Nuclear Northeast
To:	NRC/FSME
References
Download: ML061530419 (101)

Text

ENCLOSURE I 2005 Annual Report, and, Securities and Exchange Commission Form 10-K Submittal for All Enterqy Nuclear Operations, Inc. Plants For James A. FitzPatrick Nuclear Power Plant Docket No. 50-333 Indian Point Nuclear Generating Unit No. 1 Docket No.50-003 Indian Point Nuclear Generating Unit No. 2 Docket No. 50-247 Indian Point Nuclear Generating Unit No. 3 Docket No. 50-286 Pilgrim Nuclear Power Station Docket No. 50-293 Vermont Yankee Nuclear Power Station Docket No. 50-271

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ur darkest moment. Our finest hour. It's hard to imagine a scenario more catastrophic than the actual events of last year. It's equally hard to imagine a response more inspiring than that delivered by our exceptional employees.

At Entergy, we pride ourselves on our customer service, our safe and efficient operations, our well-maintained infrastructure, and our thoughtful plans and strategies. We believe our employees are well-prepared and capable of responding to whatever comes our way - whether it's an abrupt change in market conditions or weather.

In 2005, two storms unprecedented in strength and size tested our company and our employees to their very limits. Not only did our employees respond brilliantly, they demonstrated the enormous potential flooding in New Orleans left the city and our headquarters offices uninhabitable.

When the storm passed, our employees began the arduous work of restoring power. As a company, we worked through the issues - no communications capability, fuel shortages, severe flooding, and security threats. As individuals, many of our employees also dealt with overwhelming personal loss - families split apart, homes damaged or destroyed, and in too many cases the loss of a loved one. Thanks to their focus, commitment, and hard work, in just 16 days, we had restored power to 85 percent of customers who could take power in their homes and businesses. Then, on September 24 came Rita.

-Making landfall in Sabine Pass, Texas, Hurricane Rita caused massive damage to our "We are proud to serve with these people - our employees, our heroes."

- Wayne Leonard, Entergy CEO that exists in each of us when called upon to serve a cause that is right and dear to our hearts and minds.

CATASTROP11E TIMES Two On August 29, Hurricane Katrina stormed ashore near Buras, Louisiana, southeast of New Orleans. A strong Category 3 storm of unprecedented physical size, Katrina leveled much of a 400-mile section of coastline stretching from central Louisiana, across Mississippi, into Alabama and western Florida; and devastated the city of New Orleans. With damage estimates topping $75 billion, Katrina ranks as the costliest natural disaster in U.S. history; and with more than 1,300 lives lost, it was also one of the deadliest. More than one million of our customers in Louisiana and Mississippi lost power and extensive infrastructure in Louisiana and Texas - knocking 14 generation units offline and damaging more than 3,800 miles of transmission lines. More than 800,000 customers lost power.

When the storm passed, our employees - exhausted both mentally and physically - were faced with another enormous restoration effort and a wholly different set of issues. All transmission connections from Louisiana west to Texas were severed, making restoration much more difficult. In addition, several refineries with an aggregate capacity of 2.27 million barrels of crude oil per day lost power. Considered vital to the U.S. economy, restoration was urgent and had to be coordinated with each customer as well as the Departments of Energy and Homeland Security.

Randy Helmick (left),

Vice President of Transmission and our official "storm boss",

led our storm restoration efforts with outstanding results.

He Is congratulated here by Bob Luft (right), Chairman, and Wayne Leonard (center),

Chief Executive Officer.

Through extraordinary efforts and genuine creativity and innovation, 13 days after Rita's landfall, 85 percent of customers who could take power had power.

The heroic efforts of our employees - and the huge number of outside workers who came to our assistance -

are impossible to truly put into words. Even as they struggled to put their personal lives back together, they gave everything they had in the service of our customers.

Randy Helmick, vice president of transmission and our official "storm boss", led the restoration efforts with outstanding results.

Our employees repaired more than 75,000 miles of transmission lines and distribution circuits; handled more than 3 million calls; coordinated, clothed, housed, and fed more than 23,000 workers; restored critical IT systems so all employees were paid on time; and coordinated the redeployment of our headquarters offices and 1,500 headquarters employees. Our employees performed thousands of individual acts of courage and ingenuity that made our darkest moment truly our finest hour.

We are gratified by the appreciation and recognition our response received from the media, local regulators and officials, and most importantly, our customers. Without question, Entergy emerged from the trials of Katrina and Rita an even more responsive, prepared, and vigilant company.

FINANCIAL RECOVERY Even as the physical restoration began to wind down, we faced an enormous financial recovery. We incurred restoration costs for Hurricanes Katrina and Rita of approximately $1.5 billion, just over half of which was paid in 2005. This cost estimate does not include other storm effects such as estimated lost net revenue, uncollectible utility customer receivables, and the longer-term accelerated replacement of the gas distribution system in New Orleans. Based on standard, long-accepted, and applied regulatory principles, these costs should be recoverable in the retail ratemaking process. That is a well-settled principle of law, reinforced by historical practices.

The company's preparation for and response to the hurricanes and their aftermath has been in our view, prudent under the circumstances. Although storm costs should be recoverable in rates, we do have as a primary objective that rates are both "just and reasonable." Given the fact we serve some of the poorest communities in the country, maintaining "reasonable" rates in the aftermath of this catastrophe will test not only our effectiveness and efficiency as operators, but also our creativity and resolve as managers. We have pursued several initiatives to recover these costs through various sources and to maintain affordable rates while restoring our liquidity to its pre-hurricane position. While we are encouraged by the response we have received, our efforts continue along multiple fronts.

" Insurance is one avenue for cost recovery, and we expect it to cover a portion of our losses related to our generation assets and gas distribution properties.

Losses related to transmission and distribution assets, representing roughly 80 percent of our restoration costs, are generally uninsurable.

" We continue to seek federal relief from Congress - a combination of Community Development Block Grants and tax benefits, as well as other federal relief. In late 2005, the Gulf Opportunity or GO Zone legislation and the Katrina Relief Bill were passed by Congress and signed into law. The GO Zone legislation permits public utilities to accelerate the realization of tax benefits for Hurricane Katrina casualty losses and repair costs. The Katrina Relief Bill provides $11.5 billion of Community Development Block Grants and includes language that permits funding for infrastructure restoration. The Department of Housing and Urban Development has already allocated specific amounts to each of the states affected by Hurricanes Katrina, Rita, and Wilma and those states are responsible for administering the actual grants. We intend to pursue CDBG funding in Louisiana, Mississippi, and Texas, and we are working with state leaders on behalf of our customers to make the case for federal assistance through support of the operating companies in the affected areas. To be clear, these monies, if made available to utilities, are not a "shareholder" or "lender" bail-out but go directly to reducing rates that customers would otherwise struggle Cstoe ouae by day 1,0 KarnLnfl In Humcanes Katin and Rita.s,00 iaLnfl vve tued he hties minher t

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to afford. We are still working at the federal level to create additional opportunities to recover our storm costs so that we can continue to serve our customers in the manner they deserve and at rate levels that encourage and promote continued development and restoration.

w At the state level, we have made filings to request interim recovery of nearly $600 million of storm costs in Louisiana and Mississippi. And in Texas, the public utility commission has initiated a project to review exceptional storm damage costs caused by Hurricane Rita. VIe are also working with state regulators to possibly securitize our restoration costs - essentially spread the impact on rates over an extended period by accessing low-cost financing sources. Through securitization, we could recover our costs on a timely basis while our customers would benefit by incurring a smaller rate increase on their utility bills over a longer timeframe.

While we continue to pursue recovery initiatives, we also executed a comprehensive financing plan at the end of 2005, consisting of debt and equity units, to restore our financial flexibility. The plan gives us the financial capacity to meet current, as well as unexpected calls on our cash position, solidifies our credit ratings, and provides the flexibility to get the company back on the path it was on prior to the storms.

In fourth quarter 2005, we completed a new $1.5 billion corporate revolver for our parent company, issued $500 million of operating company debt, and marketed S500 million of equity units. In addition, we infused $300 million of equity into Entergy Gulf States - our subsidiary with the highest overall restoration costs - enabling it to maintain its liquidity and investment grade credit rating in anticipation of obtaining some form of cost recovery.

As our recovery initiatives progress and liquidity rises, we believe that unwinding our financing plan could be effected easily and at a reasonable cost. However, in the short term, we believe combining our cost recovery efforts with a comprehensive financing plan is highly consistent with the aspirations we have previously outlined

- to reliably serve our customers and deliver top-quartile shareholder returns - while keeping our overall risk profile on solid footing.

WHAT OF NEW ORLEANS?

While most of our service territory is on the road to recovery, the city of New Orleans is in a different situation.

Extensive flooding from breaches in the levee system left much of the city uninhabitable. At the end of 2005, roughly two-thirds of the city's population had not yet returned and when or if theywill return is a very open question.

With the reduced population, the load level for Entergy New Orleans stands at approximately sixty percent of its pre-Katrina levels - essentially stranding much of the fixed costs in a system designed to serve a larger load. Even without the storm restoration costs, rates for this much reduced customer base would have to substantially increase to cover the costs of providing power. Add in the storm costs and customers could, in the absence of outside assistance, insurance proceeds, and severe cost cuts, face a roughly 140 percent rate increase - clearly unacceptable.

Given this difficult situation and the extreme liquidity constraints placed upon it, Entergy New Orleans took a necessary step on September 23, 2005 of filing a voluntary petition for reorganization under Chapter 11 of the U.S.

Bankruptcy Code. To ensure restoration efforts continued uninterrupted, we also filed a simultaneous motion for debtor-in-possession financing that would permit Entergy Corporation making loans of up to $200 million to Entergy New Orleans. To date, debtor-in-possession loans of $100 million have been made to Entergy New Orleans.

In a major development, on December 7, 2005, the bankruptcy judge granted our request that Entergy Corporation's debtor-in-possession financing prime all existing debt, including Entergy New Orleans' first mortgage bondholders. In effect, Entergy New Orleans now has first claim on all property, plant, and equipment plus post-bankruptcy petition acquired assets, including insurance proceeds. This action by the bankruptcy court strengthens Entergy's hand in trying to rebuild the Entergy New Orleans system.

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As prudent stewards of our shareholders' money, given Entergy Nuclear delivered excellent results throughout the uncertainty surrounding the future of New Orleans, we 2005, largely due to higher contract pricing, higher cannot and will not fund Entergy New Orleans' shortfall generation, and lower operating and maintenance expense.

indefinitely. No law or agreement exists that would force Nuclear operational initiatives were implemented the company to continue to provide service at a loss. We effectively and efficiently in 2005 despite the huge continue to work with the federal government, and state distraction of storm restoration - further testimony to the and local regulators to resolve the bankruptcy in a manner depth and strength of our nuclear team.

that allows its customers to be served by a financially With the passage of the Energy Policy Act of 2005 and viable entity as required by the law.

its incentives for new nuclear unit construction and We are also redefining our corporate headquarters.

operation, NuStart - a consortium of industry leaders -

Previously we had 1,500 employees and multiple functions announced it had selected Grand Gulf as one of two sites operating out of the city of New Orleans. Given the failure to pursue a Construction and Operating License, a COL.

of the levees to withstand Category 3 hurricane strengths Separately, we are pursuing an Early Site Permit for Grand and the time required to reinforce and redo or redesign Gulf and a COL for our River Bend site. In our point of and rebuild the levee system, we are assessing the various view, nuclear remains the only economically viable and alternative locations for critical business continuity technically proven source for the large scale needs for functions in order to lessen the risk posed by any single clean, affordable power and we plan to preserve our event. Like everyone, we learned many lessons from opportunities to pursue the avenues presented in the new the events of 2005 and identified many opportunities Energy Policy.

to reduce our risks from uncontrollable events. The Finally, our non-nuclear wholesale assets business reconfiguration of our headquarters is one that we intend delivered improved results in 2005 due to the sale of SO2 to pursue in 2006.

allowances that were freed up as a result of our strong environmental programs and leadership. Some of the 2005 FiN A N (:1 AL RE S u LT S generating assets in this business have operating attributes The excellent emergency response and operating performance that produce excess allowances, which we are periodically delivered by our employees in 2005 is reflected in our able to monetize.

financial performance. In spite of the severe impact of the While we had repurchased more than $1.1 billion of two hurricanes, as-reported earnings were $898.3 million, outstanding shares as part of our $1.5 billion share or $4.19 per share, in 2005, compared to $909.5 million, or repurchase program, we halted our repurchase activity

$3.93 per share, in 2004. Operational earnings were S943.1 following Hurricane Katrina. Prior to that, we had million, or $4.40 per share, compared to $879.5 million, or expected to complete our repurchase program by the end

$3.80 per share, in the prior year.

of 2006. Instead, our Board of Directors extended the While the impact of the hurricanes depressed earnings program ending date into 2008 so that we may continue to at our utility business in 2005, we still saw an overall return available cash to our shareholders once our financial improvement in operational earnings - up 16% on a per flexibility is restored.

share basis over 2004 - primarily from the result of In 2005, we also welcomed three new members to our strong contributions from our competitive businesses Board of Directors - Gary W Edwards, Stuart L. Levenick, and accretion from our share repurchase program.

and W. J. "Billy" Tauzin. Their collective experience spans a wide range of industries as well as public service and our

company will greatly benefit from their expert insights more aggressive changes - like a step increase in our and knowledge. We would like to thank two departing dividend or accelerated share repurchases, for example -

Board members - Claiborne P. Deming and Kathleen A.

to make up the ground we lost in this area.

Murphy - for their exceptional leadership. We appreciate their many contributions and wish them well in their Even with the massive disruption we experienced last future endeavors.

year, our long-term aspirations remain intact. As we move to make up lost ground, the choices we make will be guided RECLAIMING LOST GROUND by our long-term aspirations. For example, we will continue We come out of the tests of 2005 more determined than to make investments that improve our customer service ever to be the best-in-class at safely providing clean, and reliability, the safety of our operations, our impact on the reliable, and affordable power to our customers. Financially, environment, and our cost position.

we realize we lost ground in 2005 and we will take measured steps to not only make it up, but return to where THE MOST IMPORTANT WORDS OF ALL we would have been if Katrina and Rita had never hit.

All of us who survived the devastation of Hurricanes Katrina

" In our utilities, we expect in 2006 to have hurricane and Rita - whether young or old, rich or poor, strong regulatory recovery mechanisms in place, a decision on or weak - have come to appreciate the significance of two our request for federal relief, and a clear line of sight simple words: "thank you." You survive an event of this on a resolution for Entergy New Orleans. By 2007, magnitude only through the help of others. At Entergy, we we expect our utility business to be back on track.

have many to thank.

• In our nuclear business, we continue to see strong upside First, always first, we thank our employees for their potential for efficient nuclear generators which can courage and dedication under unbelievable hardship. Their deliver reliable power. Faced with the alternative supplies individual stories were often a source of inspiration during from expensive natural gas-fueled plants, our nuclear some of the darkest moments. We are proud to serve with business continues to enter into new contracts with these people - our employees, our heroes.

attractive pricing for both new and existing customers We thank others in our industry for the massive and to generate excellent results. As we did in 2005, assistance provided to restore power following the storms.

we will adjust our hedging strategy to enable us to take We thank our suppliers and business partners for the measured market risks going forward and to conform to support they generously gave.

our dynamic point of view on market pricing for natural We thank all of you for the time, goods, and money you gas or other alternative fuels. In addition, we continue donated following Katrina and Rita. Firefighters from to assess opportunities to broaden our nuclear portfolio, around the country, volunteers in local shelters, churches We will act only when we find opportunities that are that gathered needed goods, and the millions of Americans fairly priced and leverage our existing asset base and who gave to the relief efforts - your help made a operational expertise.

tremendous difference.

" One strategy that was significantly impacted by the We especially thank those who contributed to the Power events of 2005 is our plan to return cash to our of Hope Fund. With a $1 million contribution from shareholders. With the unexpected drain on our Entergy Corporation, we established the Power of Hope liquidity, we were forced to halt our share repurchases Fund in September 2005. Contributions to the Fund -

and forego any increase in our dividend level. As we whose purpose is to help disaster victims rebuild their lives restore our financial flexibility, we will consider making following the storms - reached nearly $4 million. By the sh thod i elrý 200 we i

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end of 2005, $1.8 million had been awarded to more than 2,200 individuals and families - including 293 Entergy employees - all thanks to your generous contributions.

TURNING Loss INTO OPPORTUNITY The costs of Katrina and Rita are too large to fully measure. Lives lost, families scattered, property damaged or destroyed - it's difficult to truly comprehend the magnitude of the loss. Yet we - as a company and as individuals - have come through this experience stronger in many respects.

We learned ways to improve our safety practices and we will continue to relentlessly focus on safety until we can perform every job without accident or loss of life.

We gained a greater appreciation for the improbable and will develop new strategies to mitigate risk throughout our organization. We learned much about how to respond to overlapping catastrophic events that we will incorporate in our future planning and preparations.

Most importantly, we came to appreciate that building a diverse culture where everyone is valued and feels appreciated is an investment that never fails. We will build on that culture with the limitless individual human potential to do better what we do best - safely generate clean, reliable, affordable power for our customers.

We can use the experiences of 2005 to build a stronger Entergy. And that is just what we are doing.

Robert v.d. Luft Chairman J. Wayne Leonard Chief Executive Officer

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Even before the storm hit, oui storm restoration team began to implement its plan of action. More than 4,000 line workers were standing by to begin the arduous work of assessing and repairing damage. Led by Randy Helmick, our "storm boss" and vice president of transmission, the team remained in constant contact with other utilities and contractors to call in additional assistance as needed. Restoration work began later that night and power was restored to customers in areas not severely damaged by Katrina.

AUGUST 30 At 5 a.m. customer outages peaked at nearly 1.1 million customers spread across Louisiana and Mississippi - more than quadruple our previous record of customer outages.

Electric companies from WVest Virginia to Michigan rushed to provide crews. Support teams worked to set up staging areas to accommodate the thousands of workers that would eventually help restore power. Workers would be fed, lodged, and provided the necessary equipment, vehicles, fuel, and medical care if needed.

In all areas that were not flooded, restoration work began. Following a well-tested plan, crews began restoring power to essential customers first, like hospitals, police, fire, communications, water, sanitary services, and transportation providers.

Employees from all parts of our company staffed the phones to answer calls and we maintained frequent contact with the news media to keep our customers as informed as possible.

Areas in southeastern Louisiana remained flooded with several feet of water, especially New Orleans. Entergy crews did whatever they could to help the situation in spite of floodwaters and

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oayit ewOlas security threats. Restoring power to the City's Command Center in the Hyatt Hotel and the Port of New Orleans was top priority but would take days to accomplish.

SEPTEMBER 1 Assessments of the transmission system were largely complete and revealed extensive damage. In total, 263 substations, 3,000 miles of transmission lines, 28,500 miles of distribution circuits, and 17,400 utility poles were damaged.

More than 9,000 line and support workers were committed to power restoration efforts. As of 4 p.m. service had been restored to more than 275,000 customers.

We announced the formation of our Business Continuity Team to get our company back on its feet. The team moved quickly - getting vital systems like payroll back online, establishing support resources for displaced employees and their families, and determining housing and workplace facility needs. One of their biggest tasks was finding housing, schooling, and day care options for employees and their families from the Greater New Orleans area. Within days, the team had secured temporary headquarters facilities in Clinton, Mississippi.

The decision was made to suspend all disconnect procedures and notices and work out payment plans with individuals with high past-due balances.

These policies would later be recognized by national consumer groups as model policies for assisting low-income customers during times of crises.

SEPTEMBER 3 With a SI million contribution, Entergy established The Power of Hope Fund at the Foundation for the Mid South to help disaster victims restore their lives. The much-needed assistance would be available for Entergy employees, families, and others impacted by Hurricane Katrina.

SEPTEMBER 4 The halfway point. We had restored power to more than 541,000 homes and businesses, more than half of the nearly 1.1 million customers left without power after Katrina. Approximately 550,000 outages remained - mostly in Louisiana.

Large areas of New Orleans remained underwater, making damage assessment difficult and full restoration impossible.

SEPTEMBER 7 Entergy Gas Operations continued the dirty and dangerous work of assessing and repairing the gas system in New Orleans. While crews worked in the French Quarter, Algiers, and Uptown, other areas remained flooded and inaccessible. Since landfall, crews had worked diligently to preserve gas flow to the New Orleans Sewerage and Water Board to enable power generation for the drainage pumps needed to pump water out of flooded areas in the city.

SEPTEMBER 20 Power was restored to more than 874,000 customers, thanks to the relentless effort of thousands of workers. All customers in Mississippi had power and all other customers who could accept power were expected to be restored within two weeks.

While much of the restoration effort was complete, massive work remained in New Orleans, involving reconstruction of the system. Some 123,000 t

customers in the most devastated areas in and around New Orleans remained unable to accept electric or gas service.

Meanwhile, near the Florida Keys, Tropical Storm Rita reached hurricane strength and moved westward into the Gulf of Mexico.

SEPTEMBER 21 Wind speeds of 175 mph made Hurricane Rita the second Category 5 storm of the 2005 U.S.

hurricane season - the first time that has happened in recorded history. Exhausted workers - both support teams and linemen - began preparations for Rita. Eventually, more than 4,000 people were recruited and committed for response and plans made for locating command centers and staging sites.

SEPTEMBER 23 Entergy New Orleans, Inc. filed a voluntary petition for reorganization under Chapter 11 of the U.S.

Bankruptcy Code. To ensure the restoration of New Orleans continued uninterrupted, a simultaneous motion was filed for approval of debtor-in-possession financing to be provided by Entergy Corporation to Entergy New Orleans to support its restoration and continuing operations. Entergy Corporation has been authorized by the court to make debtor-in-possession loans up to $200 million to Entergy New Orleans for these purposes and it has to date loaned $100 million.

In a letter of support, the City Council of New Orleans stated that any long-term solution that provides for a financially viable utility at Entergy New Orleans and protects customers from the massive restoration costs they can ill afford to pay, must involve a substantial federal financial commitment.

On September 2, a mounting fuel crisis prompted a high-priority mission to repair a transmission tie to a fuel depot in Collins, Mississippi. Located in Louisiana marshlands, repairs to the transmission facilities required cutting a two-mile road through dense forest and using a Chinook helicopter provided by the Mississippi National Guard to airlift three existing transmission structures from dry ground Into the marsh. A team of 120 Entergy employees and contractors completed restoration on September 10 - resolving a fuel supply crisis that was hampering restoration efforts throughout Mississippi.

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REBUILDING LIVES Our employees took a huge personal hit when Katrina and Rita struck Homes were lost and families split apart. Life, as many employees knew it, simply no longer existed. Instead, people found themselves working in unfamiliar locations and living in temporary housing. Even those with homes to go back to faced extensive repairs and extended wait times for building supplies and contractor services. Our employees were confronted with conditions that were at the very least difficult and distracting and, at worst, debilitating.

As a company, we stepped up to help. The Power of Hope Fund, established with a $1 million contribution from Entergy shortly after Katrina struck, received nearly $4 million in contributions in 2005. By year-end, the fund had awarded

$1.8 million to more than 2,200 individuals and families who suffered losses in Katrina and Rita.

Among the recipients were 293 Entergy employees.

We also launched Operation ReStore Hope in the midst of the restoration effort. At centers in Jackson, Little Rock, Beaumont, and Baton Rouge,

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.2 donated goods ranging from clothes to bedding, furniture, toiletries, and baby items. The donations

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_i were generously made by other employees and retirees. In addition, employees could search the Operation ReStore Hope web site for critical information such as the location and availability of emergency or temporary shelters.

More than anything, we realize that rebuilding lives will take time and energy. We are committed to supporting our employees with the resources and understanding they need, as they continue their personal recoveries from the storms.

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RECOVERING PRUDENTLY INCURRED COSTS Costs associated with the storm restoration efforts total approximately $1.5 billion. These estimated costs do not include other storm effects such as estimated lost net revenue, uncollectible utility customer receivables, and the longer-term accelerated replacement of the gas distribution system in New Orleans. Even as our restoration teams were working to get the power back on for every customer possible, others were pursuing multiple cost recovery initiatives in order to minimize the storms' impact on our customers' electric bills.

Insurance is one avenue for cost recovery.

Coverage is generally not available for transmission and distribution assets - wires and poles. However, we do expect to recover some costs through coverage of our generation and gas system assets.

Repairs to these types of assets represent nearly 20 percent of our total restoration costs. We expect partial payments from our insurers to begin in early 2006.

We are also pursuing cost recovery on the federal front. We have met repeatedly with members of Congress and the Bush administration to create opportunities for federal support. Given that our service territory covers some of the poorest parishes and counties in the U.S., making our customers pay the full cost of this natural disaster is, we believe, both unrealistic and inappropriate.

In late 2005, several opportunities emerged on the federal front for cost recovery. Congress passed and the President signed into law the Gulf Opportunity or GO Zone legislation which permits public utilities to accelerate the realization of tax benefits for H urricane Katrina casualty losses and repair costs. Congress also passed and the President signed into law the Katrina Relief Bill - providing S11.5 billion of Community Development Block Grants for states affected by Hurricanes Katrina, Rita, and Wilma. Language in the bill permits funding for infrastructure restoration - funding that we intend to pursue in Louisiana, Mississippi, and Texas.

We continue to work at the federal level to create additional opportunities to recover our storm costs. We believe federal assistance is warranted to ensure our customers receive the service they deserve at rate levels that are both affordable and supportive of continued development and restoration.

At the state level, we can pursue cost recovery through special provisions in the formula rate plans that are currently in effect in Louisiana, Mississippi, and New Orleans. Our rate plans allow for the recovery of unusual but prudently incurred costs, such as the costs incurred in the restoration of power following catastrophic events like Katrina and Rita, outside the normal rate mechanism. We have made filings to request interim recovery of nearly $600 million of storm costs in Louisiana and Mississippi. And in Texas, the Public Utility Commission has initiated a project to review exceptional storm damage costs caused by Hurricane Rita. We will use rate relief to bridge the gap between what we are able to recover through insurance and legislated relief, and our actual storm restoration costs.

. In addition, we are pursuing the possibility of securitization with regulators in Louisiana, Mississippi, and Texas. Securitization minimizes the rate impact on customers by spreading the restoration costs over an extended time period.

While the costs are recovered from customers over 5 to 15 years, Entergy would recover its costs on a timely basis by securing low-cost financing through the capital markets. We expect timely action by our regulators and legislators on our request for securitization.

After we aggressively pursue these initiatives throughout 2006, we expect our cost recovery mechanisms to be in place by the end of the year.

WVe are confident that the plans we executed and the actions we took to restore power following Katrina and Rita were not only prudent, they were exceptional. Our customers deserve nothing less and we are confident that federal, state, and local authorities will agree.

RESTORING OUR FINANCIAL FLEXIBILITY

'With $1.5 billion in restoration costs, just over half of which was paid in 2005, and recovery initiatives yet to fund, combined with other demands on our liquidity from rapid, substantial increases in natural gas prices, our financial and liquidity position following the storms was strained. While we have one of the strongest balance sheets in the industry and a fairly conservative risk philosophy, we recognized that we needed additional financing capacity. Hence, we implemented a comprehensive financing plan to meet current, as well as unexpected calls on our cash position, to protect and solidifir our credit ratings, and to provide the flexibility to get back on the path we were on prior to the storms.

In fourth quarter 2005, we completed a new

$1.5 billion corporate revolver for our parent company, issued $500 million of operating comipany debt, and marketed $500 million of equity units.

In addition, we infused $300 million of equity into Entergy Gulf States - our subsidiary with the highest overall restoration costs - enabling it to maintain its liquidity and investment grade credit rating in anticipation of obtaining some form of cost recovery.

We will be relentless in our efforts to recover our storm costs. As we receive funding for those The army of more than 23,000 tool workers that was mobilized to restore power required food, water, sleeping accommodations, transportation, restrooms, soap, trash pickup, laundry, and countless other necessities. A small army

" of logistics workers housed crews in school gyms, church camps, warehouses, and In "Tent Cities" - one that housed 750 workers on the grounds of our Waterford 3 plant. Our logistics crews also met extraordinary challenges presented by supply shortages, civil unrest, and environmental hazards.

Heroes could be found at every level of our restoration effort -

A from the front lines to the supply lines.

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short term. Now we are focused on recovering costs and returning our utility business to the path it was on before the storms by 2007. However, in the long term, the success we experienced in 2005 relative to our regulatory position mill serve Entergy and its stakeholders well for years to come.

A NUCLEAR POWERHOUSE While not unaffected by the storms, our nuclear business remained focused, efficient, and turned in outstanding results for 2005. Market conditions, the hard work of our nuclear team, and new federal policies all combined to produce a year of significant milestones and excellent performance.

Rising market prices for natural gas created opportunity for our Northeast fleet. As the fundamentals driving gas pricing became clear, we adjusted our hedging strategy to take measured market risks - selling forward less of our capacity to take advantage of market pricing. We entered 2006 with a nine percent open position and, in the future, that could potentially go higher if market conditions warrant. While contract pricing in 2005 averaged $42 per megawatt-hour, a three percent increase over 2004, we were able to enter into new contracts with attractive pricing with both existing and new customers, resulting in average prices per MWh of $41, $45, and S49, for the years 2006, 2007, and 2008 respectively. As market conditions change, we will continue to adjust our contract terms and hedging strategy.

Our experienced nuclear team continues to improve the productivity of both our regulated and Northeast fleets. In 2005, our nuclear production costs for our regulated fleet were $16.3 per MWh.

Production costs for our Northeast fleet were

$19.4 per MIVh in 2005, a four percent decrease versus 2004. Our regulated fleet costs are below

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the industry median while we continue to set the median cost as an aggressive target for our Northeast fleet. We are pursuing a variety of productivity initiatives under our multi-year improvement plan to continue to drive cost savings and higher generation across our nuclear business. In spite of increases in security, fuel, and benefit costs, we still see opportunities to lower nuclear production costs in the future.

With the skill and experience of our nuclear team, we are confident we can be the best-in-class at generating clean, safe, and affordable nuclear power. That's one reason we are very pleased by the passage of the Energy Policy Act of 2005.

The Act contains significant incentives for the construction and operation of new nuclear sites. We believe it offers substantial opportunities for Entergy.

In September 2005, NuStart - a consortium of 12 industry leaders including Entergy - announced it had selected Grand Gulf to be one of two sites to pursue a Construction and Operating License, or COL, under the Energy Policy Act. At the same time, we announced that we will also pursue a COL for our River Bend site as well as an Early Site Permit, or ESP, for Grand Gulf. We look for COLs to be issued in 2007 and construction could begin in 2010 if we decide to pursue building a new plant. COL and ESP efforts preserve Entergy's opportunity to participate in the next generation of nuclear development.

In the near term, we continue to evaluate opportunities to broaden our nuclear business portfolio such as asset acquisitions, operating agreements, and other service contracts. We are strong believers in the future of nuclear power and when we see opportunities with strong potential that are fairly priced, we will act.

NEw OPPORTUNITIES While 2005 was not a year any of us would choose to relive, we believe we can build on the experiences of last year to create opportunities in the future. Wie continue to have the same mission - to safely generate clean, reliable, and affordable power for our customers.

We continue to have the same long-term aspirations in the areas of safety, environmental impact, social responsibility, and shareholder return. None of that has changed and yet our company has changed.

We have a greater appreciation for what's possible.

If we had known in early 2005 that we would have to respond in a four-week period to two of the most destructive hurricanes in U.S. history, we might have said it couldn't be done. We certainly would have had our doubts.

Now we know that it can be done and it can be done well. NNre know that our employees are capable of incredible acts of courage and skill. We know that our organization is resilient and adaptable. We know we have greater potential than we ever imagined.

Going forward, we will put that potential to use to create new opportunities in all of our businesses.

In the year ahead, we will work with our government, regulators, and rating agencies to resolve remaining storm-related issues. By demonstrating our ability to work productively with all of our constituents, we believe we can continue to achieve great things for our customers, our employees, and our shareholders.

'We enter 2006 with renewed hope and confidence that the future will bring new oppoitunities -

opportunities that may once again test our limits but wvill ultimately find us ready for the challenge.

Following Katrina, Entergy retirees began reporting to work agaln.Across Louisiana and Mississippi, retirees worked long hours and filled critical positions In customer service and outage response. Some acted as scouts - covering hundreds of miles to assess damage and Identify repair locations.

Others collected Information from the scouting teams and coordinated the deployment of restoration crews in the field.

With Incredible dedication, our retirees brought much needed skills and experience that helped our company meet the challenges presented by the largest restoration effort ever In our history.

ENERYCOPRAIN N

SRIDIR~

200

<BY THE NUMBERS>

By any measure, the test presented by Hurricanes Katrina and Rita was of enormous proportions. Here are a few of the major challenges presented by these monster storms and a few of the inspirational milestones our employees achieved under the most trying conditions imaginable.

1.5 billion The estimated number of dollars Entergy will spend to

>2,200 The number of individuals and families who received restore power and rebuild its system following the storms, grants from The Power of Hope Fund to assist them in Estimate does not include other storm effects such as rebuilding their lives.

estimated lost net revenue, uncollectible utility customer receivables, and the longer-term accelerated replacement of the gas distribution system in New Orleans.

1.1 million The peak number of customers without power following 706 The total number of transmission substations out at Hurricane Katrina. Another 800,000 customers would the peak in both storms.

lose power four weeks later following Hurricane Rita.

249,000 The number of meals served to restoration workers 47 The number of days it took following Katrina's landfall in the two weeks following Hurricane Rita.

to restore power to all customers who could accept power, including customers impacted by Hurricane Rita.

>30,000 The number of line, vegetation, logistics, and support 10 The number of refineries served by Entergy that were workers mobilized to restore power following Hurricanes impacted by the hurricanes - presenting a nationwide Katrina and Rita.

fuel supply issue and a high-priority restoration effort.

28,900 The total number of distribution poles destroyed in 0 The number of times during the storm recovery that both storms.

we wavered in our commitment to safely generate clean, reliable, affordable power for our customers.

>4,000 The number of workers recruited and committed for response before each of the storms hit to ensure the quickest, most effective response possible.

Proving the Value i4 54 5 -5 56 i 8 60 02

E.'...

E NTERGY. CORPORATION AND SUBSIDIARIES 2005 FINACAL AE E

FORWARD-LOOKING INFORMATION In this filing'and from time to time, Entergy makes statements concerning its expectations, beliefs, plans, objectives, goals, strategies, and future events or perfoirmance. Such statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995f 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 publiclý, 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 ind uncertainties, and theie are factors that could cause actual results to diffei" 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 sedurities filings) include:

n resolution of pending and future rate'cases and' a changes in regulation of nuclear generating facilities and negotiations, including various performance-based nuclear materials and fuel, including possible shutdown of rate discussions and implementation of new Texas nuclear generating facilities, particularly those in the legislation, and other regulatory proceedings, including northeastern United States those related to Entergy's System Agreement and m..

. uncertainty regarding the establishment of interim or Enteiergy's utility supply plan; recovery of storm costs, and permanent sites for spent nuclear fuel storage recovery of fuel and purchased power costs and disposal a Entergy's ability to manage its operation and resolution of pending or future applications for maintenance costs.

l i.

license extensions or modifications of nuclear p

the performance of Entergys generating plants, generating facilities' and particularly the capacity factors at its nuclear changes in law resulting from the new federal energy gener'ating facilities "

legislation, including the effects of PUHCA repeal

. prices for power generated by Entergy's unregulated -.

' changes in: environmental, tax, and other laws, including generating facilities, the ability tohedge, sell power requirements for reduced emissions of sulfur, nitrogen, forward or otherwise reduce the market price risk carbin, mercury, and other substances associated with those facilities, including the Non-Utility m the economic climate, and particularly growvth in Nuciear plants, and the prices and availability of fuel and -.

• Entergy's service territory power Entergy must purchase for its utility customers, m variations in weather and the occurrence of hurricanes and Entergy's ability to meet credit support require-and other storms and disasters, including uncertainties ments for fuel and power supply contracts.

associated with efforts to remediate the effects of a Entergy's ability to develop and execute on a point of Hurricanes Katrina and Rita and recovery of costs view regarding prices of electricity, natural gas, and other associated with restoration including Entergy's ability to energy-related commodities obtain financial assistance from governmental authorities a chanjes in the financial markets, particularly those '

in connection with these storms affecting the availability of capital and Entergy's ability-a the outcome of the Chapter 11 bankruptcy proceeding to refinance existing debt, execute its share repurchase*

of Entergy New Orleans, and the impact of this pro(gam, and fund investments and acquisitions "

proceeding oft other Entergy companies Sactions of rating agencies, including changes in the w advances in technology ratings of debt and preferred stock, changes in general

• the potential effects of threatened or actual terrorism qcrporate ratings, and changes in the rating agencies',

and war ratings criteria.

a the effects of Entergy's strategies to reduce M changes in inflation, interest rates, and foreign currency tax payments, exchinge rates a

. u the effects of litigation and government investigations

. Entergy's ability to purchase and sell assets at attractive a changes in accounting standards, corporate prices and on other attractive terms governance, and securities law requirements 0volatlity and changes in markets for electricity, natural

'a Entergy's ability to attract and retain talented gas, uranium, and other energy-related commodities management and directors changes in utility regulation, including the beginning or-end 6f retail and wholesale competition, the ability to

• GAAP To NON-GAAP RECONCILIATION recover net utility assets and other potential stranided A

T.A R

C T

" " "Earnlngs Per Share 2005 2004 costs, the establishment of a regional transmission Eisr e

2005 2004 I I As -Reported S4.19

$ 3.93 organization that includes Entergy's utility service AsReore

$4.19 3

t.4 -.

. S p e c al Ite m s

$ 0.2 1

• 1 territory, and the application of market power criteria Se.cie t

$0-.

S(0.13) by the FERC-Operational

$4.40

$3.80 30' I'

ENTERGY CORPORATION AND SUBSIDIARIES 2005 FIVE-YEAR

SUMMARY

OF SELECTED FINANCIAL AND OPERATING DATA In thousands, except percentages and per share amounts 2005 2004 2003 2002 2001 SELECTED FINANCIAL DATA:

Operating revenues Income from continuing operations before cumulative effect of accounting changes Earnings per share from continuing operations before cumulative effect of accounting changes Basic Diluted Dividends declared per share Book value per share, year-end Common shares outstanding:

At year-end Weighted average - basic Weighted average - diluted Total assets Long-term obligations"'

Preferred stock Long-term debt (excluding currently maturing debt)

Return on average common equity Net cash flow provided by operating activities DOMESTIC UTILITY ELECTRIC REVENUES:

Residential Commercial Industrial Governmental SI0,106,247 968,552

$ 9,685,521 S 9,032,714

$ 8,299,052 S 9,620,561 S

933,090 S

827,797 S

633,627 739,062 S

4.49, S

4.40 S

2.16 '

S 37.31.

207,529 210,142 214,441

$30,851,269

$ 9,013, 448 S 459,924

$ 8,824,493 11.20%

$ 1,467,808

$ 2,911,119 2,041,038 2,419,465 140,395 S

4.01 3.93 1.89 38.25 3.55 3.48 1.60 38.02 S

2.73 2.68 1.34 35.24 S

3.24 3.18 1.28 33.78 216,829 226,864 231,194 528,310,777

$ 7,180,291 382,756.

$ 7,016,831 10.70%

$ 2,929,319 S 2,841,517 2,045,382 2,311,185 199,631 228,898 226,804 231,146 S28,527,388

$ 7,497,690 355,189

$ 7,322,940 11.21%

S 2,005,820

$ 2,682,802 1,882,060 2,081,781 194,998 222,422 223,047 227,303 S27,504,366 S 7,488,919 S

358,664 S 7,308,649 7.85%

S 2,181,703 S 2,439,590 1,672,964 1,850,476 179,508 220,733 220,944 224,734 525,910,311 S 7,743,298 S

360,522 S 7,321,028 10.04%

S 2,215,548 S 2,612,889 1,860,040 2,298,825 205,054 Total retail 7,512,017 7,397,715 6,841,641 6,142,538 6,976,808 Sales for resale" 656,287 388,899 371,646 330,010 395,353 Other")

278,526 145,963 183,888 173,866 (127,334)

Total

$8,446,830

$7,932,577 S7,397,175

$6,646,414 S7,244,827 DOMESTIC UTILITY ELECTRIC SALES (GWh):

Residential 31,569 32,897 32,817 32,581 31,080 Commercial 24,401 26,468 25,863 25,354 24,706 Industrial

[

37,615 40,293 38,637 41,018 41,577 Governmental 1,568 2,568 2,651 2,678 2,593 Total retail 95,153 102,226 99,968 101,631 99,956 Sales for resale"'

5,730 8,623 9,248 9,828 8,896 Total I

100,883 110,849 109,216 111,459 108,852 (a) Includes long-term debt (excluding currently maturing debt), preferred stock witb sinking fund, and non-current capital lease obligations.

(1) Includes sales to Entergy New Orleans, which was deconsolidated in 2005. See Note 16 to the consolidated financial statements.

(c) 2001 includes the effect of a reserTe for rate refund at System Energy.

31

MANAGEMENT'S FINANCIAL Entergy operates 'primarily thre U.S. Utility and Noni-Utility Nude X U.S. UTILITY generates, trans electric power in a four-state sen portions of Arkansas, Mississippi, including the City'of New Orlea' natural gas distiibution business.

a NON-UTILITY NUCLEAR ow0 power plants located in the north sells the electric power produced wholesale custome's. This busine to other nuclear pdwer plant owr In addition to its two primary, r Entergy also operates the Energy C the Competitive. Retail Services Services. includes: En'tergy-Koch, wholesale assets busiress. Entergy-!

businesses: energy 'commodity in Entergy-Koch Trading, and gas tra Gulf South Pipeline. Entergy-Koch the fourth quarter of 2004, and Ent ating entity. The non-nuclear wh wholesale customersthe electric pc that it owns while it focuses on imp ing sales or restructunring opportun opportunities are evaluated consiste point-of-viewss The Competitive R and sells 'electricity, thermal energy, itive markets, primarily in the ERC(

decided to divest the ietail electric p Services business'operating in the now reports this portion of the busir Entergy reports: Energy Commo Retail Services as pani of Al Other Following are the liercentages of and net income.: generated by it percentage of total assets held by th Segment

.U.S. Utility Non-Utility Nuclear.

Parent Company&

Other Business Segments Segment

.us. utility Non-Utility Nuclear Parent Company &:"

Other Business Seg'mefits Segment U.S. Utility Non-Utility Nuclear Parent Company &:

Other Business Segments IIURRICANE KATRINA AND I In August and September 2005, Hu catastrophic damage io large pornd territory in Louisianal Mississippi, a extensive flooding that resulted fron

. greater New Orleans area. The s widespread power outages, signific tion, transmission' arnd generation loss of sales and.'cuitomers due the destruction of horiies and busin the repair and/or, replacement of ti facilities damaged: b' Hurricanes

• I a

, I

• ENTERGY CORPORATION AND SUBSIDIARIES. 2005

• DISCUSSION and ANALYSIS ugh two business segments:

continuity costs are estimated to be S1.5 billion, including S835.2 aT.

million in construction expenditures and $664.8 million recorded as mits, distributes, and sells regulatory assets. The cost estimates do not include other potential ice territory that includes" incremental losses, such as the inability to recover fixed costs sched-Texas, and Louisiana, uled for recovery through base rates, which base rate revenue was.

ns; and operates a small not recovered due to a loss of anticipated sales.' For instance, at.

Entergy New Orleans, the domestic utility company that continues s and operates five nuclear to have significant lost revenue caused by Hurricane Katrina',

Leastern United States and "

Entergy estimates that lost net revenue due to Hurricane Katrina Mill by those plants primarily to,'.

total approximately S320 million through 2007. In addition; ess also proiides services Entergy estimates that the hurricanes caused $32 million of uncol-'

ners.

lectible U.S. Utility customer receivables.

The estimated storm restoration costs also do not include the eportable, operating *segments,.

longer-term accelerated replacement of the gas distribution system in ommodity Services segment and New Orleans that Entergy New Orleans expects will be necessuary due business. Energy, Commodity to the massive salt water intrusion into the system caused by the L.P. and Entergy's non-nuclear flooding in New Orleans. The salt water intrusion is 'expected to Coch, L.P. engaged intwo major shorten the life of the gas distribution system, making it necessary to arketing and trading through replace that system over time. Enrergy New Orleans currently expects nsportation and storage'through the cost of the gas system replacement to be $355 million, with the sold both of these businesses in project beginning in 2008 and extending for many years thereafter.-

ergy-Koch is no longer in oper-

.Entergy ha's recorded accruals for the poition of the estimated olesale assets business sells to

$1.5 billion of storm restoration costs not yet paid. In accordance ower produced by power plants with its accounting policies, and based on historic treatment of such'.

roving performance and explor-

• costs in the U.S. Utility's service territories and communications ities for its power plants. Such with local regulators, Entergy recorded assets because management'.

ntm with Entergy's market-based believe's that recovery of these prudently incurred C'osts through 1etail Services business markets'

' some form of regulatory mechanism is probable. In December 2005, and related services in compet-Entergy Gulf States' Louisiana jurisdiction, Entergy Louisiana, and OT region in Texas. Entergy has '

Entergy Mississippi filed with their respective' retail regulators for"

'ortion of the Competitive Retail

-recovery of storm restoration costs. The filings' are discussed in' ERCOT region of Texas, and '

Note 2 to the consolidated financial statements. Because' Entergy-..'

ness as a discontinued operation.

has not gone through the regulatory process regarding these storm dity Services and Competitive costs, however, there is an element of risk, and Entergy is unable to in its segment disclosures.

predict with certainty the degree of success it may have in its recovery Entergy's consolidated revenues initiatives, the amount of restoration costs and incremental losses it operating segments and the

'may ultimately recover, or the timing of such recovery.

mem:

% o R The temporary power outages associated with the hurricanes in the 25 of Revenue 2

affected senvice territory caused Entergy Louisiana's and Entergy New 5

24 "

200 Orleans' sales volume and receivable collections to be lower than nor-14 13 '

4 mal beginning in September 2005. Revenues are expected to continue.

to be affected for a period of time that cannot be estimated as a result

'2

6.

4 of customers at Entergy New Orleans and Entergy Louisiana that are unable to accept electric and gas service and as a result of changes in

% of Net Income load patterns that could occur, including the effect of residential cus-2005 2004 -

2003 tomers who can accept electric and gas service not permanently 74 "

72 52 returning to their homes. Restoration for many of the customers who 30 26 32 are unable to accept service will follow major repairs or reconstruction of customer facilities, and will be contingent on validation by. local

(4) 2 16 authorities of habitability and electrical safety of customers' structures.

%o Total Assets Entergy estimates that lost non-fuel revenues in 2006 caused by the 2005 2004 2003 hurricanes" will be approximately S123. million for Entergy New' 82 20 79 Orleans and $39 million for Entergy Louisiana. Entergy's estimate of 16

16.

.15

'the revenue impact is subject to change, however, because of a range of uncertainties, in particular the timing of when individual customers 2

4 6

will recommence taking service.

Entergy is pursuing a broad range of initiatives to'recover storm-

• URCN IArestoration and business continuity costs' and incremental losses.

IURRICANE RITA' Initiatives include obtaining reimbursement of certain costs covered rricanes Katrina and RUta caused by insurance, obtaining assistance through federal legislation for ons of the U.S. Utility's serff ce damage caused by Hurricanes Katrina and Rita, and, as noted above,"

nnd Texas, including the effect of pursuing recovery through existing or new rate mechanisms regulated' resultek in aby the Federal Energy Regulatory Commission (FERC) and local' torms and flooding resulted

.. regulatory bodies.

ant ~ ~

~~

eultr daagoodlctiidstis.

n ant damage to electric distribu-Entergy's non-nuclear property insurance program provides coy-and gas infrastructure, and the erage up to S400 million on an Entergy system-wide basis, subject esses. Total restoration costs for to a $20 million per occurrence self-insured retention, for all risks he U.S. Utility's electric and gas' coverage for direct physical loss or damage, including boiler and' KatiSina and e

R cta and business ' machinery breakdown. Covered property generally includes power.

32

- U ii

.1 ~

ENTERGY CORPORATION AND SUBSIDIARIES 2005 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued plants, substations, facilities, inventories, and gas distribution-related properties. Excluded property generally includes above-ground transmission and distribution lines, poles, and towers. The primary property program (excess of the deductible) is placed through Oil Insurance Limited (S250 million layer) with the excess program

($150 million layer) placed on a quota share basis through Underwriters at Lloyds (50%) and Hartford Steam Boiler Inspection and Insurance Company (50%). Coverage is in place for Entergy Corporation, Entergy Arkansas, Entergy Gulf States, Entergv Louisiana, Entergy Mississippi, and Entergy New Orleans.

There is an aggregation limit of $1 billion for all parties insured by OIL for any one occurrence, and Entergy has been notified by OIL that it expects claims for Hurricane Katrina to materially exceed this limit. Entergy is currently evaluating the amount of the covered losses for each of the affected domestic utility companies, working with insurance adjusters, and preparing proofs of loss for IHlurricanes Katrina and Rita. Entergy currently estimates that its net insurance recoveries for the losses caused by the hurricanes, including the effect of the OIL aggregation limit being exceeded, will be approx-imately $382 million.

In December 2005, the U.S. Congress passed and the President signed the Katrina Relief Bill, a hurricane aid package that includes

$11.5 billion in Community Development Block Grants (for the states affected by Hurricanes Katrina, Rita, and Wilma) that allows state and local leaders to fund individual recovery priorities. The bill includes language that permits funding for infrastructure restora-tion. It is uncertain how much funding, if any, will be designated for utility reconstruction and the timing of such decisions is also uncer-tain. Entergy is currently preparing applications to seek Community Development Block Grant funding.

ENTERGY NEEW ORLEANS BANKRUPTCY Because of the effects of Hurricane Katrina, on September 23, 2005, Entergy New Orleans filed a voluntary petition in the United States Bankruptcy Court for the Eastern District of Louisiana seeking reorganization relief under the provisions of Chapter 11 of the United States Bankruptcy Code (Case No. 05-17697). Entergy Corporation owns 100 percent of the common stock of Entergy New Orleans, has continued to supply general and administrative services, and has provided debtor-in-possession financing to Entergy New Orleans. Uncertainties surrounding the nature, tim-ing, and specifics of the bankruptcy proceedings, however, have caused Entergy to deconsolidate Entergy New Orleans and reflect Entergy New Orleans' financial results under the equity method of accounting retroactive toJanuary 1, 2005. Because Entergy owns all of the common stock of Entergy New Orleans, this change did not affect the amount of net income Entergy records resulting from Entergy New Orleans' operations for any current or prior period, but did result in Entergy New Orleans' net income for 2005 being presented as "Equity in earnings (loss) of unconsolidated equity affiliates" rather than its results being included in each individual income statement line item, as is the case for periods prior to 2005.

Entergy reviewed the carrying value of its equity investment in Entergy New Orleans (S149.9 million as of December 31, 2005) to determine if an impairment had occurred as a result of the storm, the flood, the power outages, restoration costs, and changes in cus-tomer load. Entergy determined that as of December 31, 2005, no impairment had occurred because, as discussed above, management believes that recovery is probable. In addition to Entergy's equity investment in Entergy New Orleans, as of December 31, 2005, Entergy New Orleans owed Entergy and its subsidiaries a total of approximately $47 million in prepetition accounts payable. Entergy will continue to assess the carrying value of its investment in Entergy New Orleans as developments occur in Entergy New Orleans' recovery efforts.

Entergy continues to work with the federal, state, and local authorities to resolve the bankruptcy in a manner that allows Entergy New Orleans' customers to be served by a financially viable entity as required by law. Key factors that will influence the timing and outcome of the Entergy New Orleans bankruptcy include:

" The amount of insurance recover); if any, and the timing of receipt of proceeds;

" The amount of assistance funding, if any, from the federal and state government, and the timing of that funding, including Entergy's intended application for Community Development Block Grant funding-,

• The level of economic recovery of New Orleans;

" The number of customers that return to New Orleans, and the timing of their return; and

" The amount and timing of any regulatory recovery approved by the Council of the City of New Orleans (Council or City Council).

The exclusivity period for filing a final plan of reorganization by Entergy New Orleans is currently scheduled to end on April 21, 2006, with solicitation of acceptances of the plan scheduled to be complete byJune 20, 2006. If a party to the bankruptcy proceeding, including Entergy New Orleans, requests it, the bankruptcy court has the authority to extend these deadlines. In addition, the bank-ruptcy judge has set a date of April 19, 2006 by which creditors with prepetition claims against Entergy New Orleans must, with certain exceptions, file their proofs of claim in the bankruptcy case.

The deconsolidation of Entergy New Orleans is retroactive to January 1, 2005, and its 2005 results of operations are presented as a component of "Equity in earnings (loss) of unconsolidated equity affil-iates." Transactions in 2005 between Enterg" New Orleans and other Entergy subsidiaries are not eliminated in consolidation as they were in periods prior to 2005. The variance explanations for 2005 compared to 2004 in "Results of Operations" below reflect the 2004 results of oper-ations of Entergy New Orleans as if it were deconsolidated in 2004, consistent with the 2005 presentation as "Equity in earnings (loss) of unconsolidated equity affiliates." The variance explanations for 2004 compared to 2003 are based on as-reported amounts. Entergy's as-reported consolidated results for 2004 and the amounts included in those consolidated results for Entergy New Orleans, which exclude inter-company items, are set forth in the table below (in thousands):

For the Year Ended December 31, 2004 Amounts Entergy required to Corporation deconsolidate and Entergy Subsidiaries New Orleans (as-reported)

In 2004*

S9,685,521 S(435,194)

Operating Revenues Operating Expenses:

Fuel, fuel-related expenses, and gas purchased for resale and purchased power Other operation and maintenance Taxes other than income taxes Depreciation and amortization Other regulatory credits - net Other operating expenses Total operating expenses Other Income Interest and Other Charges Income from Continuing Operations Before Income Taxes and Cumulative Effect of Accounting Changes Income Taxes Consolidated Net Income Preferred Dividend Requirements and Other 4,189,818 2,268,332 403,635 893,574 (90,611) 370,601 8,035,349 125,999 477,776 (206,240)

(102,451)

(43,577)

(29,657) 4,670 (377,255)

(2,044)

(15,043) 1,298,395 (17,833) 365,305 (16,868)

S 933,049 S

(965) 23,525 S

(965)

Reflects the entry necessary to deconsolidate Entergy Nex Orleans for 2004.

The column includes intercompany eliminations.

33

MANAGEMENT'S FINANCIAL 1 RESULTS OF OPERATIONS Earnings applicable to common stock 31, 2005, 2004, and 2003 by oper (in thousands)::,

Operating Segment U.S. Utility S659 Non-Utility Nuclear 282 Parent Company &. ]

Other Business Segments (44 Total S898 ENTERGY CORPORATION AND. SUBSIDIARIES 2005

)ISCUSSION and ANALYSIS continued "

w u

,miscellaneous other income of $27.7 million (pre-tax) in 2004 for the years ended December resulting from a revision of the decommissioning liability for ating segment are as follows River Bend; as discussed in Note 8 to the consolidated financial.

statements;,

a higher net revenue; and 2005 2004 2003 n lower interest charges.

,760

$ $643,408

$469,050

,623 245,029 300,799 Net Revenue'.

2005 Compared to 2004

,052) 21,087 157,094 Net revenue, which is Entergy's measure of gross margin, consists of

.331

- $909,524

$926,943 operating revenues net ofi 1) fuel, fiuel-related expenses and gas, M

Following is a discussion of Entergy's income before taxes accord-ing to the business segments listed above. Earnings for 2005 were negatively affected b, S44.8 million net-of-tax of discontinued oper-ations due to the planned sale of the retail electric portion of Entergys Competinye Retail Services business operating in the ERCOT region 'ofTexas. This amount includes a net charge of.'

$25.8 million, net-of-tax, related to the impairment reserve for the remaining net book value of the Competitive Retail Services business' informatioA technology systems.

• Earnings for 2004 include a S97 million tax benefit that resulted from the sale of preferred stock and less than 1% of the common stock in a subsidiary in the non-nuclear wholesale assets business; and a S36 million' nei-of-tax impairment charge in the non-nuclear wholesale assets business, both of which are discussed below.

Earnings for 2003 include the $137.1 million net-of-tax cumula-.

tive effect of changes in accounting principle that increased earnings' in the first quarter of 2003, almost entirely resulting from the imple-mentation of Statement of Financial Accounting Standards (SFAS) 143. Earnings were negatively affected in the fourth quarter of 2003 by voluntary severance program expenses of $122.8 million net-of-;

tax. As part of an initiative to achieve productivity improvements with a goal of reducis g costs, primarily in the Non-Utility Nuclear and U.S. Utility businesses, in the second half of 2003 Entergy.

offered a voluntary, severance program to employees in various departments. Approximately 1,100 employees, including 650 employees in nuclearloperations from the Non-Utility Nuclear and U.S. Utility businesses, accepted the offers.

U.S. UTILITY The increase in enimIngs for the U.S. Utility from $643 million in 2004 to S660 million! in 2005 was primarily due to higher net rev-enue and lower depreciation and amortization expenses, partially offset by lower other income, including equity in earnings of uncon-.

solidated equity affiliates related to Entergy New Orleans, and higher taxes other than income taxes.

The increase in earings for the U.S. Utility from $469 million in 2003 to $643 million in 2004 was primarily due to the following-.

n the $107.7 million ($65.6 million net-of-tax) accrual in 2003 of the loss that would be associated with a final, non-appealable decision disallowing abeyed River Bend plant costs. Refer to Note 2 to the consolidated financial statements for more details regarding the River Bend abeyed plant costs; a lower other operation and maintenance expenses primarily due' to $99.8 million ($70.1 million net-of-tax) of charges recorded in 2003 in connection with the voluntary severance program; s the $21.3 milli6n nret-of-tax cumulative effect of a change in accounting princip!e that reduced earnings at Entergy Gulf States in the first quarter of 2003 upon implementation of SFAS 143. See "Critical Accounting Estimates - Nuclear Decommissioning Costs" below for discussion of the implemen-tation of SFAS 143, purchased. for -resale, 2) purchased power expenses, and 3) Other regulatory' credits. Following is an analysis of the change in net, revenue comparing 2005 to 2004 (in millions):

2004 net revenue S4,010.3 Price applied to unbilled'sales 40.8 Rate refund provisions 36.4.

Volume/weather 3.6 2004 deferrals '

(15.2).

Other.

(0.5) 2005 net revenue

$4,075.4 The price applied tounbilled sales variance resuhed from an increase in the fuel cost component included in the price applied to unbilled sales. The increase in the fuel cost component is attributable' to an increase in.the market prices of naiural gas' and purchased power. See "Critical Accounting Estimates - Unbilled Revenue" and Note 1 to the consolidated financial statements for further discus-sion of the accounting for unbilled revenues.

I

.The rate refund provisions variance is due primarily to accruals' recorded in 2004 for potential rate action at Entergy Gulf States and Entergy Louisiana.

The volume/weather variance includes the, effect of more favor-able weather in 2005 compared to 2004, substantially offset by a decrease in weather-adjusted usage and a decrease in usage during the unbilled sales period, both due to the effects of Hurricanes Katrina and Rita. See "Critical Accounting Estimates - Unbilled Revenue" and Note 1 to the consolidated financial statements for further discussion of the accounting for unbilled revenues. b The 2004 deferrals variance is due to the deferrals related to Entergy's voluntary severance pirogram, in accordance with a stipu-lation with the Louisiana Public Service Commission (LPSC) staff.

The deferrals are being amortized over a four-year period effective January 2004..

r Gross. operating revenues, fiel and-purchased power expenses, and other regulatory. credits - Gross operating revenues include an increase in fuel cost recovery revenues of $586.3 million resulting from increases in the market prices of purchased power and natural gas. As such, this revenue increase is offset by increased fuel and purchased power. expenises.'.The price applied to unbilled sales and the rate refund provisions variances,. discussed above, and an increase in gross wholesale revenue also contributed to the increase, in gross operating revenues. Gross wholesale revenues increased-

$84.2 million primarily due to an increase in the a'erage price of' energy available for resale. "

4 In

.4 3

ENTERGY CORPORATION AND SUBSIDIARIES 2005 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued Other regulatory charges (credits) have no material effect on net income due to recovery and/or refund of such expenses. Other regulatory credits decreased primarily due to the following:

i $32.4 million due to the over-recovery of costs through the power management recovery rider at Entergy Mississippi as a result of gains recorded on gas hedging contracts; and w S22.6 million due to the over-recovery of Grand Gulf costs through Grand Gulf riders at Entergy Arkansas and Entergy Mississippi.

The decrease is partially offset by S24.8 million of higher deferrals of capacity charges that are not currently recovered through base rates but are expected to be recovered in the future. See Note 2 to the consolidated financial statements for a discussion of the formula rate plan filings that will be effective in 2006 for the 2005 test year for Entergy Louisiana and the Louisiana jurisdiction of Entergy Gulf States.

2004 Compared to 2003 Net revenue, which is Entergy's measure of gross margin, consists of operating revenues net of: 1) fuel, fuel-related expenses and gas pur-chased for resale, 2) purchased power expenses, and 3) other regula-tory credits. Following is an analysis of the change in net revenue comparing 2004 to 2003 (in millions):

2003 net revenue S4,214.5 Volume/weather 68.3 Summer capacity charges 17.4 Base rates 10.6 Deferred fuel cost revisions (46.3)

Price applied to unbilled sales (19.3)

Other (1.2) 2004 net revenue

$4,244.0 Gross operating revenues, fuel and purchased power expenses, and other regulatory eredits -

Gross operating revenues include an increase in fuel cost recovery revenues of S475 million and S18 million in electric and gas sales, respectively, primarily due to higher fuel rates in 2004 resulting from increases in the market prices of purchased power and natural gas. As such, this revenue increase is offset by increased fuel and purchased power expenses.

Other regulatory charges (credits) have no material effect on net income due to recovery and/or refund of such expenses. Other regulatory credits increased primarily due to the following:

" cessation of the Grand Gulf Accelerated Recovery Tariff that was suspended in July 2003;

" the amortization in 2003 of deferred capacity charges for summer 2001 power purchases at Entergy Gulf States and Entergy Louisiana;

" the deferral in 2004 of S14.3 million of capacity charges related to generation resource planning as allowed by the LPSC;

" the deferral in 2004 by Entergy Louisiana ofS 11.4 million related to the voluntary severance program, in accordance with a proposed stipulation entered into with the LPSC staff; and

" the deferral in August 2004 of S7.5 million of fossil plant maintenance and voluntary severance program costs at Entergy New Orleans as a result of a stipulation approved by the City Council.

Other Income Statement Variances 2005 Compared to 2004 Other operation and maintenance expenses increased slightly from $1.467 billion in 2004 to S1.471 billion in 2005. The variance includes the following:

i an increase of $9.5 million in nuclear expenses for contract and material costs associated with maintenance outages and nuclear refueling outage pre-work;

" an increase of $9.5 million in miscellaneous regulatory reserves;

" an increase of S7.6 million in storm reserves (unrelated to Hurricanes Katrina and Rita);

" an increase of $5.1 million in estimated loss provisions recorded for the bankruptcy of CashPoint, which managed a network of payment agents for the domestic utility companies;

" an increase of $4.7 million in payroll and benefits costs which includes higher pension and post-retirement benefit costs, substantially offset by incentive compensation true-ups;

" a decrease of S18.2 million due to a shift in labor and material costs from normal maintenance work to storm restoration work; and

" a decrease of $15.7 million related to proceeds received from the radwaste settlement, which is discussed further in "Significant Factors and Known Trends - Central States Compact Claim."

Taxes other than income taxes increased from $300.7 million in 2004 to S321.9 million in 2005 primarily due to higher employment taxes and higher assessed values for ad valorem tax purposes in 2005.

Depreciation and amortization expenses decreased from $794.1 million in 2004 to $783.8 million in 2005 primarily due to a change in the depreciation rate for Waterford 3 as approved by the LPSC effective April 2005.

The volume/weather variance resulted primarily from increased usage, partially offset by the effect of milder weather on sales during 2004 compared to 2003. Billed usage increased a total of 2,261 GINh in the industrial and commercial sectors.

The summer capacity charges variance was due to the amortiza-tion in 2003 at Entergy Gulf States and Entergy Louisiana of deferred capacity charges for the summer of 2001. Entergy Gulf States' amortization began in June 2002 and ended in May 2003.

Entergy Louisiana's amortization began in August 2002 and ended in July 2003.

Base rates increased net revenue due to a base rate increase at Entergy New Orleans that became effective in June 2003.

The deferred fuel cost revisions variance resulted primarily from a revision in 2003 to an unbilled sales pricing estimate to more closely align the fuel component of that pricing with expected recoverable fuel costs at Entergy Louisiana. Deferred fuel cost revisions also decreased net revenue due to a revision in 2004 to the estimate of fuel costs filed for recovery at Entergy Arkansas in the March 2004 energy cost recovery rider.

The price applied to unbilled sales variance resulted from a decrease in fuel price in 2004 caused primarily by the effect of nuclear plant outages in 2003 on average fuel costs. See "Critical Accounting Estimates - Unbilled Revenue" and Note 1 to the consolidated financial statements for further discussion of the accounting for unbilled revenues.

35

>ENTERGY CORPORATION AND SUBSIDIARIES 2005..

MANAGEMENTS FINANCIAL DISCUSSION and ANALYSIScontifued Other income decreased from $134 million in 2004 to

" Interest on long-term debt decreased from $433.5 million in 2003

$111.2 million in 2065 primarily due to:

to $390.7 million in 2004 primarily due to the net retirement and -

M a revision in 2004 to the estimated decommissioning cost liability,:

refinancing of long-term debt in 2003 and the first'six months of for River Bend in accordance with a new decommissioning 2004. See Note5 to the consolidated financial statements for details:'

cost study that reflected a life extension for the plant. For the.

on long-term debt.

portion of River B'nd not subject to cost-based ratemraking, the revised estimate resulted in the elimination of the asset retire-.-

NON-UTILITY. NUCLEAR merit cost that had been recorded at the time of adoption of-Following are key performance measures for Non-Utility Nuclear.

SFAS 143 with the remainder recorded as miscellaneous income.

2005-2004 2003 of S27.7 million; NetMNVinoperationatDecember31 4,105 4,058 4,001

• a decrease of $26.3 million in Entergy New Orleans earnings, verage realized price per IVh.

$42.39

$41.26".

$39.38 which is now reported as an unconsolidated equity affiliate for Generation in GWh for the year.

33,53.9 32,524 32,379 2005 in the "Equit in earnings (loss) ofunconsolidated equity.,-

Capacity factor for the year.

93%

92%

92%

-affiliates" line on die Income Statement. The decrease in Entergy New Orleans earnings is primirily a result of lower net revenue Results of Operations.

and higher depreciation and amortization.expenses, partially offset

-:. 2005 Compared to 2004 by lower other operaton and maintenance expenses and lower The ii irease in earnings for Non-Utility Nuclear from $245 million interest charges; and.

in 2004 to $282.6 million in 2005 was primarily due to the following:.-

a a decrease of $10.i million at Entergy Gulf States due to a.

• higher revenues, which increased from SI.342 billion in 2004 to reduction in 2004 m the loss provision for an environmental:.

.... "1.422 billion in 2005, primarilyresulting from higher pricing.

clean-up site.

in its contracts to sell power. Also contributing to the increase in revenues was increased generation in 2005 due to power uprates. -

The decrease was partially offset by an increase of $35.3 million at several plants completed in 2004 and 2005 and fewer planned in interest and dividend income due to both the proceeds from I and unplanned outages in 2005; and.

the radwaste settlement, which is discussed further in "Significant

'miscellaneous income of S15.8 million net-of-tax resulting from Factors and Known Trends - Central Staties Compact Claim," and a reduction in the decommissioning liability for a plant in 2005,.

increased interest on temporary cash investments.

as discussed in' Note 8 to the consolidated financial statements.

J P

-'<The incr~asin iearnings fo-Non-Utility Nuclear,:.

$282.6 'million in 2005 was due primanryl to hiýher revenues resulting from" higher contrct pricing and increased generation. >

2004 Compared to-2003 Other operation and maiintenance expenses decreased from 51.613 billion in 2003 to S1.569 bilion in 2004 primarily due to voluntary severance program accruals'of, $99.8 million in 2003, partially offset by an increase of $30.5 rmillion as a result of higher customer service support costs in 2004 and an inlcrease of approximately $33 million as a result of higher benefits costs in 2004. See "Critical Accounting Estimates -

Pension and Other Retirement Benefits" and Note 10 to the consoli-dated financial statements for firther discussion of benefit costs.

Depreciation and amortization expenses increased from $797.6 million in 2003 to $823.7 million in 2004 primarily due to higher..

depreciation of Grand Gulf due to a higher'scheduled sale-leaseback principal payment in addition to an increase in plant in service..

Other income (deductions) changed from ($36.0 million) in 2003-:

to S108.9 million in 2004 primarily due to the following:

" the $107.7 million accrual in the second quarter of 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;

" a reduction in the decommissioning liability for River Bend.

in 2004, as discussed in Note 8 to the consolidated financial:

statements; and

" a $10 million reduction in the loss provision for an Entergy Gulf States environmental clean-up site.:. -

I3 T he increase in earnings was partially ottset by the tollowing:

m higher fuel and purchased power expenses, which increased from $125.7 million in2004 to $147.9 million in 2005; and

• . miscellaneous income of S 1.9 million net-of-tairesulting from

" a reduction in the decommissioning liability fr a plant in 2004, as discussed in Note 8 to the consolidated financial statements.

2004 Conmpared to 2003:

n The decrease in earnings for Non-Utility Nuclear from $300.8 million in 2003 to $245'million in 2004 was primarily due to the $15.4.5 mil-lion net-of-tix cumulative effect of a change in accounting principle that increased earnings in thefirst quarter of 2003 upon implementa-tion 'of S*AS 143. See "Critical Accounting Estimates:- Nuclear" Decommissioning Costs" below fur discussion of the implementation of SF*A 143. Earnings before'the cumulative effect of accounting..

• change increased by $98.7 milliofi primarily due to the following:.

a lower operation and maintenance expenses, which decreased from $681.8 million in 2003 to $595.7 million in 2004, primarily-

- resulting from charges recorded in 2003 in connection with the' voluntary severance program;'-...

n higher revenues, which increased from $1.275 billion in 2003 to

$1.342 billion in 2004, primarily resulting firom higher contract..

- opricing. Theaddition of a supportservices contract for the Cooper Nuclear Station and increased generation in 2004'due to power

.p* rpaies'completed in 2003 and fewer planned and unplanned out-ages in 2004 also contributed to the higher revenues; and m-miscellaneous income of $11.9 million net-of-tax resulting from a reduction in the decommissioning liability for a plant, as discussed in Note 8 to the consolidated financial statements.

. Partially offsetting this increase were the following:..

a higher income taxes, which increased from $88.6 million in 2003 to S142.6 million in 2004; and

.i a higher depreciation expense, which increased fiom $34.3 million in 2003 to $48.9 million in 2004, due to additions to plant in service.

6

ENTERGY CORPORATION AND SUBSIDIARIES 2005 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued PARENT COMI'ANY & OTHER BUSINESS SEGMENTS Sales of Entergy-Koch Businesses In the fourth quarter of 2004, Entergy-Koch sold its energy trading and pipeline businesses to third parties. Entergy-Koch will continue in existence pending final receipt of the purchase price. In 2004, Entergy received S862 million of the sales proceeds in the form of a cash distribution by Entergy-Koch. Entergy ultimately expects to receive total net cash distributions exceeding $1 billion. Entergy expects to record an approximate $60 million net-of-tax gain when the remainder of the proceeds are received in 2006.

Entergy Corporation has guaranteed up to 50% of Entergy-Koch's indemnification obligations to the purchasers. However, Entergy does not expect any material claims under these indemnifi-cation obligations.

Results of Operations 2005 Compared to 2004 The decrease in earnings for Parent Company & Other Business Segments from S21.1 million in earnings to a $44.1 million loss was primarily due to the following:

" a tax benefit resulting from the sale in December 2004 of preferred stock and less than 1% of the common stock of Entergy Asset Management, an Entergy subsidiary. An Entergy subsidiary sold the stock to a third party for $29.75 million.

The sale resulted in a capital loss for tax purposes of $370 million, producing a net tax benefit of $97 million that Entergy recorded in the fourth quarter of 2004; and

" a loss from discontinued operations of $44.8 million net-of-tax due to the planned divestiture of Entergy's Competitive Retail Services retail electric business in the ERCOT region of Texas. This amount includes a net charge of S39.8 million

($25.8 million net-of-tax) related to the impairment reserve for the remaining net book value of the Competitive Retail Services business' information technology systems.

These decreases were partially offset by the following:

" a charge recorded in 2004 of approximately $55 million (S36 million net-of-tax) as a result of an impairment of the value of the Warren Power plant, which is owned in the non-nuclear wholesale assets business. Entergy concluded that the plant is impaired based on valuation studies prepared in connection with the Entergy Asset Management stock sale discussed above;

" a loss of $46.4 million in 2004 from Entergy's investment in Entergy-Koch, primarily resulting from Entergy-Koch's trading business reporting a loss from its operations in 2004; and

• miscellaneous income from proceeds of S18.9 million from the sale of SO2 allowances.

2004 Compared to 2003 The decrease in earnings for Parent Company & Other Business Segments from $157.1 million to $21.1 million was primarily due to:

" earnings from Entergy's investment in Entergy-Koch were

$254 million lower in 2004, primarily as a result of Entergy-Koch's trading business reporting a loss from its operations in 2004; and

" a charge recorded in 2004 of approximately $55 million (536 million net-of-tax) as a result of an impairment of the value of the Warren Power plant, which is owned in the non-nuclear wholesale assets business. Entergy concluded that the plant is impaired based on valuation studies prepared in connection with the Entergy Asset Management stock sale discussed below.

Partially offsetting the decrease in earnings were the following:

" a tax benefit resulting from the sale of preferred stock and less than 1% of the common stock of Entergy Asset Management, an Entergy subsidiary. In December 2004, an Entergy subsidiary sold the stock to a third party for S29.75 million. The sale resulted in a capital loss for tax purposes of S370 million, producing a net tax benefit of $97 million that Entergy recorded in the fourth quarter of 2004;

" realization of S16.7 million of tax benefits related to the Entergy-Koch investment; and

" a loss from discontinued operations of S14.4 million net-of-tax in 2003 from Entergy's Competitive Retail Services business.

INCOME TAXES The effective income tax rates for 2005, 2004, and 2003 were 36.7%,

28.2%, and 37.9%, respectively. See Note 3 to the consolidated finan-cial statements for a reconciliation of the federal statutory rate of 35.0% to the effective'income tax rates. The lower effective income tax rate in 2004 is primarily due to the tax benefits resulting from the Entergy Asset Management stock sale discussed above.

LIQUIDITY AND CAPITAL RESOURCES This section discusses Entergy's capital structure, capital spending plans and other uses of capital, sources of capital, and the cash flow activity presented in the cash flow statement.

LIQUIDITY EFFECTS OF HURRICANE KATRINA AND HURRICANE RITA As discussed above, Hurricanes Katrina and Rita impacted Entergy's service territor)y In addition to the direct costs caused by the storms, Hurricanes Katrina and Rita have had other impacts that have affected the U.S. Utility's liquidity position. The Entergy New Orleans bankruptcy caused fuel and power suppliers to increase their scrutiny of the remaining domestic utility companies with the concern that one of them could suffer similar impacts, particularly after Hurricane Rita. As a result, some suppliers began requiring accelerated payments and decreased credit lines. In addition, the hurricanes damaged certain gas supply lines, thereby decreasing the number of potential suppliers. The hurricanes also exacerbated a market run-up in natural gas and power prices, thereby increasing the U.S. Utility's ongoing costs, which consumed available credit lines more quickly and in some instances required the posting of additional collateral. The U.S. Utility managed through these events thus far, adequately supplied the Entergy System with fuel and power, and as a result of steps taken by it regarding its storm costs, expects to have adequate liquidity and credit to continue supplying the Entergy System with fuel and power. The Non-Utility Nuclear business also has had to post increased collateral (principally in the form of Entergy Corporation guarantees) due to rising fuel and power prices, and it has had adequate liquidity to meet that demand.

After the hurricanes, Entergy implemented a new financing plan that sourced $2.5 billion through a combination of debt and equity units intended to provide adequate liquidity and capital resources to Entergy and its subsidiaries while storm restoration cost recovery is pursued. In addition, the plan is intended to provide adequate liquidity and capital resources to support Non-Utility Nuclear and the Competitive Retail Services business. The plan, which Entergy accom-plished primarily in the fourth quarter 2005, included I) increasing Entergy's credit revolver capacity by establishing a new S1.5 billion Entergy Corporation facility; 2) issuing $0.5 billion of equity units;

3) issuing approximately $0.5 billion of new debt at various utility operating companies; and 4) providing capital in the amount of 5300 million from Entergy Corporation to Entergy Gulf States.

37

ENTERGY CORPORATION AND SUBSIDIARIES 2005.'

MANAGEMENT'S FINANCIAL DISCUSSION and'ANALYSIS continued DEBTOR-IN-POSSA.SSION CREDIT AGREEMENT CAPITAL STRUt On September 26, 2005, Entergy New Orleans, as borrower, and I'. Entergy's capitaliz; Entergy Corporation, as lender, entered. into the Debtor-in-in the following ta Possession (DIP) cseditt agreement, a debtor-in-possession credit.

fromi 2004 to 200!

facility to provide funding to Entergy New Orleans during its business

a. dditional borroi restoration efforts. On December 9, 2005, the bankruptcy court

' credit' facility, a issued its final ordeA approving the DIP Credit Agreement. The.

Corporation's equ indenture trustee ofýEntergy New Orleans' first mortgage bonds holders' equity, pri appealed the final'order, and that appeal is pending. Subsequent to the indenture truste'e filing its notice of appeal,. Entergy New Orleans, Entergy Corporation,' and the indenture trustee filed with Net debt to net capi the bankruptcy cour a motion to approve a settlement among the.

Effect of subtracting parties. The settlement would result in thedismissal of the indenture Debt to capital at th trustee's appeal. The sett-ement is set for hearing in the bankruptcy court on March 22, 2006.. '

Net debt consists The credit facility provides for up to $200 million in loans. These

. sists of notes paya funds were requested to enable Entergy New Orleans to meet its sinking fund, and liquidity needs, including employee wages-and benefits' and

p.

tortion. Capital c payments under pow.er purchase and gas supply agreements, and -

. stock without sinl to continue its effort; to repair and restore the facilities needed to and cash equivale.

serve its electric indl gas customers. The facility enables Entergy,

in analyzing its fi New Orleans to request funding from Entergy Corporation, but the -

information to it decision to lend money is at the sole discretion of Entergy-"

financial conditio' Corporation. As of December 31, 2005, Entergy New Orleans had Long-term deb

$90 million of outstanding borrowings under the DIP credit agree-up substantially a ment. Managemeni curenty expects the bankruptcy court-authorized are Entergy's lonj funding level to bl sufficient to fund Entergy New Orleans' expected 3 1, 2005 by opera level of operations through 2006.

payments on the Borrowings under the DIP credit agreement are due in full,'and back transactions the agreement wvill terminate, at the earliest of (i)'August 23, 2006, balance sheet (in i or such later date as Entergy Corporation shall agree to in its sole discretion, (C) the acceleration of the loans and the termination of -.'. Long-term the DIP credit agseer.ent in accordance with its terms* (iii) the date-.

Debt Maturities.

of the closing of a sale of all or substantially all of Entergy New.

U.S. Utility Orleans' assets pursuant to section 363 of the United States, Non-UtilityNNucleiL Bankruptcy Code or a confirmed plan of reorganization, or (iv) the

. Parent Company &

effective date of a plaý. of reorganization in Entergy New Orleans' Business Segments bankruptcy case.

Total As security for Entergy Corporation as the lender, the terms of the December 9, 2001 bankruptcy. court order provide that all bor-

"Note to theicon rowings by Entergy New Orleans under the DIP Credit Agreement concerning long-,

are: (i) entitled to supgrpriority administrative claim status pursuant In May 2005, 1 to section 364(c)(1) of the Bankruptcy Code; (ii) secured by a per-revolving credit fa fected first priority lien on all property of Entergy New Orleans* "' a $965 million 't pursuant to sections 364(c)(2) and 364(d) of the Bankruptcy Code, *. Corporation ente except on any property of Entergy New Orleans subject to valid, facility, which exp perfected, and non-avoidable liens of the lender on Entergy New

',million in borrow Orleans' S15 million credit facility; and (iii) secured by a perfected

'In Decemb'er 2' junior lien pursuant td section 364(c)(3) of the Bankruptcy Code on' lion three-year re all property ofEntergy New Orleans subject to valid, perfected, and '

2008. As of Decen non-avoidable liens in'favor ofthe lender on EntergyNew Orleans' this facility.

$15 million credit facility that existed as of the date Entergy New'.

Entergy also h:

Orleans filed its bank-Aiiptcy petition.

total borrowing c The interest rate on borrowings under the DIP c'edit agreement credit facilities, will be the average interest rate of borrowings outstanding under

' issued against the Entergy Corporation'l $2 billion revolving credit facility, which was

. Following is asl approximately 4.70%

per annum at December 31, 2005.-

available under. the Facility-Ca

-'5-Year Facility

'S.

3-Year Facility S

CTURE stidn is balanced between equity and debt, as shown.

ble. The increase in the debt to capital percentage 5 is the result of increased debt outstanding due to.

ings on Entergy Corporation's $2 billion revolving additional "debt issuances, including.Entergy.

ity units issuance, along with a decrease in share-marily due to repurchases of common stock.'

r...1 i ;

2005 2004

'2003.-

tat at the end ofthe year 51.5%

45.3%*

45.9%

Scash from debt,

'1.6%'

2.1%.- ' 1.6%

e end of the year

. 53.1%

47.4% " 47.5%

of debt less cash and cash equivalents.' Debt con-ble, capital lease obligations, preferred stock with long-term debt, including the currently maturing onsists of debt, shareholders' equity, and preferred king fund. Net capital consists of capital less cash nts. Entergy uses the net debt to net capital ratio nancial condition and believes it provides useful investors and creditors in evaluating Entergy's

n.

t, including the currently maturing poition, makes 11 of Entergy's total debt outstanding. Following g-term debt principal maturities as' of December.,

ting segment. The figures below include principal' Entergy Louisiana and System Energy sale-lease-'

,.which are included in long-term debt on the millions):

2009-After 2006-2007

,2008 2010 2010

S23 S 93, S 802 S 746 S4,7055 r"81 80.'

20 42 1511 Other "272 1,327 586.,

S104

$173. SI,094 S2,115 5S5,442 solidated financial statements provides more detail

erm debt. :.

ntergy Corporation terminated its two separate,.

icilities, a $500 million five-year credit facility and hree-year credit facility. At that time, Entergy

'red into a S2 billion' five-year revolving credit ires in May 2010. As of December 31, 2005, $785.

ings were outstanding on this facility.

005, Entergy Corporation entered into a $1.5 bil-volving credit facility, which expires in December.

nber 31, 2005, no borrowings were outstandinig on as the ability to issue letter's of credit against th'e apacity of both the three-year and the five-year' nd $239.5 million of letters of'credit had been five-year facility at December 31, 2005..

ammary of the borrowings outstanding and capacity se facilities as of December 31, 2005 (in millions):'

pacity Borrowings. Letters of Credit Capacity Available 2,000 1,500

$785

'S-.._

S240, S -

• S' 975, "S1,500 38'

ENTERGY CORPORATION AND SUBSIDIARIES 2005 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued Entergy Corporation's credit facilities require it to maintain a consolidated debt ratio of 65% or less of its total capitalization. If Entergy fails to meet this debt ratio, or if Entergy or the domestic utility companies (other than Entergy New Orleans) default on other indebtedness or are in bankruptcy or insolvency proceedings, an acceleration of the credit facilities' maturity dates may occur.

Capital lease obligations, including nuclear fuel leases, are a minimal part of Entergy's overall capital structure, and are discussed further in Note 9 to the consolidated financial statements. Following are Entergy's payment obligations under those leases (in millions):

2009-After 2006 2007 2008 2010 2010 Capital lease payments, including nuclear fuel leases S133

$171 SI S-S2 Notes payable includes borrowings outstanding on credit facili-ties with original maturities of less than one year. Entergy Arkansas, Entergy Louisiana, and Entergy Mississippi each have 364-day credit facilities available as follows:

Expiration Amount of Amount Drawn as Company Date Facility of Dec. 31, 2005 Entergy Arkansas April 2006

$85 million"'

Entergy Louisiana April 2006

$85 million"u

$40 million Entergy Louisiana May 2006

$IS millionn° Entergy Mississippi May 2006

$25 million (a) The combined amount borrowed by EntergV Arkansas and Enterev Louisiana under these facilities at any one time cannot exceed SST million. Entergy Louisiana granted a security interest in its receivables to secure its $85 million facility.

(b) The combined amount borrowed by Entergy Louisiana under its $5 $ million facility and by Entergy New Orleans under a $15 million facility that it has with the same lender cannot exceed $15 million at any one time. Because Enterge New Orleans' facility isfid 4 drawn, no capacity is current& atailable on Entergy Louisiana's facility.

Operating Lease Obligations and Guarantees of Unconsolidated Obligations Entergy has a minimal amount of operating lease obligations and guaran-tees in support of unconsolidated obligations. Entergy's guarantees in support of unconsolidated obligations are not likely to have a material effect on Entergy's financial condition or results of operations. Following are Entergy's payment obligations as of December 31, 2005 on non-cancelable operating leases with a term over one year (in millions):

2009-After 2006 2007 2008 2010 2010 Operating lease payments

$95 S77 S63 S88 S196 In addition to these contractual obligations, Entergy expects to contribute S349 million to its pension plans and $65 million to other postretirement plans in 2006. $109 million of the pension plan contribution wvas made in January 2006. $107 million of this contri-bution was originally planned for 2005; however, it was delayed as a result of the Katrina Emergency Tax Relief Act.

Capital Funds Agreement Pursuant to an agreement with certain creditors, Entergy Corporation has agreed to supply System Energy with sufficient capital to:

" maintain System Energy' equity capital at a minimum of 35%

of its total capitalization (excluding short-term debt);

" permit the continued commercial operation of Grand Gulf;

" pay in full all System Energy indebtedness for borrowed money when due; and

" enable System Energy to make payments on specific System Energy debt, under supplements to the agreement assigning System Energy's rights in the agreement as security for the specific debt.

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 2006 through 2008, excluding Entergy New Orleans (in millions):

Planned construction and capital Investments 2006 2007 2008 Maintenance Capital:

U.S. Utility S 604 S 713

$ 719 Non-Utility Nuclear 62 64 50 Parent and Other 2

2 2

668 779 771 Capital Commitments:

U.S. Utility,

277 203 301 Non-Utility Nuclear 143 96 86 Parent and Other 6

6 5

426 305 392 Total

$1,094

$1,084

$1,163 In addition to the planned spending in the table above, the U.S.

Utility, excluding Entergy New Orleans, also expects to pay for

$310 million of capital investments in 2006 related to Hurricane Katrina and Rita restoration work that have been accrued as of December 31, 2005. Entergy New Orleans' planned capital expen-ditures for the years 2006-2008 total $93 million, and Entergy New Orleans expects to pay for $46 million of capital investments in 2006 related to Hurricane Katrina and Rita restoration work that have been accrued as of December 31, 2005.

Maintenance Capital refers to amounts Entergy plans to spend on routine capital projects that are necessary to support reliability of its service, equipment, or systems and to support normal customer growth.

Capital Commitments refers to non-routine capital investments for which Entergy is either contractually obligated, has Board-approval, or is otherwise required to make pursuant to a regulatory agreement or existing rule or law.; Amounts reflected in this category include the following:

a Transmission expansion designed to address immediate load growth needs and to provide improved transmission flexibility for the southeastern Louisiana and Texas regions of Entergy's service territory 39 The operating leases are discussed more thoroughly in Note 9 to the consolidated financial statements.

Summary of Contractual Obligations of Consolidated Entities (in millions):

2007-2009-After Contractual Obligations 2006 2008 2010 2010 Total Long-term debt"'

$ 104 SI,267 S2,115

$5,442 58,928 Capital lease payments()

$ 133 S 172 S 2

$ 307 Operating leases'2 )

S 95 $ 140 5 88 $ 196

$ 519 Purchase obligationso)

$1,012

$1,507

$1,109 $ 643

$4.271 (1) Long-term debt is discussed in Note 5 to the consolidatredfinancial statements.

(2) Capital lease payments include nudearfitd leases. Lease obligations are discussed in Note 9 to the consolidated financial statements.

(3) Purchase obligations represent the minimum purchase obligation or cancellation charge for contractual obligations to purchase goods or services. Approximately 99%

of the total pertains tofuel and purchased power obligations that are recovered in the normal course of business through various fiel cost recovery mechanisms in the U.S. Utility business.

~,.1 MANAGEMENT'S FINANCIALI uPurchase of additional generation U.S. Utiuity'servitce territory, inc January 2006 purchase of the 480 power plant.

a Nuclear site diy cask spent fuel sto From time to time1 Entergy coniside potentially being' necessary or desir additional nuclear Iplant, power assets, various transmission upgrade expenditures, or investments in new b contractual obligation, commitment pursue these investments, they ar

'planned' construction and capital investments are also subject to evalu dance with Enterg, ys policies before am Entergy's capital spending plans d transmission upgrades' requested by than projects currIently underway.

Estimated capital expenditures are in.

modification and maj vary based on t restructuring,, regulatory constraint business opportunities, market volati ability to access capital.

Dividends and Stocl Repurchases

'Declarations of dividrnds on Enterg the discretion of the Board. Among oi the level of Entergy's common stock earnings, financial strength, and fturo itsJanuary 2006 meetng,' the Board d share. In 2005, Entergy paid approxi dividends on its comrinon stoc.

In accordance 'with Entergy's sto Entergy periodically'grants stock or Smay. be exercised tO] obtain shares According to theý plan, these shares treasury stock, or'shares purchased management has beed authorized by t open market shares upi to an amount of grants under the plans. In additio approved'a, progý aIr under which repurchase up to $1.5: billion of its The amount of repurchases under th of material changes iýi business resul result of material new investment Hurricanes Katrina and Rita, the program was suspended, and the Boa for completion of the'plan through 2

• of authority remaininj under the Sl.

repurchased 12,280,500 shares of programs for'a total purchase price o SOURCES OF CAPITAL:'

Entergy's sources. to. meet its capit potential investments include:

a internally geneiited funds; a cash on hand (S582:8 million as of x securities issuances;*'.

a bank financing under new or existi 3 sales of assets.

• U1

.........., : 1,..:

ENTERGY CORPORATION AND. SUBSIDIARIES 2005

)ISCUSSION and ANALYSIS continued.

supply sources within the*'

The majority of Entergy's internally generated funds come from uding Entergy.Mississippi's" the U.S. Utility. Circumstances such as weather patterns, price

%dXV, natural gas-fired Attala

.fluctuations, and unanticipated expenses, including unscheduled plant outages and storms, could affect -the level of internally, rage and license'renewals.

generated funds in the future. In the following'section, Entergy's cash flow activity for the previous three years is discussed.'

ers other capital investments as Provisions within the Articles of Incorporation or pertinent inden-able in the future, including: -

tures and various other agreements relating to the long-term debt and,'

uprates, generation supply preferred stock of certain of Entergy Corporationls subsidiaries restrict es, environmental Compliance

'.the payment of cash dividends or other distributions on their common

'usinesses or assets. Because no "

and preferred 'stock. As of December 31, 2005, Entergy Arkansas and, or Board-approval exists to Entergy Mississippi had restricted retained earnings unavailable for e not included in Entergy's distribution to Entergy Corporation of $396.4 million and investments. These potential.'

$68.5 million, respectively. All debt and common and preferred stock uation and approval in accor-7.

issuances by the: domestic utility' companies and, System Energy

,ounts may be spent. In addition,'

"'require prior regulatory approval and their preferred stock and debt o not include spending for-

. issuances are also subject to issuance tests set forth in 'corporate merchant generators, other charters, bond indentures, and other agreements. The domestic utility'.

companies and System Energy have sufficient capacity under these subject to periodic review and." tests to meet foreseeable capital needs.

the ongoing effects of business After the repeal of the Public Utility Holding Company Act of

'environmental regulations, ',

1935 (PUHCA. 1935), effective February 8, 2006, the FERC, under' lity, economic trends, and the..'.

the Federal Power Act, and not the SEC,' has jurisdiction' over authorizing'securities issuances by the domestic utility companies and System Energy (except securities' with maturities longer than one year issued by (a) Entergy Arkansas which are subject to the

's common stock are made at,-

jurisdiction of the Arkansas Public Service Commission (APSC) and ther things, the Board evaluates' (b) Eftergy New Orleans'which are currendy subject to the jurisdiction' dividends based upon Entergy's 'of' the bankruptcy court). Under the Public' Utility Holding re investment opportunities. At CompanyAct of 2005 (PUHCA 2005) and the Federal Power Act, leclared a dividend of $0.54 per '

no approvals are necessary for Enterig Corporation to issue securities; imately $453.5 million in cash' Under a savings provision in PUHCA 2005, each of the domestic utility. companies and System Energy may rely on the financing ick-based compensation plan,'

authority in its'eidsting PUHCA 1935 Securities and Exchange, itions to its employees, which.'

Commission (SEC) order or orders through December 31I 2007 or of Entergy's common stock.

' until the SEC authority is superceded by FERC authorization. The.

s can be newly issued shares,.

.FERC has issued an order (FERC Short-Term Order) approving on the open market. Entergy's-the short-term borrowing limits of the domestic utility companies the Board to repurchase on'the.' (except Entergy New Orlians) and System Energy through March sufficient to fund the exercise' 31, 2008. Entergy New Orleans may rely on existing SEC PUHCA in to this authority, the, Board' 1935, orders for its short-term financing authority, subject to bank-Entergy was authorized' to ?

ruptcy court approval. In addition to' borrowings from commercial common stock through 2006.

. banks, the FERC Short-Term Order authorized the domestic utility e program may vary as a result

companies (except Entergy New Orleans which is authorized by an ts or capital spending, or as a SEC PUI-ICA 1935 order) and System Energy. to continue as' opportunities. As a.' result of

'participants in the Entergy System money pool.,through February 8,° Sl.5 billion share repurchase ' 2007. Entergy.Gulf States and Entergy Louisiana, LLC have ard has extended authorizatioh

, obtained long-term financing authorization from the FERC. The 008. Entergy has $400 million

' money pool is an inter-company borrowing arrangement designed 5 billion plan. in 2005, Entergy

. to reduce Entergy's subsidiaries' dependence on external short-term common stock under both,

borrowings. Borrowings from the money poo1 aid external short-f $878.2 million.

term borrowings combined may not exceed authorized limits. As of December 31, 2005, Entergy's subsidiaries' aggregate money pool and external short-term borrowings authorized limit was $2.0 billion, tal requirements and to fund

'the aggregate outstanding borrowing from the. money, pool',was

'*$379.7 million, and Entergy's subsidiaries' outstanding short-term borrowing from external sources was $40 million. To the extent that'

'December 31, 2005);

the domestic utility companies and System Energy wish to rely on,'

" SEC financing orders under PUHCA 1935 there are 'capitalization ing facilities;'and :

and investment grade ratings conditions that must be satisfied in' connection with security issuances, other than money pool borrowings.

See Note 4 to the consolidated financial statements for further

" '.discuision of Entergy's short-term borrowing limits.

40

-i II

ENTERGY CORPORATION AND SUBSIDIARIES 2005 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued CASH FLOw ACTIVITY As shown in Entergy's Statements of Cash Flows, cash flows for the years ended December 31, 2005, 2004, and 2003 were as follows (in millions):

2005 2004 2003 Cash and cash equivalents at beginning of period S 620 S 507

$1,335 Effect of deconsolidating Entergy New Orleans in 2005 (8)

Cash flow provided by (used in):

Operating activities 1,468 2,929 2,006 Investing activities (1,992)

(1,143)

(1,968)

Financing activities 496 (1,672)

(869)

Effect of exchange rates on cash and cash equivalents (1)

(1) 3 Net increase (decrease) in cash and cash equivalents (29) 113 (828)

Cash and cash equivalents at end of period S 583 S 620 S 507 Operating Cash Flow Activity 2005 Compared to 2004 Entergy's cash flow provided by operating activities decreased in 2005 primarily due to the following:

" The U.S. Utility provided $964 million in cash from operating activities compared to providing S2,208 million in 2004. The decrease resulted primarily from restoration spending and lost net revenue caused by Hurricanes Katrina and Rita. Changes in the timing of fuel cost recovery compared to the prior period due to higher natural gas prices, which caused an increase in deferred fuel cost balances, also contributed to the decrease in cash from operating activities. Also contributing to the decrease in the U.S. Utility segment were increases in income tax pay-ments and in pension plan contributions, and a S90 million refund to customers in the Louisiana jurisdiction made as a result of an LPSC-approved settlement.

" Entergy received dividends from Entergy-Koch of $529 million in 2004 and did not receive any dividends from Entergy-Koch in 2005.

" Offsetting the decreases in those two businesses, the Non-Utility Nuclear business provided $551 million in cash from operating activities compared to providing S415 million in 2004.

The increase resulted primarily from lower intercompany income tax payments and increases in generation and contract pricing that led to an increase in revenues.

2004 Compared to 2003 Entergy's cash flow provided by operating activities increased in 2004 primarily due to the following:

" The U.S. Utility provided S2,208 million in cash from operating activities compared to providing $1,675 million in 2003. The increase resulted primarily from the receipt of intercompany income tax refunds from the parent company, Entergy Corporation. Income tax refunds/payments contributed approxi-mately $400 million of the increase in cash from operating activities in 2004. Improved recovery of fuel costs and a reduc-tion in interest paid also contributed to the increase in 2004.

" The Non-Utility Nuclear business provided $415 million in cash from operating activities compared to providing $183 million in 2003. The increase resulted primarily from lower intercom-pany income tax payments and increases in generation and contract pricing that led to an increase in revenues.

" Entergy's investment in Entergy-Koch, LP provided $526 million in cash from operating activities compared to using S41 million in 2003. Entergy received dividends from Entergy-Koch of $529 million in 2004 compared to $100 million in 2003.

In addition, tax payments related to the investment were higher in 2003 because the investment had higher net income in 2003.

" The non-nuclear wholesale asset business used $46 million in cash from operating activities compared to using S70 million in 2003. The decrease in cash used resulted primarily from a one-time $33 million payment in 2003 related to a generation contract in the non-nuclear wholesale assets business.

" The parent company, Entergy Corporation, used S146 million in cash from operating activities in 2004 compared to providing

$209 million in 2003 primarily due to higher intercompany income tx payments.

In 2003, the domestic utility companies and System Energy filed, with the Internal Revenue Service (IRS), notification of a change in tax accounting method for their respective calculations of cost of goods sold. The adjustment implemented a simplified method of allocation of overhead to the production of electricity, which is pro-vided under the IRS capitalization regulations. The cumulative adjustment placing these companies on the new methodology result-ed in a S2.8 billion deduction on Entergy's 2003 income tax return.

There was no tax cash benefit from the method change in 2003.

In addition, on a consolidated basis, no cash tax benefit was realized in 2004 or 2005. The IRS has issued new proposed regulations effective in 2005 that may preclude a significant portion of the benefit of this tax accounting method change. In 2005, the domes-tic utility companies and System Energy filed a notice with the IRS of a new tax accounting method for their respective calculations of cost of goods sold. This new method is also subject to IRS scrutiny.

In 2005, Non-Utility Nuclear changed its method of accounting for income tax purposes related to its wholesale electric power contracts. The adjustment placing these companies on the new mark-to-market methodology is expected to result in a S3.8 billion deduction on Entergy's 2005 income tax return. The election did not reduce book income tax expense. This deduction is expected to reverse over the next four years. The timing of the reversal of this deduction depends on several variables, including the price of power. On a consolidated basis, it is estimated that there was a

$7 million cash tax benefit from the method change in 2005.

In August of 2005, the Energy Policy Act of 2005 was enacted.

This Act contains provisions that enable the full accumulation of nuclear decommissioning funds on a tax deductible basis, shortens the depreciation recovery period for certain transmission capital expenditures, provides a production credit for electricity generated by new nuclear plants, and expands the net operating loss carryback period to five years for 2003, 2004, and 2005 losses to the extent of 20% of transmission capital expenditures incurred in 2005, 2006, and 2007.

In December of 2005, the Gulf Opportunity Zone Act of 2005 was enacted. The Act contains provisions that allow a public utility incurring a net operating loss as a result of Hurricane Katrina to carry back the casualty loss portion of the net operating loss ten years to offset previously taxed income. The Act also allows a five-year carryback of the portion of the net operating loss attributable to Hurricane Katrina repairs expense and first year depreciation deductions, including 50% bonus depreciation, on IHurricane Katrina capital expenditures.

Entergy expects the above provisions to generate 2006 income tax refunds of approximately S300 million, including Entergy New Orleans.

41

ENTERGY CORPORATION AND' UBSIDIARIES 2005 MANAGEMENT'S: FINANCIAL DISCUSSION and ANALYSIS continued investing Activities n Entergy made temporary investments of $50 million in 2003, 2005 Compared/to 2004'

• and these investments matured in the first quarter of 2004.

Net cash used in investing activities increased in 2005 primarily due w The U.S. Utility used S156 million for other regulatory.

to the following activ It.

investments in 2003 as a result of fuel cost under-recovery.

Construction expenditures were $47 million higher in 2005 than In 2004, the U.S. Utility used S54 million for other regulatory

. in 2004, includinglan increase of S147 million in the U.S.

investments related to fuel cost under-recovery.

Utility business anri a decrease of $82 million in the Non-Utility Nuclear business. U.S. Utility Construction expenditures in 2005 Financing Activities include S302 million caused by Hurricanes Katrina and Rita.

2005 Compared to 2004

-..The non-nuclear holesale assets business realized $75 million.

Financing activities provided $496 million of cash in 2005 compared

=."*

'in net prced fro sa"o 67 "i'

of "ca tproceeds from salesof portions of three of its power to using S1,672 million of cash in 2004 primarily due to the follow-plants in 2004.-

ing activity*

, Entergy Louisianapurchased the 718 MAV Perryville power

• Net issuances of long-term debt by the U.S. Utility segment plant in June 2005 for $162 million.

provided S462 million of cash in 2005 compared to retirements a Entergy receii~d net returns of invested capital from Entergy-of long-term debt net of issuances using $345 million in 2004.

Koch of $49 million in 2005 compared to $284 million in 2004 See Note 5 to the consolidated financial statements for the after the sale by Entergy-Koch of its trading and pipeline details of long-term debt outstanding at December 31, 2005 businesses. This activity is reported in the "Decrease m other and 2004.

investments" line im the cash flow statement.

a Entergy Corporation increased the net borrowings on its credit a Approximately S60 million of the cash collateral for a letter facility by S735 million in 2005 compared to $50 million during of credit that secured the installment obligations owed to the 2004. See Note 4 to the consolidated financial statements for a "New York Power Authority (NYPA) for the acquisition of description of the Entergy Corporation credit facility.

the FitzPatrickandIndian Point 3 nuclearpower plants was n Entergy Corporation repurchased $878 million of its common released to Enterg, in 2004.

stock in 2005 compared to $1,018 million in 2004, as discussed

• The U.S. Utility used $390 million in 2005 and $54 million in above in the "Capital Expenditure Plans and Other Uses of 2004 for other regulatory investments as a result of fuel cost.

Capital" section.

under-recovery. Se4 Note I to the consolidated financial state-n Entergy Corporation issued S500 million of long-term notes in ments for discussion of the accounting treatment of these fuel connection with its equity units offering in December 2005.

cost under-recoveries.

u Entergy Louisiana, LLC issued $100 million of preferred

~

membership interests in December 2005.

Offsetting these factors was the following..

a The non-nuclear wholesale assets business received a return of 2004 Compared to 2003 invested capital of S34 million in 2005 from the Top Deer ind Net cash used in financing activities increased in 2004 primarily due power joint venture after Top Deer obtained debt financing.

to the following-.

r

• a Entergy Corporation issued $538 million of long-term notes 2004 Compared to 2003 in 2003.

Net cash used in investing activities decreased in 2004 primarily due

• Entergy Corporation repurchased $I.018 billion of its common to the following: :

stock in 2004, as discussed above in the "Capital Expenditure

. Construction expenditures were $158 million lower in 2004 than.

Plans and Other Uses of Capital" section..

in 2003, including d'ecreases of $81 million in the U.S. Utility a Entergy Corporation paid 565 million more in common stock business, $39 millioni in the Non-Utility Nuclear business, and dividends in 2004 than in 2003.

$42 million in the non-nuclear wholesale assets business.

Entergy received net returns of invested capital from Entery-.

Offsetting the factors that caused an increase in cash used in financing Koch of S284 million in 2004 after the sale by Entergy-Koch of its activities in 2004 were the following:

trading and pipeline businesses. This activity is reported in the a Retirements of long-term debt net of issuances by the "Decrease in other investments" line in the cash flow statement. -

U.S. Utility segment used S345 million in 2004 and used SApproximately $60 nmillion of the cash collateral for a letter of

$359 million in 2003. See Note 5 to the consolidated financial credit that secures the installment obligations owed to NYPA statements for the details of the long-term debt activity in 2004.

for the acquisition of the FitzPatrick and Indian Point 3 nuclear a In 2003, Entergy Corporation decreased the net borrowings on power plants was released to Entergy in 2004. Approximately its credit facility by $500 million, while in 2004, net borrowings S

. S172 million of this lash collateral was released to Entergy in on its credit facilities increased by $50 million.

2003, and the letter of credit is no longer secured by cash collateral.

s The non-nuclear wholesale assets business retired the This activity is repored in the "Decrease in other investments"

$79 million Top of Iowa wind project debt at its maturity in line in the cash flowxstatement.

January 2003.

a The non-nuclear wliolesale assets business realized $75 million in net proceeds from. sales of portions of three of its power plants in 2004. !'

].

I

ENTERGY CORPORATION AND SUBSIDIARIES 2005 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued SIGNIFICANT FACTORS AND KNOWN TRENDS Following are discussions of significant factors and known trends affecting Entergy's business, including rate regulation and fuel-cost recovery, federal regulation, market and credit risks, and nuclear matters.

STATE AND LOCAL RATE REGULATION AND FUEL-COST RECOVERY The rates that the domestic utility companies and System Energy charge for their services are an important item influencing Entergys financial position, results of operations, and liquidity. These companies are closely regulated and the rates charged to their customers are determined in regulatory proceedings, except for a portion of Entergy Gulf States' operations. Governmental agencies, including the APSC, the City Council, the LPSC, the Mississippi Public Service Commission (MPSC), the Public Utility Commission of Texas (PUCT), and the FERC, are primarily responsible for approval of the rates charged to customers. The status of material retail rate proceedings is summarized below and described in more detail in Note 2 to the consolidated financial statements.

Company Authorized ROE Pending Proceedings/vents Entergy Arkansas 11.0%

n No base rate cases are pending.

w Base rates have been in effect since 1998. The timing of its next general rate case will depend on, among other factors, the ultimate resolution of the System Agreement case at the FERC involving rough production cost equalization.

w Entergy Arkansas completed recovery in January 2006 of transition to competition costs through an $8.5 million transition cost recovery rider that has been in effect since October 2004.

Entergy Gulf States-Texas 10.95%

a Base rates are currently set at rates approved by the PUCT in June 1999.

• In June 2005, a Texas law was enacted that provides for a base rate freeze until mid-2008, but allows Entergy Gulf States to seek before then recovery of certain incremental purchased power capacity costs and recover reasonable and necessary transition to competition costs. An St8 million annual capacity rider was implemented effective December 31, 2005. A S14.5 million annual transition cost recovery rider was implemented effective March 1, 2006, subject to finalization of a settlement among the parties and approval by the PUCT.

Entergy Gulf States-Louisiana 9.9%-11.4%

a A filing was made in December 2005 with the LPSC for interim recovery of $141 million of storm costs. A hearing was held and the LPSC ordered recovery of up to $6 million of storm costs through the fuel adjustment clause during the period March 2006 to September 2006.

Beginning September 2006, Entergy Gulf States will recover $0.85 million per month of interim storm costs through base rates. The filing included provisions for updating the surcharge to reflect actual costs incurred as well as the receipt of insurance or federal aid.

m In March 2005, the LPSC approved a settlement proposal to resolve various dockets covering a range of issues. The settlement resulted in credits of S76 million to retail electricity customers in Entergy Gulf States' Louisiana service territory. The credits were issued in connection with the April 2005 billings.

n A three-year formula rate plan is in place with an ROE midpoint of 10.65% for the initial three-year term of the plan. Entergy Gulf States made its first formula rate plan filing in June 2005 for the test year ending December 31, 2004.

n A base rate increase of S37.2 million associated with the initial formula rate plan filing and the purchase of Perryville was effective in October 2005, subject to refund after consideration by the LPSC.

Entergy Louisiana 9.45%-I 1.05%

a A filing was made in December 2005 with the LPSC for interim recovery of $355 million of storm costs. A hearing was held and the LPSC ordered recovery of up to $14 million of storm costs through the fuel adjustment clause during the period March 2006 to September 2006.

Beginning September 2006, Entergy Louisiana will recover $2 million per month of interim storm costs through base rates. The filing included provisions for updating the surcharge to reflect actual costs incurred as well as the receipt of insurance or federal aid.

n In March 2005, the LPSC approved a setdement proposal to resolve various dockets covering a range of issues. The settlement resulted in credits of S14 million to retail electricity customers which were issued in connection with the April 2005 billings.

n A three-year formula rate plan is in place with an ROE midpoint of 10.25% for the initial three-year term of the plan. The initial formula rate plan filing will be in May 2006 based on a 2005 test year with rates effective September 2006.

Entergy Mississippi 9.1%-1!.9%

w In December 2005, Entergy Mississippi filed with the MPSC a Notice of Intent to change rates by implementing a Storm Damage Rider to recover storm damage restoration costs associated with Hurricanes Katrina and Rita totaling approximately $84 million as of November 30, 2005.

The notice proposes recovery of approximately $14.7 million, including carrying charges, annually over a five-year period. A hearing on this matter is expected in April 2006. Entergy Mississippi plans to make a second filing in late spring of 2006 to recover additional restoration costs associated with the hurricanes incurred after November 30, 2005.

a An annual formula rate plan is in place. Entergy Mississippi made its annual formula rate plan filing in March 2005 based on a 2004 test year. There was no change in rates based on an adjusted ROE midpoint of 10.50%.

Entergy New Orleans 9.75%-I 1.75%

a Entergy New Orleans made a formula rate plan filing in April 2005. The midpoint ROE of Electric-,

the electric and gas plans is 10.75%. The City Council ordered a reduction in electric rates of 10.25%-I 1.25%

$2.5 million and no change in gas rates. The City Council approved the continuation of the Gas formula rate plan for two more annual cycles, including a target equity component of the capital structure of 45%. The ROE midpoint for gas operations for the 2005 test year is 10.75% with a zero basis point bandwidth.

System Energy 10.94%

n ROE approved by July 2001 FERC order. No cases pending before FERC.

In addition to the regulatory scrutiny connected with base rate proceedings, the domestic utility companies' fuel and purchased power costs recovered from customers are subject to regulatory scrutiny. The domestic utility companies' significant fuel and purchased power cost proceedings are described in Note 2 to the consolidated financial statements.

43

oNTERGYCORPORATION

-AND SUBSIDIARIES 200

.S S

MAINAGEMENT2'FINANCIAL DISCUSSION and ANALYSIS continued' FEDERAL REGULATION Arkansas' total production costs are below the average. total pioduc-The FERC regulates wholesale rates (including Entergy intrasystem.

tion costs of the domestic utility companies.

sales pursuant to the System Agreement) and interstate transmission Considerable' uncertainty exists regarding future gas prices.

of electricity, as Wellfas rates for System Energy's sales of capacity Annual average Henry Hub: gas prices (daily midpoint, prices' and energy fromi Grand Gulf to. Entergy Arkansas, Entergy.

.sourced from Platts Gas Daily) have varied significandy over recent Louisiana, EntergyMississippi, and Entergy New Orleans pursuant years, ranging fr6m $2.007/mmBtu to SO.529/mmBtu for the 1996-.

to the Unit Power Sales Agreiment.' -

',200.5 period,- and. averaging S4.098/mmBtu during: the teh-,ear' period 1996-2005 and S5.434/mmBtu during the five-year period.

System Agreement Proceedings

.2001-2005, Recent market conditions have resulted'in gas prices The domestic utilityicompanies historically have engaged in the"'

that, averaged. S8.529/mmBtu' for[ the twelve, months' ended

, coordinated planning, construction, and operation of generating..

December 2005. During the twelve-month period January l, 2005 and bulk transmission facilities under the terms of the System.

. to December 31, 2005 forward gas contracts for each of the next Agreement, which is'a rate schedule that has been approved by the four years based on daily NYMFX close aveiaged S8.74/mmBru FERC. -The. LPSCI'pursued litigation: involving the, Systeiai i'(2006), S7.95/mmBtu (2007); $7.32/mmBtu (2008), and S6.83fmmBtu "Agreement at the FERC..The proceeding includes challenges to the (2009). If, after pending appeals, the FERC's decision becomes final

".allocation of costs as1defined by the Sytem Ageement and raises '

and if gas prices occur similar to. the NYMEX average closing 7~

~

1 "ti -,",

by

.h Syte Ageeen an

.raises

• '°

o.

o questions of imprudence by the domestic utility companies in their.

prces gien, the following potental annual total producton cost execution of the Sysltm Agreement..

reallocations 'among the domestic utility companies could result.

' In June 2005'the FERC issued a decisin.i the System (inmllions):..

Agreement litigationf and essentially affirmed its decision ina a

December 2005'6rdeA on reheating. The FERC decision concluded, Range of Annual Payments Average Annual Payment among other things, that:

o or (Receipts) or (Receipts) a, The System Agreement no longer roughly equalizes totalI.

Entergy Akansas S 293 to S 385.

production costs aiong the domestic utility companies.'

Entergy Gulf States S(264) to S(196)

S(230)

.

• In order to reach r*ugh production cost equalization, the FERC Entergy Louisiana

. S (96) to S' (51)

' S (77) will impose a bandvridth remedy by which each company's total Entergy lississippi S.. (31) to S (3)

S (21)'

annual production costs would have to be within +1-11% of :

Entergy New Orleans S 0 S 0 Entergy System average total annual production costs.

n When calculating the production costs for this purpose, output If natural gas prices devate by SI/mmBtu up or down from the from the Vidalia hydroelectric power plant will not reflect the' '

NYMEX average closing prices given above, it is expected that actual Vidalia price, for that year but will be priced at that year's' Entergy Arkansas' annual payments will change in the same direc-average price for the exchange of electric energy among the' w tion by approximately $70 to S80 million.

domestic utility'opanes under the System Agreement, thereby reducing the amount of Vidalia costs reflected in the comparison of the domestic utility companies' total production costs.

" The remedy ordered by FERC calls for no refunds and would'

< <The FERC decisin concluded among otherl...

be effective based on the calendar year 2006 production costs.

• ........ -thin gs, that the Syrsiem Agr ement n0 lon ger :.

with the first potential reallocation payments, if required, to bhe SystemAgreemen. n longer

'. 7 I

7."

made in 2007.

roughly equalizes total production costs The FERCs decision would reallocate total production costs of, among the'domestic Utiuitycompanies>

the domestic utility companies whose relativetotal production costs expressed 'as a percentage of Entergy System average production costs are outside an.pper or lower bandwidth. This would be-..

The LPSC,. APSC, MPSC, and the Arkansas Electmc Energy-accomplished byý payments" from domestic utility companies Consumers (AEEC) have appealed the FERC decision to'the Court:

whose production' cosis are more than 11% below Entergy System of Appeals for the D.C. Circuit. Entergy has intervened in the average production costs to domestic utility companies whose pro-LPSC appeal and intends to intervene in the other appeals. The.

duction costs are more' than I I%. above Entergy System, average City of New Orleans has also intervened in the LPSC appeal..

production csts.i Entergy will be required to file with the:FERC a compliance asesmen 'fu~

Potential effects of the FERC's decision, fln't mlement-the-, provisions.o h

ECs eiin" requires assumptions regarding the future total production cost of:..: Management believes that any. changes in the'allocation of produc-'

each domestic utility company, which assumptions include the mix '

. tion costs resulting from the FERC's decision and related retail of solid fuel and gas-fired generation available to each company and -: proceedings should result in similar'rate changes for retail cus-:

the costs of natural gas and purchased power. Entergy Louisiana, tomers. The timing of recovery of these costs in rates could be the.

Entergy Gulf States, aInd Entergy Mississippi are more dependent :subject of additional proceedings before Entergy's retail r~gulators..

upon gas-fired generation sources than Entergy 'Arkansas' or.'-Although the outcome and timing of the FERC arid other proceed-:

Entergy New Orleans. Of these, Entergy Arkansas is the least,.

ings canno &e p~rdicted at this time, Entergy does not believe that dependent upon gas'-fi ed generation sources. Therefore, increases in

-the ultimate resolution of these proceedings wvill have a material natural 'gas prices likel ill increase the amount by which Entergy.,

effect on its financial'condition or results of operations.,

44

i

).

ENTERG.Y CORPORATION AND SUBSIDIARIEs 2005 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued Citing its concerns that the benefits of its continued participation in the current form of the System Agreement have been seriously eroded, in December 2005, Entergy Arkansas submitted its notice that it will terminate its participation in the current System Agreement effective 96 months from December 19, 2005 or such earlier date as authorized by the FERC. Entergy Arkansas indicat-ed, however, that a properly structured replacement agreement could be a viable alternative. In response to an Administrative Law Judge (ALJ) Initial Decision in the System Agreement proceeding in 2004, the APSC had previously commenced an investigation into whether Entergy Arkansas' continued participation in the System Agreement is in the best interest of its customers, and had also commenced investigations concerning Entergy Louisiana's Vidalia purchased power contract and Entergy Louisiana's then pending acquisition of the Perryville power plant.

Independent Coordinator of Transmission In 2000, the FERC issued an order encouraging utilities to voluntar-ily place their transmission facilities under the control of independent RTOs (regional transmission organizations) by December 15, 2001.

Delays in implementing the FERC order have occurred due to a variety of reasons, including the fact that utility companies, other stakeholders, anti federal and state regulators continue to work to resolve various issues related to the establishment of such RTOs.

In April 2004, Entergy filed a proposal with the FERC to commit voluntarily to retain an independent entity (Independent Coordinator of Transmission or ICT) to oversee the granting of transmission or interconnection service on Entergy's transmission system, to implement a transmission pricing structure that ensures that Entergy's retail native load customers are required to pay for only those upgrades necessary to reliably serve their needs, and to have the ICT serve as the security coordinator for the Entergy region. The proposal was structured to not transfer control of Entergy's transmission system to the ICT, but rather to vest with the ICT broad oversight authority over transmission planning and operations.

After additional filings and subsequent declaratory orders issued by the FERC, on May 27, 2005, the domestic utility companies filed an enhanced ICT proposal with the FERC. Entergy believes that the filing is consistent with the FERC guidance received in the FERC's declaratory orders on the ICT. Among other things, the enhanced ICT filing states that the ICT will (I) grant or deny transmission service on the domestic utility companies' transmission system; (2) administer the domestic utility companies' OASIS node for purposes of processing and evaluating transmission service requests and ensuring compliance with the domestic utility companies' obligation to post transmission-related information; (3) develop a base plan for the domestic utility companies' transmission system that will result in the ICT making the determination on whether costs of transmission upgrades should be rolled into the domestic utility companies' transmission rates or directly assigned to the customer requesting or causing an upgrade to be constructed; (4) serve as the reliability coordinator for the Entergy transmission system; and (5) oversee the operation of the weekly procurement process. The enhanced ICT proposal clarifies the rights that customers receive when they fund a supplemental upgrade and also contains a detailed methodology describing the process by which the ICT will evaluate interconnection-related investments already made on the Entergy System for purposes of determining the future allocation of the uncredited portion of these investments.

On June 3, 2005, a group of generators filed with the FERC a request that the FERC schedule a technical conference on the enhanced ICT proposal in order for Entergy to provide additional information on the enhanced ICT proposal. In response, a stake-holder meeting was held in New Orleans on June 30, 2005.

Interventions, protests, and comments were filed by interested parties on August 5, 2005. Entergy filed a response to the various pleadings on August 22, 2005. Entergy anticipates receiving a FERC order on the May 27, 2005 filing during the second quarter 2006.

As discussed below in "Available Flowgate Capacity Proceedings,"

on October 31, 2005, the domestic utility companies notified parties to the ICT proceeding of the potential loss of historical data related to Entergy's calculation of available transfer capability for its transmission system.

In March 2004, the APSC initiated a proceeding to review Entergy's proposal and compare the benefits of such a proposal to the alternative of Entergy joining the Southwest Power Pool RTO.

The APSC sought comments from all interested parties on this issue. Various parties, including the APSC General Staff, filed com-ments opposing the ICT proposal. A public hearing has not been scheduled by the APSC at this time, although Entergy Arkansas has responded to various APSC data requests. In May 2004, Entergy Mississippi filed a petition for review with the MPSC requesting MPSC support for the ICT proposal. A hearing in that proceeding was held in August 2004. Entergy New Orleans appeared before the Utility Committee of the City Council in June 2005 to provide information on the ICT proposal. Entergy Louisiana and Entergy Gulf States have filed an application with the LPSC requesting that the LPSC find that the ICT proposal is a prudent and appropriate course of action. A hearing in the LPSC proceeding on the ICT proposal was held in October 2005, and Entergy Louisiana and Entergy Gulf States await the ALJ's initial decision.

Market-based Rate Authority On May 5, 2005, the FERC instituted a proceeding under Section 206 of the Federal Power Act to investigate whether Entergy satisfies the FERC's transmission market power and affiliate abuse/reciprocal dealing standards for the granting of market-based rate authority, and established a refund effective date pursuant to the provisions of Section 206, for purposes of the additional issues set for hearing. However, the FERC decided to hold that investigation in abeyance pending the outcomes of the ICT proceeding and Entergy's affiliate purchased power agreements proceeding. On June 6, 2005, Entergy sought rehearing of the May 5 Order and that request for rehearing is pending.

On July 22, 2005, Entergy notified the FERC that it was with-drawing its request for market-based rate authority for sales within its control area. Instead, the domestic utility companies and their affiliates will transact at cost-based rates for wholesale sales within the Entergy control area. On November 1, 2005, Entergy submit-ted proposed cost-based rates for both the domestic utility compa-nies and Entergy's non-regulated entities that sell at wholesale with-in the Entergy control area. Separately, the FERC accepted for fil-ing Entergy Gulf States' proposed cost-based rates for wholesale sales to three separate municipalities. Additionally, Entergy reserves its right to request market-based rate authority for sales within its control area in the future. The relinquishment of market-based rates for sales within the Entergy control area is not expected to have a material effect on the financial results of Entergy.

45

S-ENTERGY.CORPORATION AND SUBSIDIARIES 2005 MANAGEMENT1 FINANCIAL DISCUSSIO Nand ANALYSIS continued

.. ;Avilable Flowgate Capacity Proceeding',','

is continuing to pursue all avenues for re On December 17, 2004, the FERC issued an order initiating a hear-historic hourly data, it is difficult to pre ing and investigation concerning the justness'and reasonableness of."

extent these efforts will ultimately be su z the Available Flowgate Capacity (AFC) methodology, the method-'

the potential loss of data, the domestic Uti ology used to ev"aluate short-term transmissionI service requests steps to ensure that these errors cannot re under the domestic uiility ýompanies' open access transmission tariff, I current AFC hourly data, including the he i and establishing a-efdind'effective date. In its order, the FERC indi-

' 2005 forward, is adequately protected aj cated that although 3t- "appreciates that Entergy is attempting to reported the event to the FERC's Office explore ways to improve transmission access on its system," it believed '.. Investigations and is providing informatic thatsigtin an inesisto pa 'arrangeinto of that ancnvesrgauon was warranted to gather more evidence in light concerning this event. Additionally, Ent iuof the oncerns i

aise! by'certain transmission customers and certain ICT review the current process for retal issues raised in a FERC audit report finding errors and problems xvith part of its independent review discussed a the predecessor metholology used by Entergy for evaluating short-term transmission requests; the Generator Operating Limits methodology.

Interconnection Orders The FERC order indicates that the investigation will include an The domestic utility companies (except I examination of (i) Efitergy's implementation of the AFC program, currently defendants to several complain

. (iiwhetherEntergy'implementationhascompliedwithpriorFERC before the. FERC in which indepeni

-,orders and open access transmission tariff provisions addressing the.

(GenCos) are seeking a refund of mon AFC program,. and 'iii) whether Enitergy's -provision of access to previously paid to the Entergy companie' short-term transmission on its transmission system was just, reasonable,..

connect their generation facilities to Ente and...

... u 'discrinina or-not undultory..y The FERC has issued orders in response On.March 22, 2005, the FERC issued an dMer that holds the certain other dockets ordering Entergy

.AFChearing i byn c pnmacon onEtrgy's ITiln.

$123 million in expenses and tax obligati*

The' order holding de hearing in abeyance further indicated that GenCos, including S42 million for Ente it would cancel the Fearing when the ICT. begins'to perform its -

for Entergy Gulf States, $24 million fo functions. On April: 8, 2005, several intervenorsý filed Emergency S29 million for Entergy Mississippi. The

" Motions for Interii Relief and Expedited Commission Action "

of transmissioncreditsthat willbeutilize requesting that, during the item period before the nnplementa-take transmission service from Entergy. "I tion of the ICT, the FERC (1) institute an audit process to examine

.. that: have been` filed with FERC in an "and modifyr Eritergy's current AFC process; anid (2) require, the'

$43 million, including S27 million fozý En Southwest Power Pool (SPP) to become involved in the AFC stake-.

for Entergy Gulf States, and $8 million holder process anid order certain modificatons to Entergy's stake-.

which the FERC has not taken action.

holder process. The adit process being proposed by the intervenors To the extent the Entergy companies ai would not involve an independent auditor, but instead would be an refunds, these costs will qualify for inclusi

."ds ths cot mil qulf fo

,lus investigation performned by, a representative from the intervenors, '7 ries' rates. The' recovery of these' costs i Entergy" and possibl§, SPP.: On April 25, 2005, Entergy. filed its

' especially at the retail level, where the ma response to the emergency motion urging the FERC to reject the would occur. Entergy intends to pursue intervenors' requist f6* the "audit" because the type ofinvestigation.'

avenues available to it in order to have proposed by the intervenors would be neither independent hor fair

. have the affected interconnection agreemt and.

ould only 'distract fromthe implenentaion ofthe ICT.:"'originally by the generators.

Instead, Entergy hasp'roposed that the ICT conduct an independ-ent review of the AFC process and procedures as part of its transi-

' ENERGY POLIcY ACT OF 2005

-tionto assuming the "aentired IT responsibilities,' including the

'The Energy Policy Act of 2005 became

-aF I.-

culation' of the' C "Entergy subsequently retained SPP to legislation contains electricity provisions conduct an audit of the AFC processesand procedures. The SPP

'a Repealed PUHCA 1935, through enac released its' anudit report on-the AFC processes in which.the effective February 8, 2006; PUHCA 2C SPP, among other things, identified-anissue concerning limited amendments to Section 203(a) of the F instances in which trahnssmission service was granted when there was remove various limitations on Entergy insufficient AFC axailable. In light of this, the SPP has recommended tered holding company under PUHCA that the AFC proces' be further automated to ensure the correct maintenance and retention of books an processing' of every, transmission service request. Entergy has" holding company system companies foi advised the FERC Staff of this issue..'

and state commissions, as appropriate; OnApril 21'; 205!;the intervenors filed a separate request for

' to the jurisdiction of the FERC (or star rehearing arguing that the FERC'must allow the AFC hearing to bodies, as appropriate) (i) the issuance proceed in parallel with the establishment of the ICT..

securities; (ii) (A) the disposition ofjuri On October 31, 2005, the domestic utility'companies notified

, ' facilities by an electric utility-, (B) the a, participants in the ICT proceeding that'certain historic data related.',,

utility of securities of an electric utility, to the hourly AFC models may have been inadvertently, lost due electric utility of electric generating fac to errors in the implementation of a data archiving process. The

.' ' cases in (A), (B), and (C) only in transa, data at issue is certain hourly,AFC data for the' nine-month

$10 million); (iv) electric public utility period April 27, 2004 tough January 31 2005. Althugh Entergy (v) the acquisition by an electric public I46 covery and retrieval of the dict whether ind to what ccessful. Since discovering ility companies have taken ecur and to ensure that the' urly data from February 1, nd retained. Entergy self-of Market Oversight and in to the investigation staff.

ergy will request that the ining AFC-related data as,

ibove.

Entergy New Orleans) are' its and rehearing requests dent generation entities ies that the GenCos had s for facilities necessary to ergy's transmission system.

to three complaints and in' to refund approximately ons previously paid by the rgy Arkansas, $28 million, r Entergy Louisiana, and refunds will be in the form d over time as the GenCos

'here are other complaints approximate amount of tergy Arkansas, $8 million for Entergy Louisiana,' in re ordered to provide such on in the Entergy compa-s not automatic, however, jority of the cost recovery all regulatory and legal these orders reversed and-ents reinstated as agreed to law in August 2005. The that, among other things:

tment of PUHCA 2005, D05 and/or related +

'ederal Power Act (a) '.

Corporation as a regis-1935; (b) require the.

d records by certain -

r inspection by the FERC'.

and (c) effectively leave te or local regulatory.

by an electric utility of.

sdictional FERC electric cquisition' by'an electric (C) the acquisition by'an'

ilities (in each of the Ctions in excess of mergers;, and utility holding company

ENTERGY CORPORATION AND SUBSIDIARIES 2005 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued of securities of an electric public utility company or its holding company in excess of S$1 million or the merger of electric public utility holding company systems. PUHCA 2005 and the related FERC rule-making also provide a savings provision which permits continued reliance on certain PUHCA 1935 rules and orders after the repeal of PUHCA 1935.

" Codifies the concept of participant funding, a form of cost allocation for transmission interconnections and upgrades, and allows the FERC to apply participant funding in all regions of the country. Participant funding helps ensure that a utility's native load customers only bear the costs that are necessary to provide reliable transmission service to them and not bear costs required by generators who seek to deliver power to other regions.

" Provides financing benefits, including loan guarantees and production tax credits, for new nuclear plant construction, and reauthorizes the Price-Anderson Act, the law that provides an umbrella of insurance protection for the payment of public liability claims in the event of a major nuclear power plant incident.

" Revises current tax law treatment of nuclear decommissioning trust funds by allowing regulated and non-regulated taxpayers to make deductible contributions to fund the entire amount of estimated future decommissioning costs.

" Provides a more rapid tax depreciation schedule for transmission assets to encourage investment.

<Thne Energy Policy Act of 2005 bec.ame law in August 2005 and, among other things, provides financing benefits, including loan guarantees and production tax.credits for new nuclear construction.>

MARKET AND CREDIT RiSKs Market risk is the risk of changes in the value of commodity and financial instruments, or in future operating results or cash flows, in response to changing market conditions. Entergy is exposed to the following significant market risks:

" The commodity price risk associated with Entergy's Non-Utility Nuclear and Energy Commodity Services segments.

" The foreign currency exchange rate risk associated with certain of Entergy's contractual obligations.

" The interest rate and equity price risk associated with Entergy's investments in decommissioning trust funds, particularly in the Non-Utility Nuclear business.

• The interest rate risk associated with changes in interest rates as a result of Entergy's issuances of debt. Entergy manages its interest rate exposure by monitoring current interest rates and its debt outstanding in relation to total capitalization.

See Notes 4 and 5 to the consolidated financial statements for the details of Entergy's debt outstanding.

Entergy is also exposed to credit risk. Credit risk is the risk of loss from nonperformance by suppliers, customers, or financial counter-parties to a contract or agreement. Credit risk also includes potential demand on liquidity due to collateral requirements within supply or sales agreements. Where it is a significant consideration, counter-party credit risk is addressed in the discussions that follow.

Commodity Price Risk Power Generation 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. Entergy's Non-Utility Nuclear business has entered into purchased power agreements (PPAs) and other contracts to sell the power produced by its power plants at prices established in the PPAs. Entergy continues to pursue opportunities to extend the existing PPAs and to enter into new PPAs with other parties. Following is a summary of the amount of the Non-Utility Nuclear business' output that is currently sold forward under physical or financial contracts:

2006 2007 2008 2009 2010 Percent of planned generation sold forward:

Unit-contingent 34%

32%

25%

19%

12%

Unit-contingent with availability guarantees 53%

47%

32%

13%

5%

Firm liquidated damages 4%

2%

0%

0%

0%

Total 91%

81%

57%

32%

17%

Planned generation (MIWh) 35 34 34 35 34 Average contracted price per M*h

$41 S45

$49 S54

$45 The 'ermont 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 in 2012 of the current operating license for the plant. The PPA includes an adjustment clause under which the prices specified in the PPA vvill be adjusted downward monthly, beginning in November 2005, if power market prices drop below PPA prices.

A sale of power on a unit contingent basis coupled with an availability guarantee 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 47

" Creates mandatory electricity reliability guidelines with enforceable penalties to help ensure that the nation's power transmission grid is kept in good repair and that disruptions in the electricity system are minimized. Entergy already voluntarily complies with National Electricity Reliability Council standards, which are similar to the guidelines mandated by the Energy Policy Act of 2005.

" Establishes conditions for the elimination of the Public Utility Regulatory Policy Act's (PURPA) mandatory purchase obliga-tion from qualifying facilities.

" Significantly increased the FERC's authorization to impose criminal and civil penalties for violations of the provisions of the Federal Power Act.

The Energy PolicyAct requires several rulemakings by the FERC and other government agencies in order to implement its provisions and the FERC in its rulemakings has indicated it plans, by February 8, 2007, for further review of, and possible changes to, its implementation of PUHCA 2005 and the repeal of PUFICA 1935.

Therefore, it will be a period of time before a full assessment of its effects on Entergy and the energy industry can be completed.

-1 rT ENTERGY CORPORATION AND SUBSIDIARIES 2005 MANAGEMENT'SI FINANCIAL DISCUSSION and ANALYSIS unit to generate power at or above a specified availability threshold..

All of Entergy's outstanding availability guarantees provide for dollar.

limits on Entergy's m aximum liability under such guarantees.

Non-Utility Nuclearls purchase of the Fitzpatrick and Indian'.

Point 3 plants from NYPA included value sharing agreements with NYPA. Under the value sharing agreements, to the extent that the average annual price.of the energy sales from each of the two plants exceeds specified strike prices, the Non-Utility Nuclear business will pay 50% of the amount exceeding the strike prices to NYPA.%

These payments, if required, will be recorded as adjustments to the purchase price of the plants. The annual energy sales subject to the value sharing agreements are limited to the lesser of actual genera-ton or generation assuming an 85% capacity factor based on' the plants' capacities at the time of the purchase. The value sharing agreements are effe'ctive through 2014. The strike prices for Fitzpatrick range frodA $37.51 /MWh in 2005 increasing by approx-imately 3.5% each year to S51.30/MWh in 2014, and the strike prices for Indian Point 3 range from $42.26/MWh in 2005 increas-ing by approximatel}A3.5% each year to S57.77/MWh in 2014.

< The'sale'of electricity from the power gerieration plants owned by9 Entergy's Non-Utility Nuclear business and. Energy Commbdity Services, unless 'otherwvise contracted,'

is subject to the fluctuation of market power prices.>

2006 2007 2008 2009 2010 Percent of capacity sold forward:

Bundled capacity and.

energy contracts _

12%"

12%

12%

12%,

12%

Capacitycontracts 77%

'46%

36%1-24%

3%

Total 89%

58%

48%

36%

15%

Planned netM,\\Win operation 4,184 4,200 4,200 4,200 4,200 Average capacity contract' price per k1V per month

$1.0

$I.1

$1.

1.0

$0.9 Blended Capacity and Energy,

• (based on revenues):

.% of planned generation and capacity soldforward 82% -,71%

47%

27%

12%

Average contract revenue per,\\IAVh

$42 S46

$50.

$55

$46 As of December 31, 2005, approximately 96% of Non-Utility Nuclear's counterparty exposure from energy and capacity contracts is with counterparties with investment grade credit ratings.

Following is a summary of the amount of Energy Commodity Services' output and installed capacity that is currently sold forward under physical or financial contracts at fixed prices:

2006 2007

.2008 2009-2010 Some of the agreements to sell the power produced by Entergy's Non-Utility Nuclearlpower plants and the wholesale supply agree-ments entered into by Entergy's Competitive Retail business contain provisions that require an Entergy subsidiary to provide collateral to secure its obligations under the agreements. The Entergy subsidiary may be required to provide collateral based upon the difference between the current-market and contracted power prices in the, regions where the Non-Utility Nuclear and Competitive Retail businesses sell power. The primary form of the collateral to satisfý these requirements would be an Entergy Corporation guaranty.

Cash and letters of credit are also acceptable forms of collateral. At December 31, 2005, based on power prices at that time, Entergy' had in place as Collateral $1,630 million of Entergy Corporation guarantees for wholelale transactions, $237 million of which sup-'

port letters of crediti The'assurance requirement-associated' with Non-Utility Nuclear is estimated to increase by an amount up to

$400 million if gas prices increase $1 per MalNtu in both the short--'.

and long-term markets. In the event of a decrease in Entergy Corporation's credit Ating to below investment grade, Entergy may be required to replace Entergy Corporation guarantees with cash or-letters of credit under some of the agreements.

In addition to' selling the power produced by its plants, the Non-Utility Nuclear business sells installed capacity to load-serving distribution companies in order for those companies to meet.

requirements placed on them by the Independent System Operator (ISO) in their area. Following is a summary of the amount of the Non-Utility Nuclear business' installed capacity that is currently sold forward, and the~blended amount of the Non-Utility Nuclear business' planned generation output and installed capacity that'is-currently sold forn'ard:

• Capacity:.

" Planned MW in operation

% of capacity sold forward

- Energy:.,

Planned generatiofi (Tlh)

% of planned generation sold forward Blended Capacity and Energy (based on revenues):

• % of planned energy and capacity sold forward

• Average contract revenue per MWh.

1,57 33' 8

1,578 1,578 1,578 1,578 29%

29%

. 19%

17%

4 4

'4,.

4'.

4 41%.

43%

36%

36%.

47C 25%.

23%

26%..

17%

17%

$26

$28

$28

$21'

$20

. Entergy continually monitors industry trends in order to deter-mine whether asset impairments or other losses couild result from a deciine-in value, or cancellation', of merchant power projects, and records provisions' for impairments and losses accordingly.

As discussed in "Results of Operations" above, in 2004 Entergy determined that the value of the Warren Poweir plant owned by the non-nuclear wholesale assets business' was impaired, and recorded the appropriate provision for the loss.-

Foreign Currency Exchange Rate Risk.

Entergy. Gulf States, System Fuels, and Entergy's. Non-Utility Nuclear business enter into foreign currency forward contracts to hedge the Euro-denominated payments due under certain purchase contracts. The notional amounts of the' foreign' currency forward contracts are 16.7 million Euro and the forward currency rates, range from.96370 to 1.32540. The maturities of these forward con-;

tracts depend on the purchase contract payment dates and range in time from January 2006 to January 2007. The mark-to-market val-uation of the forward contracts at December 31, 2005 was a net asset of $3.5 million.' The counterparty banks obligated on these agree-ments are rated by Standard & Poor's Rating Services at iA on their senior debt obligations as of December 31, 2005.

8 -

/

i. "

ENTERGY CORPORATION AND SUBSIDIARIES 2005 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued Interest Rate and Equity Price Risk -

Decommissioning Trust Funds Entergy's nuclear decommissioning trust funds are exposed to fluc-tuations in equity prices and interest rates. The Nuclear Regulatory Commission (NRC) requires Entergy to maintain trusts to fund the costs of decommissioning Arkansas Nuclear One Unit I (ANO 1),

Arkansas Nuclear One Unit 2 (ANO 2), River Bend, Waterford 3, Grand Gulf, Pilgrim, Indian Point I and 2, and Vermont Yankee (NYPA currently retains the decommissioning trusts and liabilities for Indian Point 3 and FitzPatrick). The funds are invested primari-ly in equity securities; fixed-rate, fixed-income securities; and cash and cash equivalents. Management believes that exposure of the var-ious funds to market fluctuations will not affect Entergy's financial results of operations as it relates to the ANO I and 2, River Bend, Grand Gulf, and Waterford 3 trust funds because of the application of regulatory accounting principles. The Pilgrim, Indian Point 1 and 2, and Vermont Yankee trust funds collectively hold approxi-mately S952 million of fixed-rate, fixed-income securities as of December 31, 2005. These securities have an average coupon rate of approximately 5.2%, an average duration of approximately 5.6 years, and an average maturity of approximately 9.2 years. The Pilgrim, Indian Point I and 2, and Vermont Yankee trust funds also collectively hold equity securities worth approximately S519 million as of December 31, 2005. These securities are generally held in funds that are designed to approximate or somewhat exceed the return of the Standard & Poor's 500 Index, and a relatively small percentage of the securities are held in a fund intended to replicate the return of the Wilshire 4500 Index. The decommissioning trust funds are discussed more thoroughly in Notes 1, 8, and 15 to the consolidated financial statements.

CENTRAL STATES COMPACT CLAIM The Low-Level Radioactive WVaste Policy Act of 1980 holds each state responsible for disposal of low-level radioactive waste originat-ing in that state, but allows states to participate in regional compacts to fulfill their responsibilities jointly. Arkansas and Louisiana par-ticipate in the Central Interstate Low-Level Radioactive Waste Compact (Central States Compact or Compact). Commencing in early 1988, Entergy Arkansas, Entergy Gulf States, and Entergy Louisiana made a series of contributions to the Central States Compact to fund the Central States Compact's development of a low-level radioactive waste disposal facility to be located in Boyd County; Nebraska. In December 1998, Nebraska, the host state for the proposed Central States Compact disposal facility, denied the compact's license application for the proposed disposal facility.

Several parties, including the commission that governs the compact (the Compact Commission), filed a lawsuit against Nebraska seek-ing damages resulting from Nebraska's denial of the proposed facil-ity's license. After a trial, the U.S. District Court concluded that Nebraska violated its good faith obligations regarding the proposed waste disposal facility and rendered a judgment against Nebraska in the amount of S151 million. In August 2004, Nebraska agreed to pay the Compact S141 million in settlement of the judgment. In July 2005, the Compact Commission decided to distribute a sub-stantial portion of the proceeds from the settlement to the nuclear power generators that had contributed funding for the Boyd County facility, including Entergy Arkansas, Entergy Gulf States, and Entergy Louisiana. On August 1, 2005, Nebraska paid S 145 million, including interest, to the Compact, and the Compact distributed from the settlement proceeds $23.6 million to Entergy Arkansas,

$19.9 million to Entergy Gulf States, and $19.4 million to Entergy Louisiana. The proceeds caused an increase in pre-tax earnings of

$28.7 million.

CRITICAL ACCOUNTING ESTIMATES The preparation of Entergy's financial statements in conformity with generally accepted accounting principles requires management to apply appropriate accounting policies and to make estimates and judgments that can have a significant effect on reported financial position, results of operations, and cash flows. Management has identified the following accounting policies and estimates as critical because they are based on assumptions and measurements that involve a high degree of uncertainty, and the potential for future changes in the assumptions and measurements that could produce estimates that would have a material effect on the presentation of Entergy's financial position or results of operations.

NUCLEAR DECOMMISSIONING COSTS Entergy owns a significant number of nuclear generation facilities in both its U.S. Utility and Non-Utility Nuclear business units.

Regulations require Entergy to decommission its nuclear power plants after each ficility is taken out of service, and money is collected and deposited in trust funds during the facilities' operating lives in order to provide for this obligation. Entergy conducts periodic decommissioning cost studies (typically updated every three to five years) to estimate the costs that will be incurred to decommission the facilities. The following key assumptions have a significant effect on these estimates:

" Cost Ercalation Factors - Entergy's decommissioning revenue requirement studies include an assumption that decommission-ing costs wvill escalate over present cost levels by annual factors ranging from approximately CPI-U to 5.5%. A 50 basis point change in this assumption could change the ultimate cost of decommissioning a facility by as much as 11%.

" Timing - In projecting decommissioning costs, two assumptions must be made to estimate the timing of plant decommissioning.

First, the date of the plant's retirement must be estimated. The expiration of the plant's operating license is typically used for this purpose, but more often the assumption is made that the plant will be relicensed and operate for some time beyond the original license term. Second, an assumption must be made whether decommissioning will begin immediately upon plant retirement, or whether the plant will be held in "safestore" status for later decommissioning, as permitted by applicable regulations. While the effect of these assumptions cannot be determined with precision, assuming either license extension or use of a "safestore" status can possibly change the present value of these obligations. As discussed in Note 8 to the consolidated financial statements, Entergy recorded revisions in 2004 and 2005 to its estimated decommissioning cost liability for certain of its nuclear power plants to reflect changes in assumptions regarding license renewal. Increases in the probability of decom-missioning the plants at a date later than the original license expiration lowered the estimate of the decommissioning cost liability. Future revisions to appropriately reflect changes needed to the estimate of decommissioning costs will affect net income, only to the extent that the estimate of any reduction in the lia-bility exceeds the amount of the undepreciated asset retirement cost at the date of the revision, for unregulated portions of Entergy's business. Any increases in the liability recorded due to such changes are capitalized and depreciated over the asset's remaining economic life in accordance with SFAS 143.

• Spent Fuel Disposal - Federal regulations require the U.S.

Department of Energy (DOE) to provide a permanent repository for the storage of spent nuclear fuel, and legislation has been passed by Congress to develop this repository at Yucca 49

IENTERGY CORP'OR'ATION AND'SUBSIDIARIES 2005 IIANAGEMENT'SjFINANCIAL DISCUSSION and ANALYSIS

ýontinued.

Mountain; Nevada. Until this site is available, however, nuclear**

assumptions. regarding the timing plant operators must provide for interim spent fuel storage on plant. The revised estimate result the nuclear plant site, which can require the construction'and

$26.0 million (S 15.8 million net-of-maintenance of dry cask storage sites or other facilities. The reduction in the liability over the ar costs of developinj and maintaining these facilities can have a In the second quarter of 2005, En significant effect (4s much as'16% of estimated decommission-

.sion to its estimated decommission ing costs). Entergy's decommissioning studies include cost with a new decommissionin g cost sni estimates for spent fuel storage. However, these estimates could;,

an expected life extension for the pl.

change in the future based on the timing of the opening of ed in a $153.6 million reduction i the Yucca Mountain facility, the schedule for shipments to that

'along with a-S49.2 million" redi facility when it is opened, or other factors.-

$104.4 million reduction in therela w: Technology and Regulation'- To date, there is limited practical In the third quarter of 2005, Ente experience in the United States with actual decommissioning of to its estimated' decommissioning large nuclear facilities. As experience is gained and technology.

. accordance with the receipt of. apt changes, cost estimates could also change. If regulations regard-

'Arkansas!. application for a life exte ing nuclear decommissioning were to change, this could have a estimate resulted in an $87.2 million potentially significant effect on cost estimates. The effect of liability,' along with 'a corresponi these potential cha'nges is not presently determinable. Entergy's regulatory asset.

decommissioning cost studies assume current technologies -

In the third quarter of 2005, Sys and regulations.

s-to its estimated decommissioning c new decommissioningcost study SFAS 143

j.

estimate resulted in a $41.4 million Entergy implemented SFAS 143, "Accounting for Asset Retirement ' -ing cost liability for Grand Gul Obligations," effective January 1, 2003. Nuclear decommissioning reduction in utility plant and a S1.7 costs comprise substantially all of Entergy's asset retirement obliga-

.. regulatory asset.

tions. The following* revisions were made to Entergy's estimated decommissioning'cost liabilities in 2004 and 2005.

UNBILLED REVENUE..

In the first quaiteroof 2004, EntergyArkansas recorded a revision As discussed in Note I to the" co to its estimated decosimissioning cost liability in accordance with'a.

Entergy records an estimate of the r new decommissioning cost study for ANO I and 2 as a result of ered' since the latest'customer billi revised decommissioning costs and changes in assumptions regard-.'

unbilled revenue amounts are recor ing the timing of when the decommissioning of. the plants will,,

and the prior month's estimate'is re begin. The revised *stimate resulted in a $107.7 million reduction in r the estimate of the unbilled receivab its decommissioning liability, along with a $19.5 million reduction and the end of the period is thý am in utility plant and an S88.2 million reduction in the related regula-

'nized during the period. The estirr tory asset.

upon an estimate of customer usage In the third quarter of 2004, Entergy Gulf States recorded a rev.i-the billed price tocustorers in th sion to its estimated decommissioning cost liability in accordance Therefore, revenue recognized ma with a new decommissioning cost study for River Bend that reflected

. price and usage at the beginning a an expected life extension for the plant. The revised estimate resulted-price fluctuations, in addition to ch in a $116.8 million reduction in decommissioning liability, along',' 'the-calculationincluding changes with a $31.3 millioen reduction in utility plant, a S40.1 million w'hich affects the estimate of unbill reduction in the related regulatory asset, and a regulatory liability,

. tions regarding price such as the fu, of $17.7 million.' Folr the portion of River Bend not subject to.

I -

cost-based ratemaing', the revised estimate resulted in the elimina-IMPAIRMENT OF LONG-LiVED tion of the asset redremient cost that had been recorded at the"'* Entergy has significant inv,'estments time of adoption ofISFAS 143 with' the'remainder 'recorded as segments,'and Enftergy evaluates the miscellaneous incomsof $27.7 million (S17 million net-of-tax)..

nomics and under the accounting In the third quarteiiif 2004, Entergy's Non-Utility Nuclear busi-there are indications that impairm ness recorded a reducton of $20.3 million in its decommissioning

' involves a significant degree of estirr cost liability to reflect changes in assumptions regarding the timing::

estimates are particularly importan of when the decommissioning of a plant will begin. Entergy consid-Energy Commodity Services segme ered the assumptions' as part of recent studies evaluating the.'

portions of River Bend and Granc economic effect of t&e plant in its region. The revised estimate

" base,, which could reduce the rev resulted in miscellaneous income of $20.3 million (Si1.9 million

- recovered for'the applicable portio0 net-of-tax).

the Energy Commodity Services s In the first quarterlof 2005, Entergy's Non-Utility Nuclear busi-merchant' generation assets are. su ness recorded a reduction of $26.0 million in its decommissioning market conditions arise.

cost liability in.'cnjunction with a new decommissioning cost

'In order to determine if Entergy study as a result of revised decommissioning costs and changes in of a long-lived asset that is to be hel 50s of the decommissioning of a ed in miscellaneous income of

'tax), reflecting the excess of the fount of undepreciated assets.

tergy Louisiana recorded a revi-ling cost liability in accordance' idy for Waterford 3 that reflected ant. The revised estimate result-n its decommissioning liability, uction in 'utility plant and a ted regulatory asset. :

rgy Arkansas recorded a revision

'-cost liability for ANO 2 in proval by the NRC of Entergy

nsion for the unit. The revised reduction in its decommissioning ding reduction in. the related tem Energy recorded a revision' st liability in accordance with a' for Grand Gulf. The revised reduction in the decommission-f, along with' a $39.7 million million reduction in the related nsolidated financial statements, evenues earned for energy deliv-ng. Each month the estimated ded as revenue and a receivable, versed. The difference between' I1 at the beginning of the period ount of unbilled revenue recog-ate recorded is primarily based during the unbilled period and at month, including fuel price.

.y be affected by the estimated nd end of each period and fuel anges in certain components of to estimates such, as line loss, ed customer usage, and assump-el cost recovery mechanism.

ASSETS in long-lived assets in all of its se assets against the market eco-rules for impairmient whenever' ents may exist. This evaluation iation and uncertainty, and these t in Entergy's U.S. Utility and nts. In the U.S. Utility segment, I Gulf are not included in rate

'enue that would otherwise be ns of those units' generation. In gment, Entergy's investments in-bject to impairment if adverse should recognize an impairment d and used, accounting standards

ENTERGY CORPORATION AND SUBSIDIARIES 2005 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued require that the sum of the expected undiscounted future cash flows from the asset be compared to the asset's carrying value. If the expected undiscounted future cash flows exceed the carrying value, no impairment is recorded; if such cash flows are less than the carrying value, Entergy is required to record an impairment charge to write the asset down to its fair value. If an asset is held for sale, an impairment is required to be recognized if the fair value (less costs to sell) of the asset is less than its carrying value.

<Electricity and gas'prices have been very volatile inii'recent years, and.

S

-this vola tli is expecte to continue.>

These estimates are based on a number of key assumptions, including:

" Future power andfuel prices - Electricity and gas prices have been very volatile in recent years, and this volatility is expected to continue. This volatility necessarily increases the imprecision inherent in the long-term forecasts of commodity prices that are a key determinant of estimated future cash flows. There is cur-rently an oversupply of electricity throughout the U.S., includ-ing much of Entergy's service territory, and it is necessary to project economic growth and other macroeconomic factors in order to project when this oversupply will cease and prices will rise. Similarly, gas prices have been volatile as a result of recent fluctuations in both supply and demand, and projecting future trends in these prices is difficult.

" Market value ofgeneration assets - Valuing assets held for sale requires estimating the current market value of generation assets. While market transactions provide evidence for this valuation, the market for such assets is volatile and the value of individual assets is impacted by factors unique to those assets.

" Future operating costs - Entergy assumes relatively minor annual increases in operating costs. Technological or regulatory changes that have a significant impact on operations could cause a significant change in these assumptions.

In the fourth quarter of 2005, Entergy recorded a charge of

$39.8 million ($25.8 million net-of-tax) as a result of the impairment of the Competitive Retail Services business' information technology systems. Entergy has decided to divest the retail electric portion of the Competitive Retail Services business operating in the ERCOT region of Texas and, in connection with that decision, management evaluated the carrying amount of the Competitive Retail Services business' information technology systems and determined that an impairment provision should be recorded.

In the fourth quarter of 2004, Entergy recorded a charge of approximately $55 million ($36 million net-of-tax) as a result of an impairment of the value of the Warren Power plant. Entergy con-cluded that the value of the plant, which is owned in the non-nuclear wholesale assets business, was impaired. Entergy reached this conclusion based on valuation studies prepared in connection with the Entergy Asset Management stock sale discussed above in "Results of Operations."

QUALIFIED PENSION AND OTHER POSTRETIREMENT BENEFITS Entergy sponsors qualified, defined benefit pension plans which cover substantially all employees. Additionally, Entergy currently provides postretirement health care and life insurance benefits for substantially all employees who reach retirement age while still working for Entergy. Entergy's reported costs of providing these benefits, as described in Note 10 to the consolidated financial state-ments, are impacted by numerous factors including the provisions of the plans, changing employee demographics, and various actuarial calculations, assumptions, and accounting mechanisms. Because of the complexity of these calculations, the long-term nature of these obligations, and the importance of the assumptions utilized, Entergy's estimate of these costs is a critical accounting estimate for the U.S. Utility and Non-Utility Nuclear segments.

Assumptions Key actuarial assumptions utilized in determining these costs include:

" Discount rates used in determining the future benefit obligations;

" Projected health care cost trend rates;

" Expected long-term rate of return on plan assets; and

" Rate of increase in future compensation levels.

Entergy reviews these assumptions on an annual basis and adjusts them as necessary. The falling interest rate environment and worse-than-expected performance of the financial equity markets over the past several years have impacted Entergy's funding and reported costs for these benefits. In addition, these trends have caused Entergy to make a number of adjustments to its assumptions.

In selecting an assumed discount rate to calculate benefit obliga-tions, Entergy reviews market yields on high-quality corporate debt and matches these rates with Entergy's projected stream of benefit pay~ments. Based on recent market trends, Entergy reduced its dis-count rate used to calculate benefit obligations from 6.25% in 2003 to 6.00% in 2004 and to 5.90% in 2005. Entergy reviews actual recent cost trends and projected future trends in establishing health care cost trend rates. Based on this review, Entergy increased its health care cost trend rate assumption used in calculating the December 31, 2005 accumulated postretirement benefit obligation to a 12% increase in health care costs in 2006 gradually decreasing each successive year, until it reaches a 4.5% annual increase in health care costs in 2012 and beyond.

In determining its expected long-term rate of return on plan assets, Entergy reviews past long-term performance, asset alloca-tions, and long-term inflation assumptions. Entergy targets an asset allocation for its pension plan assets of roughly 65% equity securi-ties, 31% fixed-income securities and 4% other investments. The target allocation for Entergy's other postretirement benefit assets is 51% equity securities and 49% fixed-income securities. Based on recent market trends, Entergy reduced its expected long-term rate of return on plan assets used to calculate benefit obligations from 8.75% for 2003 to 8.5% in 2004 and 2005. The assumed rate of increase in future compensation levels used to calculate benefit obli-gations was 3.25% in 2003, 2004, and 2005.

51

ENTERGY CORPORATION MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS Cost Sensitivity: A The following chart'reflects the sensitivity of qualified pension cost to changes in certain actuarial assumptions (dollars in thousands):

Impact on.

Impact on Actuarial

1 Change in 2005 Qualified Qualified Projected Assumption

___Assumption Pension Cost Benefit Obligation Increase/(Decrease)

D(.2i s10,56,4, '.,9 Discount rate (0.25%)

$105,990 Rate of return on plan assets (0.25%)

$ 4,705 Rate of increase in compensation 0.25%

S 5,510

$ 33,091 AND SUB continued SIDIARIEs 2005 The following' clhart reflects the sensitivity of postretirement-benefit cost to changes in certain actuarial assumptions (dollars in thousands)-

Impact on Impact on 2005 Accumulated Actuarial

- Change In Postretirement Postretirement Assumption Assumption Benefit Cost Benefit Obligation Increase/(Decrease)

Hlealth care cost trend 0.25%

S4,511 S24,536 Discount rate

-'1 (0.25%)

$3,082

$29,341 Each fluctuation above assumes that the other components of the calculation are held constant.

Accounting Mechanisms In accordance with SFAS No. 87, "Employers' Accounting for Pensions," Entergy ultilizes a number of accounting mechanisms that reduce the vol-tility of reported pension costs. Differences between actuarial assumptions and actual plan results are deferred and are amortized into cost only when the accumulated differences exceed 10% of the greater of the projected benefit obligation or the market-related value of plan assets. If necessar); the excess is amor-tized over the average remaining service period of active employees.

Additionally, Enteigy accounts for the effect of asset performance on pension expense 6ver a twenty-quarter phase-in period through a "market-related" %Ialue of assets calculation. Since the market-related value of assets recognizes investment gains or losses over a twenty-quarter period, the future value of assets will be impacted as previously deferred gains or losses are recognized. As a result, the losses that the pen'sion plan assets experienced in 2002 may have an" adverse impact on pension cost in future years depending on whether the actuarial losses at each measurement date exceed the 10% corridor in acco'rdance with SFAS 87.

Costs and Funding In 2005, Entergy's total qualified pension cost was SI 18.3 million.

Entergy anticipates 2006 qualified pension cost to increase to S131.6 million due to a decrease in the discount rate (from 6.00%

to 5.90%), actual return on plan assets less than 8.5%, and a plan amendment at Non-Utility Nuclear. Pension funding was S131.8 million for 2005, and under current law, is projected to be $349 mil-lion in 2006. This projection may change pending passage of pen-sion reform legislation. In January 2006, S109 million was funded.

$107 million of this contribution was originally planned for 2005; however, it was delayed as a result of the Katrina Emergency Tax Relief Act. The rise in pension funding requirements is due to declining interest rates and the phased-in effect of asset underper-formance from 2000 to 2002, offset by the Pension Funding Equity Act relief passed in April 2004.'

Entergy's qualified pension accumulated benefit obligation at December 31, 2005, 2004, and 2003 exceeded plan assets. As a result, Entergy was required to recognize an additional minimum

• pension liability as prescribed by SFAS 87. At December 31, 2005, Entergy increased its qualified pension plans' additional minimum pension liability to $406 million ($382 million net of related pension assets) from $244 million ($218 million net of related pension assets) at December 31, 2004. Other comprehensive income increased to

$15 million at December 31, 2005 from $6.6 million at December

• 31, 2004, after reductions for the unrecognized prior service cost, amounts recoverable in rates, and taxes. Net income for 2005, 2004, and 2003 was not affected.

Total postretirement health care and life insurance benefit costs for Entergy in 2005 were $83.7 million, including $24.3 million in savings due to the estimated effect of future Medicare Part D subsi-dies. Entergy expects 2006 postretirement health care and life insur-ance benefit costs to approximate S94.1 million, including a project-ed $27.8 million in savings due to the estimated effect of future Medicare Part D subsidies. The increase in postretirement health care and life insurance benefit costs is due to the decrease in the dis-count rate (from 6.00% to 5.90%) and an increase in the health care cost trend rate Used to calculate benefit obligations.

52

ENTERGY CORPORATION AND SUBSIDIARIES 2005 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS concluded OTIIER CONTINGENCIES As a company with multi-state domestic utility operations and a history of international investments, Entergy is subject to a number of federal, state, and international laws and regulations and other factors and conditions in the areas in which it operates, which potentially subject it to environmental, litigation, and other risks. Entergy periodically evaluates its exposure for such risks and records a reserve for those matters which are considered probable and estimable in accordance with generally accepted accounting principles.

Environmental Entergy must comply with environmental laws and regulations applicable to the handling and disposal of hazardous waste. Under these various laws and regulations, Entergy could incur substantial costs to restore properties consistent with the various standards.

Entergy conducts studies to determine the extent of any required remediation and has recorded reserves based upon its evaluation of the likelihood of loss and expected dollar amount for each issue.

Additional sites could be identified which require environmental remediation for which Entergy could be liable. The amounts of environmental reserves recorded can be significantly affected by the following external events or conditions:

a Changes to existing state or federal regulation by governmental authorities having jurisdiction over air quality, water quality, control of toxic substances and hazardous and solid wastes, and other environmental matters.

w The identification of additional sites or the filing of other com-plaints in which Entergy may be asserted to be a potentially responsible party.

m The resolution or progression of existing matters through the court system or resolution by the EPA.

Litigation Entergy has been named as defendant in a number of lawsuits involving employment, ratepayer, and injuries and damages issues, among other matters. Entergy periodically reviews the cases in which it has been named as defendant and assesses the likelihood of loss in each case as probable, reasonably estimable, or remote and records reserves for cases which have a probable likelihood of loss and can be estimated. Notes 2 and 8 to the consolidated financial statements include more detail on ratepayer and other lawsuits and management's assessment of the adequacy of reserves recorded for these matters. Given the environment in which Entergy operates, and the unpredictable nature of many of the cases in which Entergy is named as a defendant, however, the ultimate outcome of the litiga-tion Entergy is exposed to has the potential to materially affect the results of operations of Entergy, or its operating company subsidiaries.

Sales Warranty and Tax Reserves Entergy's operations, including acquisitions and divestitures, require Entergy to evaluate risks such as the potential tax effects of a trans-action, or warranties made in connection with such a transaction.

Entergy believes that it has adequately assessed and provided for these types of risks, where applicable. Any reserves recorded for these types of issues, however, could be significantly affected by events such as claims made by third parties under warranties, addi-tional transactions contemplated by Entergy, or completion of reviews of the tax treatment of certain transactions or issues by tax-ing authorities. Tax reserves not expected to reverse within the next year are reflected as non-current taxes accrued in the financial state-ments. Entergy does not expect a material adverse effect on earnings from these matters.

NEW ACCOUNTING PRONOUNCEMENTS In December 2005, Entergy implemented Financial Accounting Standards Board (FASB) Interpretation 47, "Accounting for Conditional Asset Retirement Obligations - an interpretation of FASB Statement No. 143", (FIN 47), effective as of that date, which required the recognition of additional asset retirement obligations other than nuclear decommissioning which are conditional in nature. The obligations recognized upon implementation represent Entergy's obligation to remove and dispose of asbestos at many of its non-nuclear generating units if and when those units are retired from commercial service and dismantled. For the U.S. Utility busi-ness, the implementation of FIN 47 for the rate-regulated business of the domestic utility companies was recorded as regulatory assets, with no resulting effect on Entergy's net income. Entergy recorded these regulatory assets because existing rate mechanisms in each jurisdiction allow for the recovery in rates of the ultimate costs of asbestos removal, either through cost of service or in rate base, from current and future customers. As a result of this treatment, FIN 47 is expected to be earnings neutral to the rate-regulated business of the domestic utility companies. Upon implementation of FIN 47 in December 2005, assets increased by $28.8 million and liabilities increased by $30.3 million for the U.S. Utility segment as a result of recording the asset retirement obligations at their fair values of

$30.3 million as determined under FIN 47, increasing utility plant by $2.7 million, increasing accumulated depreciation by SI.8 mil-lion, and recording the related regulatory assets of $27.9 million.

The implementation of FIN 47 for the portion of Entergy Gulf States not subject to cost-based ratemaking decreased earnings by

$0.9 million net-of-tax.

53

-Eu, ENTERGY, CORPORATION REPORT OF MANAGEMENT Management of Entergy Corporation and its subsidiaries' has.

prepared and is responsible for the financial statements and related financial information included in this document.' To meet this responsibility, management establishes and maintains a system of internal control designed to provide reasonable assurance regarding the preparation' and fair presentation of financial statements in.

accordance with" generally accepted accounting principles.- This system includes communication through' written 'policies and' procedures, an employee Code of Entegrity, and an organizational structure that provides, for appropriate division of responsibility'.

and the training 'of~personnel. This system is also tested by a comprehensive internal audit program.

Entergy management assesses the effectiveness of its' internal control over financial reporting on an annual basis. In making this'.

assessment,' management uses the criteria set forth by the' Committee of' Spnsoring Organizations of the Treadway-Commission (COSO6 in Internal Control'- Integrated Framework.-

Management acknowledges, however, that all internal control sys-tems, no matter ho%1 well designed, have inherent limitations and' can provide only, reasonable assurance with respect to financial statement preparaone'and presentation.

As a supplement to managements assessment, Entergy's inde-pendent auditors conduct an objective assessment of the degree to which management meets its responsibility for fairness of fin'ancial reporting and issue an attestation report on the adequacy of man-'

agement's assessment They evaluate Entergy's internal control over financial reporting and peformn such tests and other procedures as they deem necessary to reach and express an opinion on the fairness of the financial statements.

In addition, the Auýlit Committee of the Board of Directors, com-.

posed solely of indep'endent Directors, meets with the independent-"

auditors, internal auditors, management, and internal accountants,.

periodically to discuss internal controls, and auditing and financial

'reporting matters. The Audit Committee appoints the independent auditors annually,'seeks shareholder ratification of the appointment.

and reviews with the independent auditors the scope and results of the audit effort. Thei Committee also meets periodically with the independent auditorsl and the chief internal auditor' without man-agement present, providing free access to the Committee.

Based on management s assessment of internal controls using the COSO criteria, management believes that Entergy maintained effective internal control over financial reporting as of December 31, 2005. Management further believes that this assessment,'

combined with the policies and procedures noted above provide reasonable assurance that Entergy's financial statements are fairly and accurately presenited in accordance with generally accepted.

accountingprinciple.

J. WAYNE LEONARD LEO P. DENAULT Chief Executive Offic'*r Executive Vice President',

and Chief Financial Officer AND SUBSIDIARIES 2005 REPORT OF INDEPENDENT REGISTERED

'PUBLICACCOUNTING FIRM To the Board of Directors and Sharrholder' of Entergy Corporation:

-,\\e have audited the ac'companying consolidated balance sheets of Entergy, Corporation and. Subsidiaries (the Corporation) as of

- December 31, 2005 and 2004,' and the related consolidated state-.

ments of income; of retained earnings, comprehensive income, and.

paid-in capital; and of cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Corporation's management. Our responsi-

'bility is to express an opinion on these financial statements based on our audits; We did not audit the financial statements of Entergy-Koch, LP, the Corporation's investment in which is accounted for by the use of the equity method. The Corporation's equity in earnings of unconsolidated equity affiliates for the year ended December 3 1,.

2003 includes $180,110,000 fori Entergy Koch, LP, which earnings were audited by other auditors whose report (which as to 2003 included an explanatory paragraph concerning a change in accounting'

- for inventory held for trading purposes and energy trading contracts not qualifying: as derivatives) has been furnished to uS, and our "opinion for the year ended December 31, 2003, insofar as it relates

• to the amount audited by other auditors included for such company, is based solely on the report'of such other auditors.

'We conducted our audits in accordance with the standards of the Public. Company Accounting Oversight Board (United-States).

Those standards require that we' plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the' amounts and disclosures in the financial statements. An audit also includes assessing the accounting -

principles used and significant estimates 'made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a.

reasonable basis for our opinion.

In our opinion, based On our audits and the report of other audi-tors, such consolidated financial statements present fairly, in 'all material respects, the financial position of Entergy Corporation and Subsidiaries as of December 31, 2005 and 2004, and the results of their operations 'and their cash flows for each of the three'years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.'.

As discussed in Note 8 to the consolidated financial statements, in 2003 Entergy Corporation adopted the provisions of Statement

'of Financial Accounting Standards (SFAS) No. 143, Accounting for Assei Retirement Obligations.

Wet have also audited, in accordance with the standards of the Public.

Company Accounting Oversight Board (United States), the effective-ness of the Corporation's internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal' Control -

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report.

dated March 9,2006 expressed an unqualified opinion on management's.

assessment of the effectiveness of the Corporation's internal control.

over financial reportinig and an unqualified opinion on the effectiveness' of the Corporation's internal control over financial reporting.

DELOITTE & TOUCHE LLP New Orleans, Louisiana

'March 9, 2006

.1.

54

ENTERGY CORPORATION AND SUBSIDIARIES 2005 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Entergy Corporation:

We have audited management's assessment, included in the accom-panying Controls and Procedures - Internal Control over Financial Reporting, that Entergy Corporation and Subsidiaries (the Corporation) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Corporation's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with gener-ally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (I) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that trans-actions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting princi-ples, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisi-tion, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over finan-cial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.

Also, projections of any evaluation of the effectiveness of the inter-nal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that the Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Corporation main-tained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

WVe have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),

the consolidated financial statements as of and for the year ended December 31, 2005 of the Corporation and our report dated March 9, 2006 expressed an unqualified opinion on those financial statements.

DELOITTE & TOUCHE LLP New Orleans, Louisiana March 9, 2006 INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Entergy Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for Entergy. Entergy's internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of its financial statements presented in accordance with generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effec-tive can provide only reasonable assurance with respect to financial statement preparation and presentation.

Entergy management assessed the effectiveness of its internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework.

Based on management's assessment and the criteria set forth by COSO, management believes that Entergy maintained effective internal control over financial reporting as of December 31, 2005.

Entergy's registered public accounting firm has issued an attestation report on management's assessment of its internal control over financial reporting.

55

] 'ENTERGY Co CONSOLIDATED STATEMENTS OF INCOME RPORATION AND'SUBSIDIARIES 2005 In thousands, except share data, for the years ended December 31.

2005 2004 2003 OPERATING REVENUES:

Domestic electric S 8,446,830.1

$7,932,577.

$7,397,175 Natural gas 77 66V-208,499 186,176 Competitive businesses I,58I,757!

1,544,445 1,449,363 Total.

10,106,247 9,685,521 9,032,714 OPERATING EXPENSES:

Operating and Maintenance:

Fuel, fuel-related'expenses, and gas purchased for resale 2,176,015 2

1,987,217 Purchased power'.

.2,521,247 1,701,610 1,579,057 Nuclear refueling outage expenses 162,653 166,072 159,995 Provision for asset impairments and restructuring charges 55,000 (7,743)

Other operation and maintenance 2,122,206 2,268,332 2,423,951 Decommissioning" 143,121 149,529 146,100 Taxes other than income taxes 382,521 403,635 402,571 Depreciation and amortization 856,377:,'

893,574 849,771 Other regulatory credits - net (49,882)

(90,611)

(13,761)

Total

" 8,314,258 8,035,349 7,527,158 OPERATING INCOME 1,791,989",

1,650,172 1,505,556 OTHER INCOME:.'

Allowance for equity funds used during construction 45,736:

39,582 42,710 Interest and dividend income 150,479

-. 109,635.

87,334 Equity in earnings (loss) of unconsolidated equity affiliates 985 (78,727) 271,647 Miscellaneous - net 1

14,251 55,509 (76,376)

Total

,1 211,451 125,999 325,315 INTEREST AND OTHER CHARGES:

Interest on long-term debt 440,3 34!

463,384 485,964 Other interest-net 64,646 40,133-52,868 Allowance for borrowed funds used during construction (29,376)::

(25,741)

(33,191)

Total 475,604' 477,776 505,641 INCOME FROM CONTINUING OPERATIONS BEFORE INCOME ITAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 1,527,836,1 1,298,395 1,325,230 Income taxes "559,2844 365,305 497,433 INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 968,552 933,090 827,797 LOSS FROM DISCONTINUED OPERATIONS (net of income tax expense (benefit) of $(24,051), $603, and S(7,359), respectively)

(.4,794)

(41)

(14,404)

CUMULATIVE EFFECT OF ACCOUNTING CIHANGES" (net of income tax expense of $89,925) 137,074 CONSOLIDATED, NET INCOME 923,758,;

933,049 950,467 Preferred dhidend requirements and other.

25,427 23,525 23,524 EARNINGS APPLICABLE TO COMMON STOCK S

898,331 S 909,524

$ 926,943 Basic earnings (loss) per average common share:

Continuing operations S 4.49, S4.01 S3.55 Discontinued operations S(0.21)i S(0.06)

Cumulative effect ofaccounting changes*-

S 0.60 Basic earnings per average common share S4.27

$4.01 S4.09 Diluted earnings (loss) per average common share:

• Continuing operationis S 4.40%

$ 3.93

$ 3.48 Discontinued operations S(0.2 1)i 5(0.06)

Cumulative effect ofaccounting changes

$ 0.59 Diluted earnings per a'erage common shareS 4.19 S3.93 S 4.01 Dividends declared per common share S2.$161

$1.89 S 1.60 Basic average number of common shares outstanding 2 1 0,1 4 1,8 8 7

-226,863,758 226,804,370 Diluted average number of common shares outstanding 214,441,362 231,193,686 231,146,040 Ste Notes to Consolidated Financial Statements.

56 IC I,.-*

4,

'p LI I.

1 Is 4.

I

• II I

'4 p1

ENTERGY CORPORATION AND SUBSIDIARIES 2005 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME, AND PAID-IN CAPITAL In thousands, for the years ended December 31, 2005 2004 2003 RETAINED EARNINGS Retained Earnings - Beginning of period

$4,984,302

$4,502,508 S3,938,693 Add: Earnings applicable to common stock 898,331.

.898,331 909,524 S 909,524 S926,943 S926,943 Deduct:

rII Didends declared on common stock 453,657 427,740 362,941 Capital stock and other expenses 569 (10) 187 Total 454,226 -

427,730 363,128 Retained Earnings - End of period 1$5,428,407

$4,984,302 S4,502,508 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (NET OF TAXES):

Balance at beginning of period:

L-I'.,.

Accumulated derivative instrument fair value changes S(141,411)$

(25,811)

S 17,313 Other accumulated comprehensive income (loss) items "47,958 "

18,016 (39,673)

Total (93,453)

(7,795)

(22,360)

Net derivative instrument fair value changes arising during the period (net of tax (benefit) of $(159,236),

$(74,082), and S(27,862))

-(251,203)

(251 203)

(115,600)

(115,600)

(43,124)

(43,124)

Foreign currency translation (net of tax expense of 1,

$211, S659, and $1,459) 6002 1,882 1,882 4,169 4,169 Minimum pension liability (net of tax expense (benefit) of S(9,176), SI,875, and S503)

(15,773)

(15,773)"

2,762 2,762 1,153 1,153 Net unrealized investment gains (net of tax expense of

$10,573, S16,599, and $33,422)

"16,008 16,008!

25,298 25,298 52,367 52,367 Balance at end of period:

Accumulated derivative instrument fair value changes (392,614)

(141,411)

(25,811)

Other accumulated comprehensive income items 48,795 47,958 18,016 Total tS (343,819).-

$ (93,453)

(7,795)

Comprehensive Income

$647,965 1

$ 823,866

$941,508 PAID-IN CAPITAL Paid-in Capital - Beginning of period

$4,835,375 S4,767,615

$4,666,753 Add (Deduct):

Issuance of equity units (39,904)

Common stock issuances related to stock plans 166 67,760 100,862 Paid-in Capital - End of period 1$4,817,637

$4,835,375

$4,767,615 See Notes to Consolidated Financial Statements.

57

.ENTE CONSOLIDATED'BALANCE SHEETS lIT ZRGY CORPORATION AND SUBSIDIARIES.2005 In thousands, as of December 31, 2005 2004 ASSETS CURRENT ASSETS:

Cash and cash equivalents:

Cash "j

S 221,773 S

79,136 Temporary cash investments - at cost, which approximates market 361,047 540,650 Total cash and cash equivalents 582,820 619,786 Other temporary investments 187,950 Note receivable - Entergy New Orleans DIP loan

.90,000 Notes receivable 3,227 3,092 Accounts receivable:

Customer

'732,455 435,191 Allowance for doubtful accounts (30,805)

(23,758),

Other 356,414 342,289 Accrued unbilled revenues 477,570 460,039 Total receivables I 1,535,634-1,213,761 Deferred fuel costs 543,927 4 1 55,069 Accumulated deferred income taxes

.!76,899 Fuel inventory-at

-average cost 206,195 127,251 Materials and supplies I at average cost 610,932.'

569,407 Deferred nuclear refueling outage costs 157,764 107,782 Prepayments and other 325,795.j 116,279 Total 4,056,294 3,077,276 OTUER PROPERTY'AND INVESTMENTS:

Investment in affiliates - at equity

- 296,784 231,779 Decommissioning trust funds

- 2,606,765.

2,453,406' Non-utility property - at cost (less accumulated depreciation) 228,833.

.i 219,717 Other

` 81,535 90,992 Total 3,213,917 2,995,894 PROPERTY, PLANT AND EQUIPMENT:

,7 Electric 29,161,027 29,053,340 Property under capital lease 727,565, 738,554 Natural gas 86,794 262,787.

Construction work in progress 1,524,085 1 1,197,551 Nuclear fuel underc-apital lease 271,615 262,469 Nuclear fuel 436,646 320,813 Total property, plarit and equipment 32,207,732".

31,835,514 Less-accumulated'depreciation and amortization 13,010,687 i 13,139,883 Property, plant and'equipment - net 19,197,045 18,695,631 DEFERRED DEBITS AND OTHER ASSETS:

Regulatory assets:

SFAS 109 regulatory asset-net 735,221 746,413 Other regulatory assets 2,133,724:1 1,429,261 Deferred fuel costs 1 120,489 30,842 Long-term receivables:'

25,572 39,417, Goodwvill 377,172 377,172 Other r 991,835 918,871 Total 4,384,013 -4 3,541,976 TOTAL ASSETS,

S30,851,269.'i

$28,310,777 SeeMoes o onsfiai'd ia Saeet 58 I

-I

ENTERGY CORPORATION AND SUBSIDIARIES 2005 CONSOLIDATED BALANCE SHEETS In thousands, as of December 31.

2005 2004 LIABILITIES AND SIIAREIIOLDERS' EQUITY CURRENT LIABILITIES:

Currently maturing long-term debt S

103,517 S

492,564 Notes payable 40,041 193 Accounts payable 1,655,787 896,528 Customer deposits 222,206 222,320 Taxes accrued 188,159 224,011 Accumulated deferred income taxes 143,409 Nuclear refueling outage costs 15,548 Interest accrued 154,855 144,478 Obligations under capital leases 130,882 133,847 Other 473,510 218,442 Total 3,127,914 2,332,383 NON-CURRENT LIABILITIES:

Accumulated deferred income taxes and taxes accrued 5,279,228 5,067,381 Accumulated deferred investment tax credits

. 376,550 399,228 Obligations under capital leases

.175,005 146,060 Other regulatory liabilities 408,667 329,767 Decommissioning and retirement cost liabilities

_1,923,971 2,066,277 Transition to competition 79,101 79,101 Regulatory reserves 18,624 103,061 Accumulated provisions 556,028 549,914 Long-term debt 8,824,493 7,016,831 Preferred stock with sinking fund 13,950 17,400 Other 1,879,017 1,541,331 Total

- 19,534,634 17,316,351 Commitments and Contingencies Preferred stock without sinking fund 445,974 365,356 SIIAREIHOLDERS' EQUITY:

Common stock, S.01 par value, authorized 500,000,000 shares; issued 248,174,087 shares in 2005 and in 2004 2,482 2,482 Paid-in capital 4,817,637 4,835,375 Retained earnings 5,428,407 4,984,302 Accumulated other comprehensive loss (343,819)

(93,453)

Less - treasury stock, at cost (40,644,602 shares in 2005 and 31,345,028 shares in 2004) 2,161,960 1,432,019 Total 7,742,747 8,296,687 TOTAL LIABILITIES AND SIHAREIIOLDERS' EQUITY

$30,851,269 S28,310,777 See Notes to Consolidated Financial Statements.

59

" "ENTERGY CORPORATION AND SUBSIDIARIEs 2005 CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands, for the years ended December 31, OPERATING ACTIVITIES:

Consolidated net incomije Adjusmients to reconcile consolidated net income to net cash flow prod6ded by opeting activities:

Reserve for regulatory adjustments Other regulatory credits - net Depreciation, amortization, and decommissioning Deferred income taxes and investment tax credits Cumulative effect of accounting changes Equity in earnings (loss) of unconsolidated equity affiliates -

net of dividends Provision for asset impairments

• and restructuring charges Changes in working capital:

Receivables F

Fuel inventory Accounts payable Taxes accrued Interest accrued Deferred fuel.

j Other working capital accounts Provision for estimated losses and reserves Changes in other regulatory assets Other Net cash flow provided by operating activities 2005 S 923,758 (82,033)

(49,882)'

1,001,852 626,813 4,315 39,767

,I (367,351) -.

'(83,125).1 303,194

.I

,(172,315) 15,133

',(236,801)..'

(45,653)

(3,704)-

(311,934)

(94,226) 1,467,808 (1,458,086) 45,736 (314,414) 184,403 -j (162,075) 9,905 (1,591,025) 1,778,975

.944,253 (1,039,824)

(390,456)

S S

933,049 33,533 (90,611) 1,045,122 275,458 608,141 55,000

(210,419)

(16,769) 95,306 75,055 5,269 213,627 41,008 (18,041) 48,626 (164,035) 2,929,319 2004 tr) 2003 950,467 13,090 (13,761).

996,603 1,189,531 (137,074)

(176,036)

(7,743)

(140,612)

(14,015)

(60,164)

(882,446)

(35,837)

(33,874) 16,809 196,619 22,671 121,592 2,005,820 1,568,943)

'i 42,710 (224,308) r 150,135 25,987 (71,438) 172,187-(613,464) 378,664 A

729,440 (820,958)-

(156,446) 11 In7U INVESTING ACTIVITIES:

Construction/capital expenditures Allowance for equity funds used during construction Nuclear fuel purchases Proceeds from sale/leasback of nuclear fuel Proceeds from sale of assets and businesses Payment for purchise of plant Investment in non-utility properties Decrease in other investments Purchases of other temporary investments Liquidation of other, temporary investments Proceeds from nuclear decommissioning trust fund sales Investment in nuclear decommissioning trust funds Other regulatory inestments Other I

Net cash flow used in investing activities SCC Notes to Consolidatcd FInndal Statrm"nts.

(1,410,610) 39,582 (238,170)

• 1 109,988 75,430 (6,420) 383,498-(1,629,500) 1,676,350

• 679,466 (769,273)

(53,566)

(1,143,225)

(I k1 9 9 "0U) 1.967.930) 11007 60M i 60

ENTE.RGY CORPOR~ATION AND) SUBSIDIARIEs 2005 CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands, for the years ended December 31, 2005 2004 2003 FINANCING ACTIVITIES:

Proceeds from the issuance of:

Long-term debt Preferred stock Common stock and treasury stock Retirement of long-term debt Repurchase of common stock Redemption of preferred stock Changes in credit line borrowings - net Dividends pail:

Common stock Preferred stock 4,302,570 1J27,995

- ".106,068

..(2,689,206)

(*

3,719) 39,850

• (25.472)1 3,653,478 170,237 (4,022,548)

(1,017,996)

(3,450)

(154)

(427,901)

(23,525) 4,596,189 217,521 (5,284,917)

(8,135)

(3,450)

(362,814)

(23,524)

Net cash flow provided by (used in) financing activities

'496,390 1 (1,671,859)

(869,130)

Effect of exchange rates on cash and cash equivalents

(

- (602)j (1,882) 3,345 Net increase (decrease) in cash and cash equivalents (29,012) 112,353 (827,895)

Cash and cash equivalents at beginning of period

" ' 619,786 507,433 1,335,328 Effect of the deconsolidation of Entergy New Orleans on cash and cash equivalents Cash and cash equivalents at end of period S":-582,820 I S 619,786 S 507,433 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid (luring the period for:

Interest - net of amount capitalized S 461,345 S 477,768 S

552,017 Income taxes 116,072 S

28,241 S

188,709 See Votes to Consolidated Financial Statements.

61

ENTERGY-CORPORATION"A NOTES to CONSOLIDATED FINANCIAL STATEMENTS NOTE 1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of Entergy:Corporation and its direct and indirect sub-sidiaries. As required by generally accepted accounting principles, all signiflcant intercompany transactions have been eliminated in the consolidated financial statements. The domestic utility compa=-

nies and System, Energy, maintain, accounts in accordance with Federal Energy Regulatory Commission (FERC) and other regula-tory guidelines. Certain previously reported amounts have been reclassified to confor'm' to current classifications, with no effect on net income orsharehblders' equity. --

S ['

USE OF ESTIMATES IN TIHE PREPARATION OF FINANCIAL STATEMENTS" The preparation of Ezitergy Corporation's consolidated financial state-ments, in confornity'with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contin-.

gent assets and liabilities and the reported amounts of revenues and expenses. Adjustments to the reported amounts of assets and liabilities may be necessary in the future to the extent that future estimates or.

actual results are diffezrent from the estimates used.

4'.

• REVENUES AND FUEL COSTS-The domestic utiuitycompanies generate, transmit, and distribute electric power primarily to retail customers in Arkansas, Louisiana, including the City of New Orleans, Mississippi, and Texas. Entergy Gulf States distributes gas to retail customers i and around Baton Rouge, Louisiana 'and' Entergy New Orleans distributes gas to retail.

customers in the' C~ty of New Orleans. Entergy's Non-Utility Nuclear and Energy Commodity Services segments derive almost all of their revenue from sales of electric power generated by plants owned by them.

Entergy recognizes revenue from electric power and gas sales when it delivers power or gas to its customers. To the extent that, deliveries have occurred but a bill has not been issued, the domestic utility companies accrue an estimate of the revenues for energy delivered since the latest billings. Entergy calculates the estimate based upon several factors including billings through the last billing cycle in a month, actual generation in the month, historical line loss factors, and prices in effect in the domestic utility companies' various jurisdictions. Each month the estimated unbilled revenue amounts are reco-ded as revenue and a receivable, and the prior.:

month's estimate is reversed. Therefore, changes in price and volume differences resulting from factors such as weather affect the:

calculation of unbille(d revenues from one period to the next, and may result in variabily in reported revenues from one period to the next as prior estimatei are so recorded and reversed.

'I.'

ND )SUBSIDIARIES 2005 The domestic utility companies' rate schedules include either fuel adjustment clauses or fixed fuel factors, which allow either current "

recovery in billings to customers or deferral of fuel costs until the costs are billed to'customers. Because the fuel adjustment clause mechanism allows monthly adjustments to recover fuel costs, Entergy Louisiana, Entergy New Orleans, and the Louisiana portion of Entergy Gulf States include a component of fuel cost recovery in 'their unbilled revenue calculations. Where the fuel component of revenues is billed based on a pre-determined fuel cost (fixed fuel

]

factor), the fuel factor remains in effect until changed as part of a general rate case, fuel 'reconciliation, or fixe& fuel factor filing.-

Entergy Mississippi's fuel factor includes an energy cost rider that is adjusted quarterly. As discussed in Note 2 to the consolidated finan-cial statements, the Mississippi Public Service Commission (MPSC)'

approved Entergy Mississippi's deferral of the refund of over-recov-eries for the third quarter of 2004 that would have been refunded in the first quarter of 2005. The deferred amount plus carrying charges was refunded in the second and third quarters of 2005. In the case of Entergy Arkansas and the Texas portion of Entergy Gulf States, their fuel under-recoveries are treated in the cash flow statements as regulatory investments because those companies are allowed by their regulatory jurisdictions to recover the fuel cost regulatory asset over longer than a twelve-month period, and the companies earn a carrying charge on the under-recovered balances.

System Energy's operating revenues are intended to recover from Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans operating expenses and capital costs attribut-able to Grand Gulf. The capital costs are computed by allowing a return on System Energy's common equity funds allocable to its net investment in' Grand Gulf, plus System Energy's effective interest cost for its debt allocable to its investment in Grand Gulf.

PROPERTY, PLANT, AND EQUIPMENT.

Property, plant, and equipment is stated at original cost. For the domestic utility. companies and System Energy, the original cost of plant retired 'or removed, less salvage; is charged to' accumulated depreciation. Normal maintenance, repairs, and minor replacement costs are charged to operating expenses. Substantially, all of the domestic utility companies' and System Energy's plant is subject to mortgage liens.,

ris, a

Electric plant includes the portions of Grand Gulf and Waterford-3 that have been sold and leased back. For financial reporting purposes, these sale and leaseback arrangements are reflected as financing transactions.

62

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued Net property; plant, and equipment (including property under capital lease and accumulated amortization) by business segment and functional category, as of December 31, 2005 and 2004, is shown below (in millions):

Non-U.S.

Utility Utility Nuclear Non-U.S.

Utility Utility Nuclear 2005 Production Nuclear Other Transmission Distribution Other Entergy S 7,390 1,590 2,394-4,599 992 S 5,955 1,321 2,394 4,599 989

$1,435 All Other 2004 Production Nuclear 269 Other Transmission Distribution 3

Other Entergy All Other

$ 7,308 1,533 2,182 4,672 1,123

$ 5,987 1,228 2,182 4,672 1,115

$1,321 305 8

Construction work in progress Nuclear fuel (leased and owned) 1,524 Construction work 1,268 232 24 in progress Nuclear fuel 373 335 (leased and owned) 1,198 924 244 30 708 583 297 286 Property; plant, and equipment - net

$19,197

$16,899

$2,002

$296 Asset retirement obligation 97 97 Property, plant, and equipment-net

$18,696

$16,502

$I,851

$343 Depreciation is computed on the straight-line basis at rates based on the estimated service lives of the various classes of property.

Depreciation rates on average depreciable property approximated 2.7% in 2005 and 2.8% in 2004 and 2003. Included in these rates are the depreciation rates on average depreciable utility property of 2.6% in 2005, 2.7% in 2004, and 2.8% in 2003 and the depreciation rates on average depreciable non-utility property of 3.2% in 2005, 3.8% in 2004, and 3.3% in 2003.

Non-utility property - at cost (less accumulated depreciation) is reported net of accumulated depreciation of $162.2 million and

$152.8 million as of December 31, 2005 and 2004, respectively.

JOINTLY-OWNED GENERATING STATIONS Certain Entergy subsidiaries jointly own electric generating facilities with third parties. The investments and expenses associated with these generating stations are recorded by the Entergy subsidiaries to the extent of their respective undivided ownership interests. As of December 31, 2005, the subsidiaries' investment and accumulated depreciation in each of these generating stations were as follows (S in millions):

Total Megawatt Accumulated Generating Stations Fuel-Type Capability"'

Ownership Investment Depreciation U.S. Utility:

Grand Gulf Unit I Nuclear 1,270 90.00%m S3,680

$1,890 Independence Units 1 and 2 Coal 1,630 47.90%

$ 466 White Bluff Units I and 2 Coal 1,635 57.00%

$ 430 Roy S. Nelson Unit 6 Coal 550 70.00%

$ 405 Big Cajun 2 Unit 3 Coal 575 42.00%

$ 233 Energy Commodity Services:

Harrison County Gas 550 60.90%

S 179 Warren Gas 300 75.00%

24

(!) "Total Megawatt Capability" is the dependable load carrying capability as demonstrated under actual operating conditions based on the primary fuel (assuming no curtailments) that each station was designed to utilize.

(2) Includes an 11.5% leasehold interest held by System Energy. System Energy's Grand Gulf lease obligations are discussed in Note 9 to the consolidated financial statements.

63

$ 260

$ 277

$ 249

$ 134 10 9

F ENTERGY CORPORATION NOTES to CONSOLIDATED FINANCIAL STATEMENTS conti; NUCLEAR REFUEING OUTAGE COSTS.'.

Entergy records nuclear refueling outage costs in accordance with regulatory treatment and the matching principle. These refueling outage expenses are incurred to prepare the units to operate for the next operating cycle mithout having to be taken off line. Except for the River Bend pland, the costs are deferred during the outage and-amortized over the period to the next outage. In accordance with the -

regulatory treatmentlof the River Bend plant, River Bend's costs are accrued in advance and included in the cost of service used to estab&

lish retail rates. Entergy Gulf States relieves the accrued liability when it incurs costs during the next River Bend outage.

ALLOWANCE FOR: FUNDS USED DURING' CONSTRUCTION (AFUDC)

AFUDC represents the approximate net composite interest cost of borrowed funds and'a reasonable return on the equity funds used for.

construction in 'the! U.S. Utility' segment. Although AFUDC increases both the pla'nt balance and earnings, it is realized in cash through depreciation' provisions included in rates.

INCOME TAXES:

Entergy Corporation and the majority of its subsidiaries file a United States consolidated federal income tax return. Entergy, Louisiana, LLC, form1ied December 31, 2005, is not a member-of the consolidated group ýnd files a separate federal income tax return.:

Income taxes are allocated to the subsidiaries in proportion to their contribution to consolidated taxable income. In accordance.

with Statement 'of Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes," deferred income taxes are recorded for all temporary diffi'rences between the book and tax basis of assets and liabilities, and for'certain credits available for carryforward.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates in the period in which the tax or rate was enacted.

Investment tax credits are deferred and amortized based upon the average useful life of the related property, in accordance with ratemaking treatment.

I:...

AND" SUBSIDIARIES 2005 EARNINGS PER SHARE The following table presents Entergy's basic and diluted earnings per share (EPS) calculation included on the consolidated income statement (in millions, except per share data):

For the years ended December 31, 2005'

-2004 2003 S/share S/share S/share Income from continuing operations before cumulative' effect of accounting changes

$943.1 S909.6 S804.3 Average number of common sharesoutstanding-basic 210.1

$4.49 226.9 $4.01, 226.8 S3.55 Average dilutive effect oF" Stock OptionsW 4.0 (0.085) 4.1 (0.071) 4.1 (0.063)

Deferred Units 0.3 (0.006) 0.2 (0.004) 0.2 (0.003)

Average number of common shares outstanding-diuted 214.4 S4.40 231.2 $3.93 231.1 S3.48 Earnings applicable to common stock S898.3 S

909.5

$926.9 Average number of common shares outstanding-basic

. 210.1. S4.27 226.9 $4.01 226.8 $4.09

• Average dilutive effect of Stock Options0 4.0 (0.081) 4.1 (0.071) 4.1 (0.073)

Deferred Units' 0.3 (0.00") 02 (0.004) 0.2 (0.004)

Average number of common shares outstanding-diluted 214.4 54.19 231.2

$3.93 231.1 S4.01 (1) Options to ptrchase approximately 1,727,579 common stock shares in 2005, 3,319 common stock shares in 2004, and 15,231 common stock shares in 2003 at various prices =ere ouwtanding at the end of those yearr that were not included in the computation of diluted earnings per share because the exercise prices were greater than the common share average market price at the end of eacb of the.ye-ar presented.

STOCK-BASED COMPENSATION PLANS Entergy-grants stock options to key employees of the Entergy sub-sidiaries, which is described more fully in Note 7 to the consolidated financial statements. Effective January 1, 2003, Entergy prospec-tively 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 2004 and 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effec-tive date of SFAS 123. There is no pro forma effect for 2005 because all non-vested awards are accounted for at fair value. Stock-based compensation expense included in earnings applicable to common stock, net of related tax effects, for 2005 is S7.8 million. The follow-ing 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 thousands, except per share data):

For the years ended December 31, 2004

'2003 Earnings applicable to common stock

$909,524

$926,943 Add back: Stock-based compensation expense included in earnings applicable to common stock, net of related tax effects 5,141, 2,818 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects 16,668 24,518 Pro forma earnings applicable to common stock

$897,997

$905,243 Earnings per average common share:

Basic S $4.01

$4.09 Basic-pro forma

"$3.96

$3.99 Diluted S3.93

$4.01 Diluted - pro forma S3.88

$3.92 A.

64

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued APPLICATION OF SFAS 71 The domestic utility companies and System Energy currently account for the effects of regulation pursuant to SFAS 71, "Accounting for the Effects of Certain Types of Regulation." This statement applies to the financial statements of a rate-regulated enterprise that meets three criteria. The enterprise must have rates that (i) are approved by a body empowered to set rates that bind customers (its regulator); (ii) are cost-based; and (iii) can be charged to and collected from customers. These criteria may also be applied to separable portions of a utility's business, such as the generation or transmission functions, or to specific classes of customers. If an enterprise meets these criteria, it capitalizes costs that would other-wise be charged to expense if the rate actions of its regulator make it probable that those costs will be recovered in future revenue. Such capitalized costs are reflected as regulatory assets in the accompanying financial statements. A significant majority of Entergy's regulatory assets, net of related regulatory and deferred tax liabilities, earn a return on investment during their recovery periods, or Entergy expects that they will earn a return. SFAtS 71 requires that rate-regulated enterprises assess the probability of recovering their regulatory assets.

Mhen an enterprise concludes that recovery of a regulatory asset is no longer probable, the regulatory asset must be removed from the entity's balance sheet.

SFAS 101, "Accounting for the Discontinuation of Application of Financial Accounting Standards Board (FASB) Statement No. 71,"

specifies how an enterprise that ceases to meet the criteria for appli-cation of SEAS 71 for all or part of its operations should report that event in its financial statements. In general, SFAS 101 requires that the enterprise report the discontinuation of the application of SFAS 71 by eliminating from its balance sheet all regulatory assets and liabilities related to the applicable segment. Additionally, if it is determined that a regulated enterprise is no longer recovering all of its costs and therefore no longer qualifies for SFAS 71 accounting, it is possible that an impairment may exist that could require further write-offs of plant assets.

Emerging Issues Task Force (EITF) 97-4: "Deregulation of the Pricing of Electricity - Issues Related to the Application of EASB Statements No. 71 and 101" specifies that SFAS 71 should be dis-continued at a date no later than when the effects of a transition to competition plan for all or a portion of the entity subject to such plan are reasonably determinable. Additionally, EITF 97-4 promul-gates that regulatory assets to be recovered through cash flows derived from another portion of the entity that continues to apply SFAS 71 should not be written off; rather, they should be considered regulatory assets of the segment that will continue to apply SEAS 71.

See Note 2 to the consolidated financial statements for discussion of transition to competition activity in the retail regulatory jurisdic-tions served by the domestic utility companies. Only Texas has a currently enacted retail open access law, but Entergy believes that significant issues remain to be addressed by regulators, and the enacted law does not provide sufficient detail to reasonably deter-mine the impact on Entergy Gulf States' regulated operations.

CASH AND CASH! EQUIVALENTS Entergy considers all unrestricted highly liquid debt instruments with an original or remaining maturity of three months or less at date of purchase to be cash equivalents. Investments with original maturities of more than three months are classified as other tempo-rary investments on the balance sheet.

OTHER TEMPORARY INVESTMENTS The consolidated balance sheet as of December 31, 2004 reflects a reclassification from cash and cash equivalents to other temporary investments of S188 million of instruments used in Entergy's cash management program. A corresponding change was made to the consolidated statement of cash flows for the years ended December 31, 2004 and 2003 resulting in reductions ofS188 million and S185 mil-lion, respectively, in the amounts presented as cash and cash equiva-lents as of December 31, 2004 and December 31, 2003. This reclas-sification is to present certain highly-liquid auction rate securities as short-term investments rather than as cash equivalents due to the stated tenor of the maturities of these investments. Entergy actively invests its available cash balance in financial instruments, which prior to September 2005 included auction rate securities that have stated maturities of 20 years or more. The auction rate securities provided a high degree of liquidity through features such as 7 and 28 day auctions that allow for the redemption of the securities at their face amount plus earned interest. Because Entergy intended to sell these instruments within one year or less, typically within 28 days of the balance sheet date, they are classified as current assets.

As of December 31, 2005, Entergy no longer holds any of these auction rate securities.

INVESTMENTS Entergy applies the provisions of SEAS 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. Because of the ability of the domestic utility companies and System Energy to recover decommissioning costs in rates and 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/(iosses) on investment securities in other regulatory liabili-ties/assets. For the nonregulated portion of River Bend, Entergy Gulf States has recorded an offsetting amount of unrealized gains/(losses) in other deferred credits. 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 in the accumulated other comprehensive income component of share-holders' equity because these assets are classified as available for sale.

See Note 15 to the consolidated financial statements for details on the decommissioning trust funds. Entergy records an impairment on investments when the fair market value is less than the carrying value of the asset and that condition is considered other than temporary.

EQUITY METHOD INVESTEES Entergy owns investments that are accounted for under the equity method of accounting because Entergy's ownership level results in significant influence, but not control, over the investee and its oper-ations. Entergy records its share of earnings or losses of the investee based on the change during the period in the estimated liquidation value of the investment, assuming that the investee's assets were to be liquidated at book value. In accordance with this method, earnings are allocated to owners or members based on what each partner would receive from its capital account if, hypothetically, liquidation were to occur at the balance sheet date and amounts distributed were based on recorded book values. Entergy discontinues the recognition of losses on equity investments when its share of losses equals or exceeds its carrying amount of investee plus any advances made 65

t r ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued or commitments to provide additional financial support. See Note 12 TRANSITION TO COMIPETITION LIABILITIES to the consolidated financial statements for additional information In conjunction with electric utility industry restructuring activity in regarding Entergy's equity method investments.

Texas, regulatory mechanisms were established to mitigate potential stranded costs. Texas restructuring legislation allowed depreciation DERIVATIVE FINANCIAL INSTRUMENTS on transmission and distribution assets to bedirected toward gener-AND COMMODITY" DERIVATIVES ation assets. The liability recorded as a result of this mechanism SFAS 133, "Accounting for Derivative Instruments and Hedging is classified as "transition to competition" deferred credits on the Activities," requires that all derivatives be recognized in the balance balance sheet sheet, either as assets or liabilities, at fair value, unless they meet the' normal purchase, normal sales criteria. The changes in the fair value.

REACQ UIRED DEBT of recognized derivatives are recorded each period in current earnings The premiums and costs associated with reacquired debt of the or other comprehensve income, depending on whether a derivative domestic utility companies and System Energy (except that portion is designated as paIrt of a hedge transaction and the type of allocable to the deregulated operations of Entergy Gulf States) are hedge transaction. ]

included in regulatory assets and are being amortized over the life of Contracts for commodities that will be delivered in quantities the related new issuances, in accordance with ratemaking treatment.

expected to be useý or sold in the ordinary course of business, including certain purchases and sales of power and fuel, are not FOREIGN CURRENCY TRANSLATION classified as derivativ'es. These contracts are exempted under the All assets and liabilities of Entergy's foreign subsidiaries are translated normal purchase, nor-mal sales criteria of SFAS 133. Revenues and into U.S. dollars at the exchange rate in effect at the end of the period.

expenses from these contracts are reported on a gross basis in the Revenues and expenses are translated at average exchange rates appropriate revenue and expense categories as the commodities are prevailing during the period. The resulting translation adjustments.

received or deliveredi:

are reflected in the comprehensive income component of shareholders' For other contracts for commodities in which Entergy is hedging equity. Current exchange rates are used for U.S. dollar disclosures of the variability of casl* flows related to a variable-rate asset, liability, future obligations denominated in foreign currencies.

or forecasted transautions that qualify as cash flow hedges, the changes in the fair value of such derivative instruments are reported NEW ACCOUNTING PRONOUNCEMENTS in other comprehensive income. To qualify for hedge accounting, SFAS 123R, "Share-Based Payment" was issued in December 2004 the relationship between the hedging instrument and the hedged and is effective for Entergy in the first quarter of 2006. SFAS 123R item must be documented to include the risk management objective requires all employers to account for share-based payments at fair and strategy and, at inception and on an ongoing basis, the effective-value and also provides guidance on determining the assumptions to ness of the hedge in 9ffsetting the changes in the cash flows of the estimate fair value. SFAS 123R also provides guidance on how to item being hedged. Gains or losses accumulated in other compre-account for differences in the amounts of deferred taxes initially hensive income'are ryclassified as earnings in the periods in which recorded when the options are recorded as expense and the amount earnings are affected by the variability of the cash flows of the of expense deducted on a company's tax return when the options are hedged item. The ineffecve portons of all hedges are recognized actually exercised. Entergy began voluntarily expensing its stock in current-period'earnings.

options effective January'l, 2003 in accordance wvith SFAS 148, "Stock-Based Compensation - Transition and Disclosure." Entergy IMPAIRMENT OF ONG-LIVED ASSETS.

is in the process of finalizing its evaluation of the reporting and dis-Entergy periodically reviews long-lived assets held in all of its busi-closure issues resulting from the adoption of SFAS 123R but does ness segments whenever events or changes in circumstances indicate not expect the effect of the adoption of this standard to be material that recoverability ofethese assets is uncertain. Generally, the deter-:

to Entergy's financial position or results of operations.

mination' of recoverability is based on the undiscounted net cash, As discussed in Note 8 to the consolidated financial statements, flows expected to result from such operations and assets. Projected Entergy adopted FIN 47, "Accounting for Conditional Asset net cash flows depe~id on the future operating costs associated.

• Retirement Obligations" during the fourth quarter of 2005. FIN 47 with the assets, the-efficiency and availability of the assets and requires that a liability be recorded currently for costs associated generating units, and the future market and price for energy over.

with a legal obligation to perform an asset retirement obligation the remaining life o0 the assets. See Note 11 to the consolidated activity for which the timing and (or) method ofsettlement are con-financial statements for a discussion of asset impairments recognized ditional on a future event that may or may not be within the control by Entergy in 2005 and 2004.-

ofthe entity but fbr which the obligation to perform the asset retire-ment activity is unconditional. FIN 47 requires that a liability be RIVER BEND A cFU

• DC recognized for the fair value of a conditional asset retirement obli-The River Bend AFUDC gross-up is a regulatory asset that repre-

" gation if the fair value of the liability can be reasonably estimated.

sents the incrementai'difference imputed by the Louisiana Public SFAS 151, "Inventory Costs - an amendment of ARB No. 43, Service Commission (LPSC) between the AFUDC actually recorded.

Chapter 4" and SFAS 153, "Exchanges of Nonmonetary Assets",

by Entergy Gulf States on a net-of-tax basis during the construction were issued during the fourth quarter of 2004 and are effective for of River Bend and wlat the AFUDC would have been on a pre-tax

. Entergy in 2006 and 2005, respectively. SFAS 154, "Accounting basis. The imputed "mount was only calculated on that portion Changes 'and Error Corrections" was issued in 2005 and is effective of River Bend that the LPSC allowed in rate base and is being for Entergy in 2006., Entergy does not expect the impact of the amortized over the estimated remaining economic life of River Bend.

issuance of these standards to be material to its financial position or' results ofoperations.:

66

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDAFITD FINANCIAL STATEMIENTS continued NOTE 2. RATE AND REGULATORY M REGULATORY ASSETS Other Regulatory Assets The domestic utility companies and System the provisions of SFAS 71, "Accounting for Types of Regulation." Regulatory assets rep revenues associated with certain costs that ar ered from customers through the ratemaking the regulatory assets that are specifically discl balance sheets, the table below provides deta assets" that are included on the balance shee 2005 and 2004 (in millions):

Asset Retirement Obligation -

recovery dependent upon timing of decommissioning (Note 8)

Deferred fuel - non-current -

recovered through rate riders when rates are redetermined periodically (Note 2)

Depreciation re-direct -

recovery begins at start of retail open access (Note 1)

U.S. Department of Energy (DOE)

Decommissioning and Decontamination Fees -

recovered through fuel rates until December 2006 (Note 8)

Low-level radwaste Pension costs (Note 10)

Postretirement benefits -

recovered through 2012 (Note 10)

Provision for storm damages -

recovered through cost of service"'1 Removal costs -

recovered through depreciation rates (Note 8)

Deferred capacity - recovery timing will be determined by the LPSC in the formula rate plan filings (Note 2)

River Bend AFUDC -

recovered through August 2025 (Note 1)

Sale-leaseback deferral -

recovered through June 2014 (Note 9)

Spindletop gas storage facility -

recovered through December 2032 Unamortized loss on reacquired debt -

recovered over term of debt Other - various Total ATTERS approximately $14.7 million, including carrying charges, annually over a five-year period. A hearing on this matter is expected in April 2006. Entergy Mississippi plans to make a second filing in late Energy are subject to spring of 2006 to recover additional restoration costs associated with the Effects of Certain the hurricanes incurred after November 30, 2005 and to reflect resent probable future receipt of insurance and federal aid.

e expected to be recov-In December 2005, Entergy Gulf States filed with the LPSC for process. In addition to interim recovery of $141 million of storm costs. The filing proposes osed on the face of the implementing an S18.7 million annual interim surcharge, including il of "Other regulatory carrying charges and subject to refund, effective March 2006 based ts as of December 31, on a ten-year recovery period. The filing includes provisions for updating the surcharge to reflect actual costs incurred as well as the receipt of insurance or federal aid. Hearings occurred in February 2005 2004 2006. The LPSC ordered that Entergy Gulf States recover

$850,000 per month as interim storm cost recovery. For the period March 2006 to September 2006, Entergy Gulf States' interim storm

$ 271.7 S 380.1 cost recovery shall be through its fuel adjustment clause, with the total recovery for that time period capped at $6 million. The mech-anism for the fuel adjustment clause recovery is a retention by 6.1 21.9 Entergy Gulf States of 15% of the difference between the February 2006 fuel adjustment clause and the fuel adjustment clause in those successive months in which the fuel adjustment clause is lower than 79.1 79.1 it was in the February 2006 fuel adjustment clause, until the $6 mil-lion cap is reached. Beginning in September 2006, Entergy Gulf States' interim storm cost recovery of S850,000 per month shall be through base rates. In addition, all excess earnings that Entergy Gulf 17.5 25.3 States may earn under its 2005 formula rate plan, and any ensuing 19.4 period in which interim relief is being collected, will be used as an 396.1 207.3 offset to any prospective storm restoration recovery.

In December 2005, Entergy Louisiana filed with the LPSC for 16.8 19.1 interim recovery of $355 million of storm costs. The filing proposes implementing a $41.8 million annual interim surcharge, including 695.8 124.5 carrying charges and subject to refund, effective March 2006 based on a ten-year recovery period. The filing includes provisions for 140.4 53.2 updating the surcharge to reflect actual costs incurred as well as the receipt of insurance or federal aid. Hearings occurred in February 2006. The LPSC ordered that Entergy Louisiana recover $2 mil-93.8 25.4 lion per month as interim storm cost recovery. For the period March 2006 to September 2006, Entergy Louisiana's interim storm 35.6 37.5 cost recovery shall be through its fuel adjustment clause, with the total recovery for that time period capped at $14 million. The 121.4 127.3 mechanism for the fuel adjustment clause recovery is a retention by 40.6 42.3 Entergy Louisiana of 15% of the difference between the February 2006 fuel adjustment clause and the fuel adjustment clause in those 165.1 169.9 successive months in which the fuel adjustment clause is lower than it was in the February 2006 fuel adjustment clause, until the S14 33.7 S

97.0 million cap is reached. Beginning in September 2006, Entergy 52,133.7 S 1,429.3 Louisiana's interim storm cost recovery of S2 million per month athitEnueiry'srSflo'the shall be through base rates. In addition, all excess earnings that recorded acerualh for tbean of these costs as

• gulatory Entergy Louisiana may earn under its 2005 formula rate plan, and prudently incumd costs any ensuing period in which interim relief is being collected, will be Entergy is pursuing a used as an offset to any prospective storm restoration recovery.

(a) As a result of Hurricane Katrina and tHurrkane Rita tb territory in August and September 2005, Entergy basr estimated storm restoration costs. Enteryy recorded some assets because management believes that recovety of these tbrougb some form of regulatory mechanism is probable.

broad range of initiatives to recover storm restoration cost. Initiatives include obtaining reimbursement of certain costs covered by insurance, obtaining assistance through federal legislasion for Hurricanes Katrina and Rita, and purmuing recovery through existing or new rate mechanisms regulated by the FERC and local regulatory bodies.

In December 2005, Entergy Mississippi filed with the MPSC a Notice of Intent to change rates by implementing a Storm Damage Rider to recover storm damage restoration costs associated with Hurricanes Katrina and Rita totaling approximately S84 million as of November 30, 2005. The notice proposes recovery of Deferred Fuel Costs The domestic utility companies are allowed to recover certain fuel and purchased power costs through fuel mechanisms included in electric and gas rates that are recorded as fuel cost recovery rev-enues. The difference between revenues collected and the current fuel and purchased power costs is recorded as "Deferred fuel costs" on the domestic utility companies' financial statements. The table below shows the amount of deferred fuel costs as of December 31, 2005 and 2004 that Entergy expects to recover or (refund) through 67

NOTES to CONSOLIDATED FIN the fuel mechanism of the domestic subsequent regulatory review (in mill EntergyArkansas Entergy Gulf State!

Entergy Louisiana-Entergy Mississippi Entergy New Orleans (a) Not indtuled due to the deconsolidation of En Entergy Arkanias In March 2005, Entergy Arkansas f6 Service Commission (APSC) its ener period April 2005 through March 201 which accounts for 15 percent of a t)l using 1,000 kwihpeil month, increase utable to a true-up adjustment for S11.2 million and a nuclear refuelinga ages scheduled in 2005 at Arkansas (ANO I and 2) and Grand Gulf.

In September 2005, Entergy Arka interim energy cost rate per the energ vides for an interimn adjustment sh under-recovery for the energy period costs for that period! As of the end under-recovery of fuel and purchased the 10 percent threshold due to increa ditures resulting frorA higher natural became effective' thej first billing cyc October 2005, the APSC initiated Arkansas' interim rate. The investi

,Va ss

1) ga I

Arkansas

1) gas co'ntracting,' port

.I

2) wholesale purchases during the pen inventory at its coa! generation pla contractual failure of the railroads to APSC established-. : procedural sc]

Entergy Arkansas, the APSC Staff, an public hearing in Mayr 2006.

Entergy Gulf States (Texas)

In the Texas jurisdiction, Entergy Gul a fixed fuel factor to recover fuel and I ing carrying charges,'not recovered in methodology, semi-annual revisions made in March and September based gas. Entergy Gulf States wvill likely co gy until the start of retail open access amounts collected under Entergy Gu any interim surchargd implemented u commences are subject to fuel reco the PUCT. In the Texas jurisdiction, electric fuel costs ar' S203.2 millio which includes the followving (in milli Under-recovered fuel costs for the period to be recovered thiough an interim fuel s twelve-month period beginning in Januar Under-recovered fuel costs for the period Items to be addressed as part of unbundlin Other Cincludes imputed' capacity charges)

II 1.

ENTERGY CORPORATION AND SUBSIDIARIES 2005

'ANCIAL STATEMENTS continued utility companies, subject to The PUCT. has ordered that the imputed capacity charges be ions):

excluded from fuel rates and therefore recovered through base rates.

Entergy Gulf States filed with the PUCT in July 2005 a request for 2005 2004 implementation of an incremental purchased capacity recovery

$204.2 S 7.4 rider, consistent with the recently passed Texas legislation discussed.

S324.4 S 90.1 below under. "Electric Industry Restructuring and the Continued-.

S 21.9

$ 8.7 Application of SIAS 7." The rider requested S23.1 million annual-

$114.0

$(22.8) ly in incremental revenues on a Texas retail basis which represents N/M1 S 2.6 the incremental purchased capacity costs, including Entergy Gulf crgy New' Orleans in 2005.

States' obligation to purchase' power from. Entergy Louisiana's recently acquired Perryville plant, over what is already in Entergy Gulf States' base rates. Entergy Gulf States reached an initial agree-.

led with the Arkansas Public ment with parties that the date upon which cost recovery and cost gy cost recovery rider for the reconciliation would begin is September 1, 2005. A further non-

06. The filed energy cost rate, unanimous settlement was reached with most of the parties that pical residential customer's bill allows for the rider to be implemented effective December 1, 2005 d 31 percent primarily attrib-and collect S18 million annually. The settlement also provides for a an under-recovery balance of fuel reconciliation to be filed by Entergy Gulf States by May 15."

adjustment resulting from out-2006 that will resolve the remaining issues in the case with the Nuclear One Units 1 and 2 exception of the amount of purchased power in current base rates and the costs to which load growth is attributed, both of which were ansas filed with the APSC an settled. The hearing with respect to the non-unaniimous settlenient, cost recovery rider that pro-which was opposed by the Office of Public Utility Counsel, was con-ould the cumulative over-or ducted on October 19, 2005 before the Administrative Law Judge xceed 10 percent of the energy (A, ), who issued a Proposal for Decision supporting the settle-of July 2005, the cumulative ment. In December 2005, the PUCT approved the settlement.

power expenses had exceeded The amounts collected by the purchased capacity recovery rider are ses in purchased power expen-subject to reconciliation.

I gas prices. The interim rate~ In September 2005, Entergy Gulf States filed an application with cle in October 2005. In early the PUCT to implement a net S46.1 million interim fuel surcharge, an investigation into Entergy including interest, to collect under-recovered fuel and purchased ration is focused on Entergy power expenses incurred from August 2004 through July 2005. The folio, and hedging practices; application was approved, and the surcharge will be collected over a iod; 3) management of the coal twelve-month period beginning in January 2006. On March 1, 2006, ants; and 4) response to the Entergy Gulf States filed wvith the PUCT an application to imple-o provide coal deliveries. The ment an interim fuel surcharge in connection with the under-recov-hedule with testimony from ery of $97 million including interest of eligible fuel costs for the

.d intervenors culminating in a period August 2005 through January 2006. This surcharge is in addition to the interim surcharge that went into effect in January.

2006. Entergy Gulf States has requested that the interim surcharge requested in its March 2006 filing be implemented byJune 1, 2006' f States' rate schedules include and remain in effect for twelve months. Amounts collected through.

purchased power costs, includ-the interim fuel surcharges are subject to final reconciliation in a base rates. Under the current future fuel reconciliation proceeding.

of the fixed fuel factor may be In March 2004, Entergy Gulf States filed with the PUCT a fuel on the market price of natural recoriciliationcase covering the period September 2000 through mntinue to use this methodolo-August 2003 reconciling $1.43 billion of fuel and purchased power.

,which has been delayed. The costs on a Texas retail basis. This amount includes S8.6 million of Ilf States' fixed fuel factor and under-recovered costs that Entergy Gulf States asked to reconcile

.ntil the date retail open access and roll into its fuel over/under-recovery balance to be addressed in nciliation proceedings before the next appropriate fuel proceeding. This case involves imputed Entergy Gulf States' deferred capacity and River Bend payment issues similar to those decided n as of December 31, 2005, adversely in theJanuary 2001 proceeding; dishussed below, whichis ons):

now on appeal. On January 31, 2005, the ALJ issued a Proposal for, Decision that r'ecommends disallowing $10.7 million (excluding 8/04-7/05 interest) related to these two issues. In April 2005, the PUCT issued-an order reversing in part the AL's Proposal for Decision and urcharge 206 S

allowing Entergy Gulf States to recover a part of its request related

$46.1 to the imputed capacity and River Bend payment issues. The PUCT's order reduced the disallowance in the case to $8.3 million.

n

$ 297.1 Both Entergy Gulf States and certain Cities served by Entergy Gulf 68

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued States filed motions for rehearing on these issues which were denied by the PUC'I. Entergy Gulf States and certain Cities filed appeals to the Travis County District Court. The appeals are pending.

Any disallowance will be netted against Entergy Gulf States' under-recovered costs and will be included in its deferred fuel costs balance.

In January 2001, Entergy Gulf States filed with the PUCT a fuel reconciliation case covering the period from March 1999 through August 2000. Entergy Gulf States was reconciling approximately S583 million of fuel and purchased power costs. As part of this filing, Entergy Gulf States requested authority to collect $28 million, plus interest, of under-recovered fuel and purchased power costs. In August 2002, the PUCT reduced Entergy Gulf States' request to approximately S6.3 million, including interest through July 31, 2002. Approximately S4.7 million of the total reduction to the requested surcharge relates to nuclear fuel costs that the PUCT deferred ruling on at that time. In October 2002, Entergy Gulf States appealed the PUCT's final order in Texas District Court.

In its appeal, Entergy Gulf States is challenging the PUCT's disal-lowance of approximately S4.2 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 case was argued before the Travis County) District Court in August 2003 and the

'Travis Count)y District Court judge affirmed the PUCT's order. In October 2003, Entergy Gulf States appealed this decision to the Court of Appeals. Oral argument before the appellate court occurred in September 2004, and the Court denied Entergy Gulf States' appeal. In October 2005, Entergy Gulf States filed a petition fior review by the Texas Supreme Court, and in December 2005, the Texas Supreme Court requested that responses be filed to Entergy Gulf States' petition as part of its ongoing consideration of whether to exercise its discretion to grant review of this matter. Those responses and Entergy Gulf States' reply to those responses were filed in January 2006.

Entergy Gulf States (Louisiana) and Entergy Louisiana In Louisiana, Entergy Gulf States and Entergy Louisiana recover electric fuel and purchased power costs for the upcoming month based upon the level of such costs from the prior month. In Louisiana, Entergy Gulf States' purchased gas adjustments include estimates for the billing month adjusted by a surcharge or credit for deferred fuel expense arising from monthly reconciliations of actual fuel costs incurred with fuel cost revenues billed to customers.

In August 2000, the LPSC authorized its staff to initiate a pro-ceeding 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 recommended a disallowance with regard to one item. The issue relates to the alleged failure to uprate W'aterford 3 in a timely manner, a claim that also has been raised in the summer 2001, 2002, and 2003 purchased power proceedings.

The global settlement approved by the LPSC in March 2005, dis-cussed below in "Retail Rate Proceedings," resolves the uprate imprudence disallowance and is no longer at issue in this proceed-ing. Subsequent to the issuance of the audit report, the scope of this (locket was expanded to include a review of annual reports on fuel and purchased power transactions with affiliates and a prudence review of transmission planning issues. Also, in July 2005, the LPSC expanded the audit to include the years 2002 through 2004.

A procedural schedule has been established and LPSC staff and intervenor testimony is due in April 2006.

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 gen-eral 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 31,'2002. Discover)y is underway, but a detailed proce-dural schedule extending beyond the discovery stage has not yet been established, and the LPSC staff has not yet issued its audit report. In June 2005, the LPSC expanded the audit to include the years through 2004.

In November 2005, the LPSC authorized its staff to initiate an expedited proceeding to audit the fuel and power procurement activities of Entergy Louisiana and Entergy Gulf States for the period January 1, 2005 through October 31, 2005.

Entergy Mississippi Entergy Mississippi's rate schedules include an energy cost recover),

rider which is adjusted quarterly to reflect accumulated over-or under-recoveries from the second prior quarter. In January 2005, the MPSC approved a change in Entergy Mississippi's energy cost recovery rider. Entergy Mississippi's fuel over-recoveries for the third quarter of 2004 of $21.3 million were deferred from the first quarter 2005 energy cost recovery rider adjustment calculation. The deferred amount of $21.3 million plus carrying charges was refund-ed through the energy cost recovery rider in the second and third quarters of 2005.

In May 2003, Entergy Mississippi filed and the MPSC approved a change in Entergy Mississippi's energy cost recover), rider. Under the MPSC's order, Entergy Mississippi 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 S77.6 million plus carrying charges was collected through the energy cost recovery rider over a twelve-month period that began in January 2004.

RETAIL RATE PROCEEDINGS Filings with the APSC Retail Rates No significant retail rate proceedings are pending in Arkansas at this time.

Filings with the PUCT and Texas Cities Retail Rates Entergy Gulf States is operating in Texas under a base rate freeze that has remained in effect dluring the delay in the implementation of retail open access in Entergy Gulf States' Texas service territory.

As discussed in "Electric Industry Restructuring and the Continued Application of SFAS 71" below, a Texas law was enacted in June 2005 which includes provisions in the Texas legislation regarding Entergy Gulf States' ability to file a general rate case and to file for recovery of transition to competition costs. As authorized by the legislation, in August 2005, Enterg%" Gulf States filed with the PUCT an application for recovery of its transition to competition costs. Entergy Gulf States requested recovery of S189 million in transition to competition costs through implementation of a 15-year rider to be effective no later than March 1, 2006. The S189 million 69

7ENTERGY CORPORATION NOTES to CONSOLIDATED FINANCIAL STATEMENTS conti:

represents. transition to competition costs Entergy Gulf States incurred fromJune 1, 1999 throughJune 17, 2005 in preparing for competition in its seMce area, including attendant AFUDC, and all carrying costs projected to be incurred on the transition to compe-tition costs through February 28, 2006. The $189 million is before any gross-up for taxes or carrying costs over the 15-year recovery.

period. Entergy Gul'f States has reached a unanimous settlement agreement in principle on all issues with the active parties in the transition to competition cost recover), case. The agreement in prin-ciple allows Entergy Gulf States to recover S 14.5 million per year in transition to competition costs over a 15-year period. Entergy Gulf States implemented interim rates based on this revenue level on March 1, 2006, subject to refund. Entergy Gulf States expects that the PUCT will c6nsider the formal settlement document, which is currently being developed, in the second quarter 2006.

The Texas law enacted also allowed Entergy Gulf States to file with the PUCT for recovery of certain incremental purchased capacity costs which was implemented effective December 1, 2005.

This proceeding is discussed above under "Deferred Fuel Costs."

Recovery of River Bend Costs In March 1998, the PUCT disallowed recovery of $1.4 billion of company-wide aleyed River Bend plant costs, which have been held in abeyance since 1988. Entergy Gulf States appealed the PUCT's decision on this matte~r to the Travis County District Court in Texas.

In April 2002, the Travis County District Court issued an order affirming the PUCT'4 order on remand disallowing recovery of the abeyed plant costs. Ehntergy Gulf States appealed this ruling to the Third District Courtlof Appeals. In July. 2003, the Third District Court of Appeals unahimously affirmed the judgment of the Travis County District Courw After considering the progress of the proceed-ing in light of the de:cision of the Court of Appeals, Entergy Gulf States accrued for the loss that would be associated with'a final, non-appealable decision disallowNing the abeyed plant costs. The net carry-ing value of the abeyed plant costs was $107.7 million at the time of the Court of Appeals decision. Accrual of the S107.7 million loss was recorded in the second quarter of 2003 as miscellaneous other income (deductions) and reduced net income by $65.6 million after-tax.'

In September 2004, tlie Texas Supreme Court denied Entergy Gulf States' petition fur review, and Entergy Gulf States filed a motion for rehearing. In February 2005, the Texas Supreme Court denied the, motion for rehearing, iind the proceeding is now final.

Filings with the LPSC Global Settlement including Entergy' Gulf States' and Entergy Louisiana In March 2005, the LPSC approved a settlement proposal to resolve.'

various dockets covering a range of issues for Entergy Gulf States..

and Entergy Louisiana. The settlement resulted in credits totaling S76 million fur retail 1electricity customers in Entergy Gulf States' Louisiana service territory and credits totaling $14 million for retail electricity customers of Entergy Louisiana. The net income effect of

$48.6 million for Entergy Gulf States and $8.6 million for Entergy Louisiana was recognized primarily in 2004 when Entergy Gulf States and Entergy. Luisiana recorded provisions for the expected outcome of the proceeding. The settlement dismissed Entergy Gulf

• States' fourth, fifth,'sixth, seventh, and eighth annual earnings reviews, Entergy Gulf States' ninth post-merger earnings review and revenue requirement analysis, the continuation of a fuel review for Entergy Gulf States, dockets established to consider issues con-cerning power purchases for Entergy Gulf States and Entergy Louisiana for the'sumimers of 2001, 2002, 2003, and 2004, all

• I 7c AND SUBSIDIARIES 2005 prudence issues associated with decisions made through May 2005 related to the nuclear plant uprates at issue in these cases, and an LPSC docket concerning -retail issues arising under the System Agreement. The settlement does not include the System Agreement case at FERC. In addition, Entergy Gulf States agreed not to seek recovery from customers of $2 million of excess refund amounts associated with the fourth through the eighth annual earnings reviews and Entergy Louisiana agreed to forgo recovery ofS3.5 mil-lion of deferred 2003 capacity costs associated with certain power purchase agreements. The credits were issued in connection with-April 2005 billings. Entergy-Gulf States and Entergy Louisiana, reserved for the approximate refund amounts.

The settlement includes the establishment of a three-year formula rate, plan for Entergy Gulf States that, among other provisions, establishes an ROE midpoint'of. 10.65% for the initial three-year term of the plan and permits Entergy Gulf States to recover incre-mental cipacity'costs outside of a traditional base rate proceeding.

Under the formula rate plan, over-and under-earnings outside 'an allowed range of 9.9% to 11.4% will be allocated 60% to customers and 40% to Entergy Gulf States. Entergy Gulf States made its initial formula rate plan filing in June 2005, as discussed below. In addition, there is the potential to extend the formula rate plan beyond the initial three-year effective period by mutual agreement of the LPSC and Entergy Gulf States.

Retail Rates - Electric (Entergy Louisiana)

Entergy Louisiana made a rate filing with the LPSC requesting a base rate increase in January 2004' In March 2005, the LPSC staff and Entergy Louisiana filed a proposed settlement that included an annual base rate increase of approximately $18.3 million that was implemented, subject to refund, effective with May 2005 billings. In May 2005, the LPSC approved a modified settlement which, among other things, reduces depreciation and decommissioning expense due to assuming a life extension of Waterford 3 and results in no change in rates. Subsequently, in June 2005, Entergy Louisiana made a revised compliance filing with the LPSC supporting a revised depreciation rate for Waterford, 3, which reflects the removal of interim additions, and a rate increase from the purchase' of the Perryville power plant, which results in a net $0.8 million annual rate reduction. Entergy Louisiana reduced rates effective with the first billing cycle in July 2005 and refunded excess revenue.

collected during May 2005, including interest, in August 2005.

The May 2005 rate settlement includes the adoption of a three-year formula rate plan, the terms of which include an ROE midpoint of 10.25% for the initial three-year term of the plan and permit Entergy Louisiana to recover incremental capacity costs outside of a traditional base rate proceeding. Under the formula rate plan, over-and under-earnings outside an allowed regulatory range of 9.45% to 11.05% will be allocated 60% to customers and 40% to Entergy Louisiana. The initial formula rate plan filing will be in May 2006 based on a 2005 test year with rates effective September 2006. In addition, there is the potential to' extend the formula rate plan beyond the initial three-year effective period by mutual agreement of the LPSC and Entergy Louisiana."

(Entergy Gulf States)

In June 2005, Entergy Gulf States made its formula rate plan filing with the LPSC for the test year ending December 31, 2004. The fil-ing shows a net revenue deficiency of $2.58 million indicating that no refund liability exists. The filing also indicates that a prospective rate increase of $23.8 million is required in order for Entergy Gulf.

States to earn the authorized ROE midpoint of 10.65%. A'revision

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued to the filing was made in September 2005 resulting in a $37.2 million base rate increase effective with the first billing cycle of October 2005, subject to refund. The base rate increase consists of two components. The first is a base rate increase of approximately S21.1 million due to the formula rate plan 2004 test year revenue requirement. The second component of the increase is the recovery of the annual revenue requirement of $16.1 million associated with the purchase of power from the Perryville generating station, which purchase was approved by the LPSC. A final order from the LPSC is expected by the second quarter of 2006.

Retail Rates - Gas (Entergy Gulf States)

In July 2004, Entergy Gulf States filed with the LPSC an applica-tion for a change in its rates and charges seeking an increase of

$9.1 million in gas base rates in order to allow Entergy Gulf States an opportunity to earn a fair and reasonable rate of return. In June 2005, the LPSC unanimously approved Entergy Gulf States' proposed settlement that includes a $5.8 million gas base rate increase effective the first billing cycle of July 2005 and a rate stabi-lization plan with an ROE midpoint of 10.5%.

In January 2006, Entergy Gulf States filed with the LPSC its gas rate stabilization plan. The filing showed a revenue deficiency of

$4.1 million based on an ROE midpoint of 10.5%. Approval by the LPSC and implementation are not expected until the second quarter of 2006.

Filings with the MPSC Formula Rate Plan Filings EntergyMississippi made its annual formula rate plan filing with the MPSC in March 2005 based on a 2004 test year. In May 2005, the MPSC approved a joint stipulation entered into between the Mississippi Public Utilities Staff and Entergy Mississippi that provides for no change in rates based on a performance-adjusted ROE midpoint of 10.50%, establishing an allowed regulatory earnings range of 9.1% to 11.9%.

Power Management Rider The MPSC approved the purchase of the Attala power plant in November 2005. In December 2005, the MPSC issued an order approving the investment cost recovery through its power manage-ment rider and limited the recovery to a period that begins with the closing date of the purchase and ends the earlier of the date costs are incorporated into base rates or December 31, 2006. The MPSC order also provided that any reserve equalization benefits be credited to the annual ownership costs beginning with the date that Entergy Mississippi begins recovery of the Hurricane Katrina restoration costs or July 1, 2006, whichever is earlier. On December 9, 2005, Entergy Mississippi filed a compliance rider.

Filings with the City Council Formula Rate Plans In April 2005, Entergy New Orleans made its annual scheduled formula rate plan filings with the City Council. The filings showed that a decrease of $0.2 million in electric revenues was warranted and an increase of S3.9 million in gas revenues was warranted. In addition, in May 2005, Entergy New Orleans filed with the City Council a request for continuation of the formula rate plans and generation performance-based rate plan (GPBR) for an additional three years. In August 2005, Entergy New Orleans, the City Council advisors, and the intervenors entered into an agreement in principle which provided, among other things, for a reduction in the Customer Care System investment of $3.2 million and for a reduc-tion in Entergy New Orleans' electric base rates of $2.5 million and no change in Entergy New Orleans' gas base rates. The agreement provided for the continuation of the electric and gas formula rate plans for two more annual cycles, effective September 1, 2005, with a target equity ratio of 45% as well as a midpoint return on equity (ROE) of 10.75%. The ROE bandwidth is 100 basis points from the midpoint for electric operations. For gas operations, the ROE bandwidth is 50 basis points from the midpoint and zero basis points for the 2005 evaluation period. The agreement in principle also includes the continuation and modification of the GPBR by separating the operation of the GPBR from the formula rate plan so that the core business' electric rates are not set on a prospective basis by reference to GPBR earnings. The agreement in principle provided for a $4.5 million cap on Entergy New Orleans' share of GPBR savings. The GPBR plan, however, has been temporarily suspended due to impacts from Hurricane Katrina. Entergy New Orleans will notify the City Council's advisors and the City Council at such time as it is reasonable to resume the operation of the GPBR.

In August 2005, prior to Hurricane Katrina, the Council Utility, Cable and Telecommunications Committee voted to recommend to the City Council a resolution approving this agreement in principle.

The City Council was to consider this recommendation at its regu-larly scheduled meeting on September 1, 2005, but this meeting did not occur due to Hurricane Katrina. On August 31, 2005, the chairman of the Council Utility, Cable and Telecommunications Committee issued a letter authorizing Entergy New Orleans to implement the agreement in principle in accordance with the resolution previously considered by this Council committee, and advising Entergy New Orleans that the City Council would consider the ratification of this letter authorization at the first available opportunity. On September 27, 2005, the City Council ratified the August 31, 2005 letter, and deemed the resolution approving the agreement in principle to be effective as of September 1, 2005.

Fuel Adjustment Clause Litigation In April 1999, a group of ratepayers filed a complaint against Entergy New Orleans, Entergy Corporation, Entergy Services, and Entergy Power in state court in Orleans Parish purportedly on behalf of all EntergyNew Orleans' ratepayers. The plaintiffs seek treble damages for alleged injuries arising from the defendants' alleged violations of Louisiana's antitrust laws in connection with certain costs passed on to

• ratepayers in Entergy New Orleans' fuel adjustment filings with the City Council. In particular, plaintiffs allege that Entergy New Orleans improperly included certain costs in the calculation of fuel charges and that Entergy New Orleans imprudently purchased high-cost fuel from other Entergy affiliates. Plaintiff allege that Entergy New Orleans and the other defendant Entergy companies conspired to make these pur-chases to the detriment of Entergy New Orleans' ratepayers and to the benefit of Entergy's shareholders, in violation of Louisiana's antitrust laws. Plaintiffs also seek to recover interest and attorneys' fees. Entergy filed exceptions to the plaintiffs' allegations, asserting, among other things, that jurisdiction over these issues rests with the City Council and FERC. In March 2004, the plaintiffs supplemented and amended their petition. If necessary, at the appropriate time, Entergy will also raise its defenses to the antitrust claims. The suit in state court has been stayed 1b, stipulation of the parties pending review of the decision by the City Council in the proceeding discussed in the next paragraph.

Plaintiffs also filed a corresponding complaint wvith the City Council in order to initiate a review by the City Council of the plaintiffi' allegations and to force restitution to ratepayers of all costs 71

ENTERGY CORPORATION NOTES to CONSOLIDATED FINANCIAL STATEMENTS con they allege were improperly and imprudently included in 'the fuel adjustment filings. Testimony was filed on behalfof the plaintiffs in this proceeding asserting, among other things, that Entergy New Orleans and other defendant! have engaged in fuel procurement and power purchasing practices and included costs in Entergy New Orleans' fuel adjustment that could have resulted in Entergy New Orleans customers being overcharged by more than S100 million over a period.

of years. Hearings were held in February and,March 2002. In February 2004, the City Council approved a resolution that resulted in a refind to customers of$I1.3 0

nillion, including interest, during the months of June through September 2004. The resolution concludes, among.

other things, that th'e record does not support an allegation that Entergy New Orleans' actions or inactions, either alone or in concert with Entergy or any of its affiliates, constituted a misrepresentation or a suppression of the truth made in order to obtain an unjust advantage of Entergy New Orleans, or to cause loss, inconvenience or harm to its ratepayers. Management believes that it has adequately provided for the liability associated ývith this proceeding. The plaintiffs appealed the City Council resolution to the state courts. OnMay 26, 2005, the Civil District Court for the Parish of Orleans affirmed the City, Council resolution that resulted in a refund to customers of S 11.3 million, including interest, diring the months of June through September 2004, finding no support for the plaintiffs' claim that the refund.

amount should be higher.

In June 2005, the plaintiffs appealed the Civil District Court deci-.

sion to the Louisiana Fourth Circuit Court of Appeal. Subsequent to Entergy New Orlean;' filing of a bankruptcy petition in the Eastern District of Louisiana, Entergy New Orleans filed a Notice of Stay with the Court ofAppeal. The Bankruptcy Court lifted the stay with respect to the plaintiffs' appelil of the Civil District Court decision, but the class action lawsuit renains stayed. In February 2006, Entergy New Orleans filed a notice removing the class action lawsuit from the Civil District Court to the U.S. District Court for the Eastern District of Louisiana. Additionally, in the Entergy New Orleans bankruptcy pro-ceeding, the named plaintiffs in the Entergy New Orleans fuel clause lawsuit, together with the named, plaintiffs in the Entergy New Orleans rate of return lawsuit, filed a Complaint for Declaratory, Judgment asking. the court to declare that. Entergy New' Orleans,.

Entergy Corporation, and Entergy Services are a single business enter-prise, and as such, are.liable in solido with Entergy New Orleans for any claims asserted in the Entergy New Orleans fuel clause lawsuit and the Entergy New Orleans rate of return lawsuit, and alternatively, that the automatic stay be lifted to permit the movants to pursue the same.

relief in state court. Afswers were due in this adversary proceeding in February 2006, but Entergy New Orleans has requested an extension to answer until March 2006.

ELECTRIC INDUSTRY RESTRUCTURING AND TIHE CONTINUED APPLICATION OF SFAS'71 Although Arkansas and Texas enacted retail open access laws, the retail open access law in Arkansas has now been repealed. Retail open access in Entergy Gulf States' service territory in Texas has' been delayed. Enterg6 believes that significant issues remain to be

'addressed by Texas'relolators, and the enacted law does not provide sufficient detail to allbw Entergy Gulf States to reasonably deter,-

mine the impact on' Entergy Gulf States' regulated operations.-

Entergy therefore continues to apply regulatory accounting princi-ples to the retail operations of all of the domestic utility companies.

1' AND SUBSIDIARIES 2005

.ý.Texas (Entergy Gulf States)

• .'As ordered by the PUCT, in January 2003, Entergy Gulf States filed

.ts proposal for an interim solution (retail open access without a FERC-approved RTO), which among other elements, included:

w the recommendation that retail open access in Entergy Gulf States' Texas service territory, including corporate unbundling,

' occur byJanuary 1, 2004, or else bedelayed until at least January 1, 2007. If retail open access is delayed pastJanuary 1, 2004, Entergy Gulf States requested authorization to separate into two bundled utilities, one subject to the retail jurisdiction of the PUCT and one subject to the retail jurisdiction of the LPSC.

a the r'ecommendation that Entergy's transmission organization, possibly with the Oversight of another entity, will continue to serve as the transmission authority for purposes of retail open access in Entergy Gulf States' service territory.

n tle recommendation that the decision points be identified that.

would'require prior toJanuary 1, 2004, the PUCT's determina-tion, based upon objective criteria, whether to proceed with ftirtber efforts toward retail open access in Entergy Gulf States' Texas service territory.

After* considering the proposal, in an April 2003 order the PUCT

.set forth a sequence of proceedings and activities designed to initi-ate an interim solution. These proceedings and activities included initiating a proceeding to certify an independent organization to administer market protocols and ensure nondiscriminatory access to transmission and distribution systems.

In July 2004, the PUCT. denied Entergy's application to certify Entergy's transmission organization as an independent organization

'under Texas law. In its order, the PUCT.also ordered: the cessation of efforts to develop an interim solution for retail open access in Entergy Gulf States' Texas service territory, termination of the pilot project in that territory, and a delay in retail open access in that territory until either a FERC-approved RTO is in place or some other independent transmission entity is certified under Texas law. Several parties have appealed the termination of the pilot program aspect of the order,.

claiming the issue was not properly a part of the proceeding.

In June 2005, a Texas law was enacted which provides that:

a Entergy Gulf States is authorized by the legislation to proceed with a jurisdictional separation into two vertically integrated utilities, one subject solely to the retail jurisdiction of the LPSC and one'subject solely to the retail jurisdiction of the PUCT; x the portions of all prior PUCT orders requiring Entergy Gulf.

States to comply with any provisions of Texas law governing transition to retail competition are void; a Entergy Gulf States must file a plan byJanuary 1, 2006, identifying the power region(s) to be considered for certification and the steps and schedule to achieve certification (as discussed below);

M Entergy Gulf States must file a transition to competition plan

."no later than January 1, 2007, that would address how Entergy Gulf States intends to mitigate market power and achieve full customer choice, including potential construction of additional transmission facilities, generation auctions, generation capacity divestiture, reinstatement of a customer choice pilot project, establishment of a price to beat, and other measures; v Entergy Gulf States' rates are subject to cost-of-service regula-tion until retail customer choice is implemented;

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued

" Entergy Gulf States may not file a general base rate case in Texas before June 30, 2007, with rates effective no earlier than June 30, 2008, but may seek before then the recovery of certain incremental purchased power capacity costs, adjusted for load growth, not in excess of five percent of its annual base rate revenues (as discussed above in "Deferred Fuel Costs," in July 2005, Entergy Gulf States filed a request for implementation of an incremental purchased capacity recovery rider); and

" Entergy Gulf States may recover over a period not to exceed 15 years reasonable and necessary transition to competition costs incurred before the effective date of the legislation and not previously recovered, with appropriate carrying charges (as discussed above in "Filings with the PUCT and Texas Cities,"

in August 2005, Entergy Gulf States filed with the PUCT an application for recovery of its transition to competition costs).

Entergy Gulf States made the January 2006 filing regarding the identification of power region(s) required by the 2005 legislation, and based on the statutory requirements for the certification of a qualified power region (QPR), previous PUCT rulings, and Entergy Gulf States' geographical location, Entergy Gulf States identified three potential power regions:

1. Electric Reliability Council of Texas (ERCOT) as the power region and Inlependent Organization (10);

2. Southwest Power Pool (SPP) as the power region and 10; and

3. the Entergy market as the power region and the Independent Coordinator of Transmission (ICT) as the 10.

Based on previous rulings of the PUCT, and absent reconsidera-tion of those rulings, Entergy Gulf States believes that the third alternative - an ICT operating in Entergy's market area - is not likely to be a viable QPR alternative at this time. Accordingl); while noting this alternative, Entergy Gulf States' filing focuses on the first two alternatives, which are expected to meet the statutory requirements for certification so long as certain key implementation issues can be resolved. Entergy Gulf States' filing enumerated and discussed the corresponding steps and a high-level schedule associated with certifying either of these two power regions.

Entergy Gulf States' filing does not make a recommendation between ERCOT and the SPP as a power region. Rather, the filing discusses the major issues that must be resolved for either of those alternatives to be implemented. In the case of ERCOT, the major issue is the cost and time related to the construction of facilities to interconnect Entergy Gulf States' Texas operations with ERCOT, while addressing the interest of Entergy Gulf States' retail customers and certain wholesale customers in access to generation outside of Texas. With respect to the SPP, the major issue is the development of protocols that would ultimately be necessary to implement retail open access.

Enterg-Gulf States recommended that the PUCT open a project for the purpose of involving stakeholders in the selection of the single power region that Entergy Gulf States should request for certification. Entergy Gulf States notes that Hlouse Bill 1567 also directs Entergy Gulf States to file a transition to competition filing no later than January 1, 2007. The contents of the January 1, 2007 filing will be affected by the power region selected. Accordingly, Entergy Gulf States recommended that the goal of the project should be to reach consensus on a power region in a timely manner to inform Entergy Gulf States' January 1, 2007 filing.

NOTE 3. INCOME TAXES Income tax expenses from continuing operations for 2005, 2004, and 2003 consist of the following (in thousands):

2005 2004 2003 Current:

Federal'.,',

Foreign State""',

Total","

S (306,524) 13,290 (27,212)

(320,446)

$ 67,924 (2,231) 38,324 104,017 S (725,319) 8,284 23,316 (693,719)

Deferred - net 898,384 282,275 1,218,796 Investment tax credit adjustments - net (18,654)

(20,987)

(27,644)

Income tax expense from continuing operations

$559,284 S365,305

$ 497,433 (a) The actual cash taxes paid were $98,072 in 2005, $28,241 in 2004, and $1$$,709 in 2003. Entergy Louisiana's mark-to-market tax accounting election significantly reduced taxes paid in 2002. In 2001, Entergy Louisiana changed its method of accountingfor tax purposes related to its wholesale electric power contracts. The most significant of these is the contract to purchase prwerfrom the Iidalia project (the contract is disrused in Note 8 to the consolidated financial statements). The new tr accounting method has provided a cumulative cash flow benefit ofapproxintately

$664 million througb 2005, which is expected to revese in the year; 2006 througb 2031 depending on several variables, including the price of power. The election did not reduce book income tax expense.

(b) In 2003, the domestic utility companies and S)otem Energy filed. wih the Internal Revenue Service (IRS), a change in tor accounting method notification for their respective calulations of coet of goods sold. The adjustment implemented a simplified method of allocation of oerhead to the production of electricity, which is provided under the IRS capitalization regulations. The cumulative adjustment placing these companies on the new methodology resulted in a $2.8 billion deduction on Entergy's 2003 income tax return. There was no cash benefit foit the method change in 2003. In addition, on a consolidated basi, there was no cash benefitfrom this method change in 2004 or 2005.

The IRS bar issued new proposed regulations effective in 2005 that may preclude a significant portion of the benefit of this tar accounting method change. In 2005, the domestic utility companies and S)ytem Energy filed a notice with the IRS of a new tar accounting method for their respective caculations of cost of goods sold. This new method is also s*oect to IRS smrutiny.

Total income taxes from continuing operations differ from the amounts computed by applying the statutory income tax rate to income before taxes. The reasons for the differ'ences for the years 2005, 2004, and 2003 are (in thousands):

Computed at statutory rate (35%)

Increases (reductions) in tax resulting from:

State income taxes net of federal income tax effect Regulatory differences-utility plant items Amortization of investment tax credits EAM Capital Loss Flow-through/permanent differences U.S. tax on foreign income Other - net Total income taxes from continuing operations Effective income tax rate 2005 2004 2003 S534,743

$454,438 S463,831 44,282 36,149 43,210 28,983 41,240 52,446 (18,691)

(20,596)

(792)

(86,426)

(24,364)

(29,722) 7,888 (15,856)

(32,518) 2,798 479 (43,037) 2,014 (18,477)

$559,284

$365,305

$497,433 36.6%

28.1%

37.5%

The EAM capital loss is a tax benefit resulting from the sale of preferred stock and less than 1% of the common stock of Entergy Asset Management, an Entergy subsidiary. In December 2004, an Entergy subsidiary sold the stock to a third party for S29.75 million. The sale resulted in a capital loss for tax purposes of S370 million, producing a 73

____________.~~.~~~.,~.~~~~~.~~~~~.~~-~~~.~'----.---.-----.---.-----------------------,

C

.:T.RGY C0RP ATO NOTES to CONSOLIDATED FINANCIAL STATEMENTS con federal and state net 6ix benefit of $97 million that Entergy recorded in the fourth quarter of 2004. Entergy has established a contingency provision in its financial statements that management believes will sufficiently cover the 'risk associated with this issue.

Significant'compoAents of net deferred and non-current accrued tax liabilities as of D5ecember 31, 2005 and 2004 are as follows (in thousands):..

1 2005 2004 AND SU

'tinued BSIDIARIES 2005 Deferred and Non-currfnt' Accrued Tax Liabilities!

Netregulatory liabilitis Plant-related basis differences Power purchase ;greements Nuclear decommissioning Other Total S (954,742)-

.(5,444,178)

(2,422,967)

(390,256)

(621,179)

(9,833,322)

S (978,815)

(4,699,803)

(972,348)

(545,109)

(346,993)

(7,543,068)

Deferred Tax Assets-i Accumulated deferred investment tax credit

.125,521

.133,979 Capital losses 119,003 134,688 Net operating loss carryforwards 2,788,864 1,201,006 Sale and leaseback';

238,557

.227,155 Unbilled/deferred revenues 25,455 28,741 Pension-related items; 231,154 247,662 Reserve for regulatory adjustments 120,792 131,112 Customer deposits

• II, 70,222, i07,652 Nuclear decommissioning 168,928 158,796 Other

• 1 560,980 225,659 Valuation allowance (38,791)

(43,864)

Total 4,410,685 2,552,586 Net deferred and non-current accrued tax liability.:

5(5,422,637)

S(4,990,482)

At December 3 V, 2005, Entergy had $268.4 million in net realized federal capital loss carr;forwards that will expire as fbllows: $104.9 mil-lion in 2007, SO.8 inillion in 2008, and $162.7 million in 2009.

At December 31, 2005, Entergy had federal net operating loss

• carryforwards of $6.6 bllion primarily resulting from changes in tax accounting methods i*lating to (a) the domestic utility companies calculation of cost ofj goods sold and (b) Non-Utility Nuclear's 2005 mark-to-marketl tax accounting election, and losses due to Hurrcanes Katrina and Rita. Both tax accounting method changes produce temporary book tax differences, which will reverse in the future. Approximately $4.0 billion of the net operating loss, attrib-

"utable to the. two taxiaccounting method changes, is expected to reverse within four years. The timing of the reversal depends on several variables, including the price of power and nuclear plant life extensions. If the fede-al net operating loss carryforwards are not utilized, they will expire in the years 2023 through 2025. Entergy expects to receive a r'efund of $242 million from prior tax years under the special prousions of the Gulf Opportunity Zone Act of 2005 and the-Eniergy, Policy Act of 2005 in the second quarter of 2006. The expected refund is reflected as a receivable in the "Prepayamentsdand other" line on the balance sheet as of, December 31, 2005. :,

At December 31 9 2005, Entergy had estimated state net operating loss carryforwards of $8.4 billion, primarily resulting from Entergy isiana's mark-to-market tax election, the domestic utility companies' change in method of accounting for tax purposes related to cost of goods sold,I and Non-Utility Nuclear's 2005 mark-to-market tax accounting election, all discussed above. If the state net*

operating loss carryfobrvards are not utilized, they will expire in the years 2008 through 2020.

The 2005 and 2004 valuation allowances are provided against United Kingdom (UK) capital loss and UK net operating loss carry-*

forwards, and certain state net operating loss carr)forwards. The UK losses can be utilized against future UK taxable income. For UK.

tax purposes, these carryforwards do not expire.

On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was enacted. The Act promotes domestic production and investing activities by providing a number of tax incentives including a temporary. incentive to repatriate. accumulated' freign earnings, subject 'to certain limitations, 'by providing an 85% dividends received deduction for certain repatriated earnings and also provid-ing a tax deduction of up to 9% of qualifying production activities.

In 2004, Entergy repatriated $59.1 million of accumulated foreign earnings, which resulted in approximately $ 1 1.0 million of tax ben-efit. At December 31, 2005, Entergy had no undistributed earnings from subsidiary companies outside the United States that are being considered for repatriation. In accordance with FASB Staff Position (FSP) 109-1, which was issued by the FASB to address the'account-ing for the impacts of the Act, the allowable production tax credit will' be treated as a special deduction in the period in which it is deducted rather than treated as a tax rate change during 2004 which is the period in which the Act was signed into law. The adoption of FSP 109-1 and FSP 109-2, also issued by the FASB to address the accounting for the repatriation provisions of the Act, did not have a material effect on Entergy's financial statements.

INCOME TAX AUDITS.

Entergy is currently under audit by'the IRS with respect to' tax returns for tax periods subsequent to 1995 and through 2003, and is subject to audit by the IRS and other taxing authorities for subse-.

quent tax periods. The amount and timing of any tax assessments' resulting from these audits are uncertain, and could have a material

' effect on' Entergy's financial position and results of operations.

Entergy believes that the contingency provisions established in its financial statements will sufficiently cover the liabilities that are rea-soniably estimable associated with tax matters. Certain material audit matters as to which mnanagement believes -there is a reasonable possibility of a future tax payment are discussed below..

Depreciable Property Lives In October 2005, Entergy Arkansas,' Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy concluded settlement discussions with IRS Appeals related to the 1996 - 1998 audit' cycle. The most significant issue settled involved the changes.

in tax depreciation methods with respect to certain types of depre-ciable property. Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans partially conceded deprecia-tion associated with assets other than street lighting and intend to pursue the street lighting depreciation in litigation. Entergy Gulf States was not part of the settlement and did not change its accounting method for these certain assets'until 1999. The total cash concession related to these deductions for Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy is $56 million plus interest of $23 million. The effect of a similar settlement by Entergy Gulf States would result in a cash tax exposure of approximately $25 million plus interest of $8 million.

Because this issue relates to the timing ofwhen depreciation expense is deducted, the conceded amoun't for Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy, or any future conceded amounts by Entergy. Gulf States will be recovered in future periods. Entergy believes that the contingency provision established in its financial statements sufficiently covers the risk associated with this item.

74,

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued Mark-to-Market of Certain Power Contracts In 2001, Entergy Louisiana changed its method of accounting for income tax purposes related to its wholesale electric power con-tracts. The most significant of these is the contract to purchase power from the Vidalia hydroelectric project. On audit of Entergy Louisiana's 2001 tax return, the IRS made an adjustment reducing the amount of the deduction associated with this method change.

The adjustment had no material impact on Entergy Louisiana's earnings and required no additional cash payment of 2001 income tax. The Vidalia contract method change has resulted in estimated cumulative cash flow benefits of approximately S664 million through December 31, 2005. This benefit could reverse in the years 2006 through 2031 depending on several variables, including the price of power. The tax accounting election has had no effect on book income tax expense.

NOTE 4. LINES OF CREDIT AND SHORT-TERM BORROWINGS Entergy Corporation has in place two separate revolving credit facilities, a five-year credit facility and a three-year credit facility.

The five-year credit facility, which expires in May 2010, has a borrowing capacity of $2 billion, of which $785 million was outstanding as of December 31, 2005. The three-year facility, which expires in December 2008, has the borrowing capacity of $1.5 billion, none of which was outstanding at December 31, 2005. Entergy also has the ability to issue letters of credit against the total borrowing capacity of both credit facilities, and letters of credit totaling S239.5 million had been issued against the five-year facility at December 31, 2005. The total unused capacity for these facilities as of December 31, 2005 was approximately $2.2 billion. The commitment fee for these facilities is currently 0.13% per annum of the unused 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.

Entergy Corporation's facilities require it to maintain a consoli-dated debt ratio of 65% or less of its total capitalization. If Entergy fails to meet this ratio, or if Entergy or the domestic utility compa-nies (except Entergy New Orleans) default on other indebtedness or are in bankruptcy or insolvency proceedings, an acceleration of the facilities' maturity dates may occur.

Entergy Arkansas, Entergy Louisiana, and Entergy Mississippi each have 364-day credit facilities available as follows:

Amount Drawn as Company Expiration Date Amount of Facility of Dec. 31. 2005 Entergy Arkansas April 2006 S85 million')

Entergy Louisiana April 2006 S85 million()

$40 million Entergy Louisiana May 2006

$15 million"'

Entergy Mississippi May 2006 S25 million (a) The combined amount borrowed by Entergy Arkansas and Entergy Louisiana under these facilities at any one time cannot exceed $85 million. Entergy Louisiana granted a security interest in its receihables to secure its $85 million facility.

(b) The combined amount borrowed by Entergy Louisiana under its $15 million facility and by Ensergy New Orleans under a $15 million facility that it has with the same lender cannot exceed $15 million at any one time. Because Entergy Neu, Orleans' facility isjltby drawn, no capacity is current.y availabk on EntergW Louisiana efadlity.

The 364-day credit facilities have variable interest rates and the average commitment fee is 0.13%. The $85 million Entergy Arkansas and Entergy Louisiana credit facilities each require the respective company to maintain total shareholders' equity of at least 25% of its total assets.

After the repeal of the Public Utility Holding Company Act of 1935 (PUHCA 1935), effective February 8, 2006, the FERC, under the Federal Power Act, and not the SEC, has jurisdiction over authorizing securities issuances by the domestic utility companies and System Energy (except securities with maturities longer than one year issued by (a) Entergy Arkansas which are subject to the jurisdiction of the APSC and (b) Entergy New Orleans which are currently subject to the jurisdiction of the bankruptcy court). Under the Public Utility Holding Company Act of 2005 (PUHICA 2005) and the Federal Power Act, no approvals are necessary for Entergy Corporation to issue securities. Under a savings provision in PUHCA 2005, each of the domestic utility companies and System Energy may rely on the financing authority in its existing PUHCA 1935 Securities and Exchange Commission (SEC) order or orders through December 31, 2007 or until the SEC authority is superceded by FERC authorization. The FERC has issued an order (FERC Short-Term Order) approving the short-term borrowing limits of the domestic utility companies (except Entergy New Orleans) and System Energy through March 31, 2008. Entergy New Orleans may rely on existing SEC PUHCA 1935 orders for its short-term financing authority, subject to bankruptcy court approval. In addi-tion to borrowings from commercial banks, the FERC Short-Term Order authorized the domestic utility companies (except Entergy New Orleans which is authorized by an SEC PUIHCA 1935 order) and System Energy to continue as participants in the Entergy System money pool through February 8, 2007. 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 short-term borrowings combined may not exceed authorized limits. As of December 31, 2005, Entergy's subsidiaries' aggregate money pool and external short-term borrowings authorized limit was $2.0 billion, the aggregate outstanding borrowing from the money pool was $379.7 million, and Entergy's subsidiaries' outstanding short-term borrow-ing from external sources was S40 million. To the extent that the domestic utility companies and System Energy wish to rely on SEC financing orders under PUIICA 1935, there are capitalization and investment grade ratings conditions that must be satisfied in con-nection with security issuances, other than money pool borrowings.

There is further discussion of commitments for long-term financing arrangements in Note 5 to the consolidated financial statements.

75

ENTERGY CORPORATION AND NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued NOTE 5. LONG-TERM DEBT Long-terni debt as of December 31, 2005 and 2004 consisted of (in thousand SUBSIDIARIEs 2005

-II Is):

Mortgage Bonds:

Matu rity Date 2005.

2004 6.125% Series 8.125% Series 6.77% Series 4.875% Series 4.35% Series 3.6% Series 3.875% Series Libor + 0.75% Series Libor + 0.40% Series 4.5% Series 4.67% Series 5.12% Series 5.83% Series

/

4.65% Series 4.875% Series 6.0% Series 5.15% Series 5.25% Series 5.09% Series 5.6% Series 5.25% Series 5.70% Series 5.56% Series 6.75% Series 5.4% Series 4.95% Series 5.0% Series 5.5% Series 7.0% Series 5.6% Series 5.66% Series 5.65% Series 6.7% Series 7.6% Series 6.0% Series.

6.0% Series 7.25% Series 5.9% Series 6.20% Series 6.25% Series 6.4% Series 6.38% Series 6.19% Series 6.30% Series Entergy Arkansas" Fnrtergy New OrleansF° Entergy Gulf States System Energy Entergy Mississippi Entergy Gulf States Entergy New Orleans"s)

Entergy Gulf States Entergy Gulf States" Entergy Arkansas Entergy Louisiana Entergy Gulf States Entergy Louisiana Entergy.Mississippi Entergy Gulf States Entergy Gulf States..

Entergy Mississippi Entergy New Orleansl)"

Entergy Louisiana.

Entergy Gulf States Entergy Gulf States Entergy Gulf States Entergy Louisiana Entergy New Orleansx)"

Entergy Arkansas.

Entergy Mississippi Entergy Arkansas Entergy Louisiana Entergy Arkansas Entergy New Orleans4" Entergy Arkansas Entergy New Orleans'6 Entergy Arkansas Entergy Louisiana Entergy Arkansas Entergy.\\ississippi Entergy Mississippi Entergy Arkansas Entergy Gulf States, Entergy Mississippi Entergy Louisiana Entergy Arkansas Entergy Gulf States Enteriv Louisiana July 2005 July 2005 August 2005 October 2007 April2008 June2008 August 2008 December 2008 December 2009 June 2010 June 2010 August2010 November 2010

. May2011 November 2011 December 2012 February 2013 S

August 2013 November 2014 December2014

• .August 2015 June 2015 September 2015

.... "" ' October 2017-

-,May 2018 June 2018 July 2018 April 2019 FOctober 2023

' i 'September 2024.-

February 2025 September 2029 April 2032

-April2032 November 2032 November 2032 SDecember 2032 June 2033 July 2033, April2034 October 2034

.November 2034-March 2035:

September 2035-70,000 100,000 325,000 350,000.

225,000 100,000

.55,000 100,000 150,000 80,000 200,000 1 40,000 100,000 115,000 50,000 200,000-200,000

• .'" 100,000 15)0,000 95,000 115,000 100,000 175,000 100,000 150,000 0oo,oo0 175,000 100,000 100 7,000 240,000, 100,000 70,000 60,000 85,000W 100,000 30,000

.98,000 70,000 100,000 325,000 30,000 225,000 80,000 200,000 140,000 100,000 70,000 1.15,000 50,000 200,000

.25,000 150,000 95,000 115,000 100,000 175,000 35,000 40,000 100,000 150,000.

100,000 75,000 100,000 100,000 240,000

-.100,000 70,000 60,000 100,000 Total mortgage bonds,

S4,575,000 S

3,763,000 76

ENTERGY CORPORATION AND SUBSIDIARIS 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued Governmental Bonds(":

5.45% Series 6.75% Series 6.7% Series 5.7% Series 7.7% Series 5.8% Series 7.0% Series 7.5% Series 9.0% Series 5.8% Series 6.3% Series 5.6% Series 6.3% Series 6.3% Series 6.25% Series 7.5% Series 5.0% Series 5.875% Series 5.9% Series 7.0% Series 7.05% Series Auction Rate 4.6% Series 5.95% Series 6.2% Series 6.875% Series 6.375% Series 6.2% Series 5.05% Series 6.6% Series Auction Rate 4.9% Series Total governmental bonds Calcasieu Parish - Louisiana Calcasieu Parish - Louisiana Pointe Coupee Parish - Louisiana Iberville Parish - louisiana WVest Feliciana Parish - Louisiana West Feliciana Parish - Louisiana West Feliciana Parish - Louisiana West Feliciana Parish - Louisiana WVest Feliciana Parish - Louisiana West Feliciana Parish - Louisiana Pope County - Arkansas'"

Jefferson County - Arkansas Jefferson County - Arkansas`0 Pope County - Arkansas Independence County - Arkansas St. Charles Parish - Louisiana Independence County - Arkansas Mississippi Business Finance Corp.

Mississippi Business Finance Corp.

St. Charles Parish - Louisiana St. Charles Parish - L.ouisiana Independence County - Mississippi*

Mississippi Business Finance Corp.")

St. Charles Parish -

I.ouisiana'f St. Charles Parish - I ouisiana St. Charles Parish - Louisiana St. Charles Parish - Louisiana Claiborne County - Mississippi Pope County - Arkansas't' West Feliciana Parish - Louisiana St. Charles Parish - Louisiana(6 St. Charles Parish - Louisiana'"

Maturity Date 2010 2012 2013 2014 2014 2015 2015 2015 2015 2016 2016 2017 2018 2020 2021 2021 2021 2022 2022 2022 2022 2022 2022 2023 2023 2024 2025 2026 2028 2028 2030 2030 2005 S

22,095 48,285 17,450 21,600 28,400 39,000 20,000 19,500 45,500 9,200 120,000 45,00 216,000 102,975 3(),0O0 16,030 25,000 90,000 40,000 60,000 S1,016,035 2004 S

22,095 48,285 17,450 21,600 94,000 28,400 39,000 41,600 45,000 20,000 19,500 45,500 9,200 120,000 45,000 50.000 216,600 10-2,975 24,00) 211,0w0 30,Ov'O 16,1130 25,000 33,000 20,400 16,770 90,000 47,(00 40,000 60,000 55,000 SI,462,805 77

.-.-.-------------.-.-~.-,----~-.------.----.-------.-..-.---.---~---------~..------.---t I ENTERGY CORPORATION AND NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued Athar I nnn.Tprm rloht.

SUBSIDIARIES 2005 Note Payable to NYPA, non-interest bearing, 4.8% implicit rate 5-year Bank Credit Facility (Entergy Corporation and Subsidiaries, Note 4) 3-year Bank Credit Facility (Entergy Corporation and Subsidiaries, Note 4)

Bank term loan, Entergy Corporation, avg. rate 2.98%, due 2010 Bank term loan, Entergy Corporation, avg. rate 3.08%, due 2008 6.17% Notes due Malch 2008, Entergy Corporation 6.23% Notes due Maich 2008, Entergy Corporation 6.13% Notes due September 2008, Entergy Corporation 7.75% Notes due December 2009, Entergy Corporation 6.58% Notes due M'ay 2010, Entergy Corporation 6.9% Notes due November 2010, Entergy Corporation -

7.625% Notes initially due February 2011, Entergy Corporation')

7.06% Notes due Mach 2011, Entergy Corporation Long-term DOE Obligation(t

" Waterford 3 Lease Obligation 7.45% (Entergy Corporation and Subsidiaries, Note 9)

Grand Gulf Lease Obligation 5.02% (Entergy Corporation and Subsidiaries, Note 9)

Unamortized Premium and Discount - Net 8.75% Junior Subordinated Deferrable Interest Debentures Due 2046 - Entergy Gulf States Other i

2005 S 373,186 785,000 60,000

,- 35,000 72,000 15,000 150,000 267,0100

- 75,000 140,000 500,000 2004 S 445,605 50,000 60,000 35,000 72,000 15,000 150,000 267,000 75,000 140,000

.86,000 156,332 86,000 161,048 247,725 364,806 (6,886) 247,725 397,119 (10,277) 87,629

• !12.096 9.457 Total Long-Term Debt

$8,928,010 S7,509,395 Less Amount Due XWthin One Year 103,517 492,564 Long-Term Debt Excluding Amount Due Within One Year S8,824,493 S7,016,831 Fair Value of Long-Term Deb&5

$ 8,009,388 S 6,614,211 (a) Consists of pollution conthl retvnue bonds and enriromnental revenue bonds.

('b) Tbe bonds bad a mandatlry tender date of September !, 200.. Entergy Arkansas purchased the honds frm the bolders, pursuant to the mandatory tender pr'iision, and has not remarketed the bonds at this time.

(c) Pursmant to tbe Nuclea;4 Mrste Poliy Act of 1912, Entergy, nuclear oner/licensee subsidiar have contracts with the US. Department of Energy (DOE) for spent nuclear fie disposal ser'Tice. The contracts include a one-timefee for generation prior to April 7, 1983. Enter jArkansas is the onsy Entergy company that generated electric power witb nuclear fel prior to that date asd indudes the one-time fee, plus accrued interest, in long-term debt (d) The fair value excludes lease obligations and long-term DOE obligations, and includes debt due witbin oneyear It is determined using bid prices reportedly dealer markets and by national rrecognized intsn ent bankingjfn7wn.

(e) The bonds had a mandat~ny tender date ofune) 1, 2005. Entergy Louisiana purchased the bonds from the holder, pursuant to the'mandator tender provision, and has not rermarketed the bonds at this time.

(0 The bonds are secured ly a series of collateral first mortgage bonds.

(g) Because of the Entergy New Orleans bankruptqfiling Entergy deconsolidated Entergy New Orleant and reports its finandal position and results under the equity method of accounting retroactive toj7anuar, 1, 2005.

r (h) In December 200Y, Entrey Corporation sold 10 million equity units witsh a stated amount of SYO each. An equity unit consists of (1) a note, initially due February 2011 and initially bearing interest "at an anmual rate of Y.75%, and (2) a purchase contract that obligates the holder of the equity unit to purchase for $50 betteen 0. 570; and 0.7074 shares of Entergy Corporation c/wron stock on or before February 17, 2009. Entergy rill pay the holders quarterly contract adjustment payments of 1.875% per year on the stated amount of S50 per equit unit. Under the terms of the purchase contract; Enterge Corporation rill issue between 5, 705,000 and 7,074,000 shares of common stock in the settlement of the purchas contracts (ndsect to adjustment under certain circumstances).

78

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued The annual long-term debt maturities (excluding lease obligations) for debt outstanding as of December 31, 2005, for the next five years are as follows (in thousands):

2006 S 80,528 2007 S 149,539 2008 S1,066,625 2009 S 512,584 2010 S 923,667 In November 2000, Entergy's Non-Utility Nuclear business purchased the FitzPatrick and Indian Point 3 power plants in a seller-financed transaction. Entergy issued notes to New York Power Authority (NI'PA) with seven annual installments of approximately

$108 million commencing one year from the date of the closing, and eight annual installments of $20 million commencing eight years from the date of the closing. These notes do not have a stated inter-est rate, but have an implicit interest rate of 4.8%. In accordance with the purchase agreement with NYPA, the purchase of Indian Point 2 in 2001 resulted in Entergy's Non-Utility Nuclear business becoming liable to NTYPA for an additional $10 million per year for 10 years, beginning in September 2003. This liability was recorded upon the purchase of Indian Point 2 in September 2001, and is included in the note payable to NYPA balance above. In July 2003, a payment of $102 million was made prior to maturity on the note payable to NPA. Under a provision in a letter of credit supporting these notes, if certain of the domestic utility companies or System Energy were to default on other indebtedness, Entergy could be required to post collateral to support the letter of credit.

Non-Utility Nuclear's purchase of the Fitzpatrick and Indian Point 3 plants from NYPA included value sharing agreements with NYPA. Under the value sharing agreements, to the extent that the average annual price of the energy sales from each of the two plants exceeds specified strike prices, the Non-Utility Nuclear business will pay 50% of the amount exceeding the strike prices to NYPA.

These payments, if required, will be recorded as adjustments to the purchase price of the plants. The annual energy sales subject to the value sharing agreements are limited to the lesser of actual generation or generation assuming an 85% capacity factor based on the plants' capacities at the time of the purchase. The value shar-ing agreements are effective through 2014. The strike prices for Fitzpatrick range from $37.5 I/MWh in 2005 increasing by approx-imately 3.5% each year to $51.30/M\\Vh in 2014, and the strike prices for Indian Point 3 range from $42.26/M\\\\"h in 2005 increas-ing by approximately 3.5% each year to $57.77/M\\h in 2014.

Covenants in the Entergy Corporation notes require it to maintain a consolidated debt ratio of 65% or less of its total capitalization.

If Entergy's debt ratio exceeds this limit, or if Entergy or certain of the domestic utility companies default on other indebtedness or are in bankruptcy or insolvency proceedings, an acceleration of the notes' maturity dates may occur.

The long-term securities issuances of Entergy Mississippi and System Energy also are limited to amounts authorized by the SEC under PUHCA 1935. After the repeal of PUHCA 1935 on February 8, 2006, the FERC, under the Federal Power Act, has jurisdiction over the securities issuances of these companies. Under a savings provision in the PUHCA 1935 repeal legislation, these companies can rely on the authority of their existing SEC orders until each obtains new orders from the FERC. The SEC PUH1CA 1935 financing order of Entergy Mississippi limits securities issuances unless certain capitalization and investment grade ratings conditions are met. Entergy Gulf States and Entergy Louisiana, LLC have received FERC long-term financing orders that do not have such conditions. The long-term securities issuances of Entergy Arkansas are limited to amounts authorized by the APSC.

CAPITAL FUNDS AGREEMENT Pursuant to an agreement with certain creditors, Entergy Corporation has agreed to supply System Energy with sufficient capital to:

" maintain System Energy's equity capital at a minimum of 35%

of its total capitalization (excluding short-term debt);

• permit the continued commercial operation of Grand Gulf;

" pay in full all System Energy indebtedness for borrowed money when due; and

" enable System Energy to make payments on specific System Energy debt, under supplements to the agreement assigning System Energy's rights in the agreement as security for the specific debt.

79

NOTES to CONSO NOTE 6. PREFERi The number of'shar.I subsidiaries as of De mandatory redemptic ENTERGY CORPORATION AND SUBSIDIARIES 2005 LIDATED FINANCIAL STATEMENTS continued.

tED STOCK"

• S authorized and outstanding and dollar value of preferred stock and minority interest for Entergy Corporation cember 31, 2005 and 2004 are presented below. Only the Entergy Gulf States'series "with sinking fund" contain n requirements. All other series of the U.S. Utility are redeemable at Entergy's option (S in thousands):

Shares Authorized Shares Outstandin 2005 2004 2005 2004 2005 2004 Entergy Corporation U.S. Utility:.

Preferred Stock without sinking fund:

EntergyArkansas,'4.32%-7.88% Series 1,613,500 1,613,500 1,613,500 1,613,500 S116,350 S116,350r Entergy Gulf States, 4.20% - 7.56% Series 473,268

. 473,268

'- 473,268 473,268*

.47,327 47,327.

Entergy Louisiana Holdings, 4.16% - 8.00% Series 2,115,000 2,115,000, 2,115,000 2,115,000 100,500-100,500 Entergy Louisiana LLC, 6.95% Series.

1,000,000 1,000,000 ;

100,000-EntergyMississippi, 4.36% - 6.25% Series 1.403,807.

503,807 1,403,807-503,807 50,381:

50,381 Entergy New Orleans, 4.36% - 5.56% Series`

197,798 197,798 19,780 Total U.S. Utility Preferred Stock without sinking fund 6,605,575 4,903,373 6,605,575-4,903,373 -

5414,557.

$334,337 Energy Commodity Seriices:.

Preferred Stock without sinking fund:

EntergyAsset.lanagement, 11.50% Rate 1,000,000 1,000,000-297,376 297,376

• 29,738 29,738 Other 1,679 1,281 Total Preferred Stock.%ithout sinking fund 7,605,575 5,903,373 6,902,951 5,200,749

$445,974 S365,356 U.S. Utility:.

Preferred Stock with sinking fund:

Entergy Gulf States, Adjustable Rate 7.0%b1 139,500 174,000 139,500 174,000 S 13,950 S 17,400 Total Preferred Stock iith sinking fund 139,500 174,000 139,500 174,000 S 13,950 S S 17,400 Fair Value of Preferred Stock with sinking fund*..

S 13,950 S 15,286 Totab may not foot due to rounding.

(a) Because of the Entergy A=e Orleans bankrupny filing, Entergy deconsolidated &Enterg New Orleans and rrports itsfnandal position and results under the equity metbod of accounting retroactnhe to'January 1,' 2005.

(b) Represents weigbted-avefage annuali.ed rate for 2005 and 2004.

(c) Fair values were determrned wing bid prices reported by dealer markets and by nationally recognized inrestment banking firms. There is additional disclosure offair value offinandal instruments in Note 14 to the consolidated financial statements.

All outstanding*preferred stock is cumulative.

Entergy Gulf State's' preferred stock with sinking fund retirements were 34,500 shares in 2005, 2004, and 2003. Entergy Gulf States has annual sinking fund requirements of S3.45 million through 2008 for its'preferred stock outstanding.

In June 2005, Entergy Mississippi issued 1,200,000 shares of $25 par value 6.25% Series Preferred Stock, all of which are outstanding as of December 31, 2005. The dividends are cumulative and payable quarterly beginning November 1, 2005. The preferred stock is redeemable on or afterJuly 1, 2010, at Entergy Mississippi's option, at the call price ofS25 per share. The proceeds from this issuance were used in the third quarter of 2005 to redeem all S20 million of Entergy Mississippi's $100 par value 8.36% Series Preferred Stock and all S10 million of Entergy Mississipji's S100 par value 7.44% Series Preferred Stock..

In December 20051 Entergy Louisiana, LLC issued 1,000,000 shares of S100 par value 6.95% Series Preferred Stock, all ofwhich are out-standing as of December 31, 2005. The dividends are cumulative and payable quarterly beginning March 15, 2006. The preferred stock is redeemable on orafte-December 31, 2010, at Entergy Louisiana's option, at the call price of $100 per share. The proceeds from the issuance will be used to repay short-term borrowings.

In 2004, Entergy realized a pre-tax gain of $0.9 million upon the sale to a third party of preferred shares, and less than 1% of the common shares, of EntergyAsset Management, an Entergy subsidiary. See Note 3 to the consolidated financial statements for a discussion of the tax benefit realized on the.sale. Entergy Asset Management's stockholders' agreement provides that at any time during the 180-day period prior to December 31,.200 7 or each subsequent December 31 thereafter, either Entergy Asset Management or thepreferred shareholders may request that the preferred dividend rate be reset. If Entergy Asset Management and the preferred shareholders are unable to agree on a dividend reset rate, a preferred shareholder can request that its shares be sold to a third party. If Entergy Asset Management is unable to sell the preferred shares within 75 days, the preferred shareholder has the right to take control of the Entergy Asset Management board of direc-tors for the purpose of liquidating the assets of Entergy Asset Management in order to repay thepreferred shares and any accrued dividends.

80

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMIENTS continued NOTE 7. COMMON EQUITY COMMON STOCK Treasury Stock Treasury stock activity for Entergy for 2005 and 2004 is as follows ($ in thousands):

2005 2004 Treasury Shares Cost Treasury Shares Cost Beginning BalanceJanuary I 31,345,028 S1,432,019 19,276,445 S 561,152 Repurchases 12,280,500 878,188 16,631,800 1,017,996 Issuances:

Employee Stock-Based Compensation Plans (2,965,006)

(147,888)

(4,555,897)

(146,877)

Directors' Plan (15,920)

(359)

(7,320)

(252)

Ending Balance, December 31 40,644,602 S2,161,960 31,345,028

$1,432,019 Entergy Corporation reissues treasury shares to meet the require-forfeited previously under the terms of the grant, options expire ments of the Stock Plan for Outside Directors (Directors' Plan), the ten years after the date of the grant if they are not exercised.

Equity Ownership Plan of Entergy Corporation and Subsidiaries Stock-based compensation expense included in earnings applicable (Equity Ownership Plan), the Equity Awards Plan of Entergy" to common stock, net of related tax effects, for 2005 is $7.8 million.

Corporation and Subsidiaries, and certain other stock benefit plans.

There was no-effect on net income in 2004 or 2003.

The Directors' Plan awards to non-employee directors a portion of Entergy determines the fair value of the stock option grants made their compensation in the form of a fixed number of shares of in 2005, 2004, and 2003 by considering factors such as lack of mar-Entergy Corporation common stock.

ketability, stock retention requirements, and regulatory restrictions on exercisability, The fair value valuations comply with SFAS 123R, Equity Compensation Plan Information "Share-Based Payment," which was issued in December 2004 and is Entergy grants stock options, equity awards, and incentive awards effective in the first quarter 2006. The stock option weighted-average to key employees of the Entergy subsidiaries under the Equity assumptions used in determining the fair values were as follows:

Ownership Plan which is a shareholder-approved stock-based compensation plan.

2005 2004 2003 Stock price volatility 18.8%

23.1%

26.3%

Stock Options Expected term in years 3

6.3 6.2 Stock options are granted at exercise prices not less than market Risk-free interest rate 3.6%

3.2%

3.3%

value on the date of grant. The majority of options granted in 2005, Dividend yield 3.1%

3.3%

3.3%

2004, and 2003 will become exercisable in equal amounts on each of Dividend payment

$2.16 S1.80

$1.40 the first three anniversaries of the date of grant. Unless they are Stock option transactions are summarized as follows:

2005 2004 2003 Number Average Number Average Number Average of Options Exercise Price of Options Exercise Price of Options Exercise Price Beginning-of-year balance 12,310,077

$41.88 15,429,383

$38.64 19,943,114

$35.85

_Options granted 1,835,218 S69.37 1,898,098

$58.63 2,936,236 S44.98 Options exercised (3,135,396)

S40.11 (4,541,053)

$38.07 (6,927,000)

$33.12 Options forfeited/expired (154,440)

S59.16 (476,351)

$39.94 (522,967)

S40.98 End-of-year balance 10,855,459 S46.80 12,310,077

$41.88 15,429,383 S38.64 Options exercisable at year-end 7,397,622 S40.21 7,162,884

$37.25 6,153,043 S34.82

%.Veighted-average fair value of options at time of grant

$8.17

$7.76

$6.86 The following table summarizes information about stock options outstanding as of December 31, 2005:

Options Outstanding Options Exercisable Weighted-Range of As of Average Remaining Weighted-Average Number Exercisable Weighted-Average Exercise Prices 12/31/2005 Contractual Life-Years Exercise Price at 12131/2005 Exercise Price

$23 -$33.99

$34 -$44.99

$45-$55.99 S56 -$66.99 S67 -$78.99 S23 -$78.99 1,274,410 5,940,768 211,394 1,688,091 1,740,796 10,855,459 4.1 6.1 4.6 8.1 8.9 6.6

$25.98

$41.12

$49.39

$58.63

$69.64

$46.80 1,274,410 5,260,842 207,360 532,714 122,296 7,397,622 S25.98 S40.69 S49.43 S58.69 S71.92 S40.21

• g 81

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued.

Equity Awards and Incentive Awards, NUCLEAR INSURANCE: -

Entergy grants t

6stof. the equity awards and incentive awards

'Third Party Liability Insurance earned under its stock benefit plans in the form of performance The Price-Anderson Act provides units, which are equal to the cash value of shares of Entergy event of a nuclear power plant acc Corporation common stock at the time of payment. In addition to are borne by the nuclear power the potential for equivalent share appreciation or depreciation, per-.-

Congress in 1957 and most recen formance units %ill earn the cash equivalent of the dividends paid'--

Anderson Act requires nuclear p(

during the performance period applicable to each plan. The costs'of financial protection in the event oi equity and incentivd awards, given either as company stock or '

tion must consist of two levels:

performance units, are charged to income over the period of the.

1. The primary level is private insi grant or restricted pe'riod, as appropriate. In 2005, 2004, and 2003, Nuclear Insurers and provide

$36 million, $47 million, and $45 million, respectively, was charged.

$300 million. If this amount to compensation expense,.

arising from the accident, the s Protection, applies. An indust RETAINED EARNINGS AND DIVIDEND RESTRICTIONS S300 million exists for dome Provisions within' th4 articles of in'corporation or pertinent inden There is no aggregate limitation t tures and various other agreements relating to the long-term debt

2. Within the Secondary Financi:

and preferred stock of certain of Entergy Corporation's subsidiaries

.. 'plant must pay a retrospective pi restrict the payment of cash dividends or other distributions on their share of the loss in excess of the common and preferred stock. As of December 31, 2005, Entergy

of $100.6 million 'per reactor Arkansas and EntergI Mississippi had restricted retained earnings.

-S. $95.8 million maximum retrospI unavailable for distribbtion to Entergy Corporation of $396.4 million surcharge that may be applied, ii and $68.5 million, respectively. Entergy Corporation received dividend

• set at $15 million per year per n payments from subsidiaries totaling $424 million in 2005, S825 million -

domestically or fbreign-sponsoe in 2004, and S425 miilion in 2003.

Currently, 104 nuclear reactorsa NOTE 8. COMMITMENTS AND CONTINGENCIES Financial Protection program 7 Entergy is involved in a number of legal, tax, and regulatory-under construction. The product proceedings before various' courts, regulatory commissions, and premium assessment to the nuclea:

governmental agencies in the ordinary course of its business. While

' of nuclear power' reactors provid management is unable to predict the outcome of such proceedings, coverage to compensate the publi management does'nIt believe that the ultimate resolution 'of these.

reactor accident.

matters will have a m" ateiia'l adverse effect on Entergy's results of

.Entergy owns and operates ten c operations, cash flows, or financial condition.

r.

owns the shutdown Indian Point owned by a non-affiliated compan)

ENTERGY NEW ORLEANS BANKRUPTCY basis in any retrospective premil See Note 16 to the consolidated finahcial statements for information Anderson Act).

on the Entergy N w'rleans bankruptcy procedng..

An additional but temporary Ne "

v Orleans bankuptc "nuclear power reactor owners beca' VIDALIA PURCHASED POWER AGREEMENT Tort (long-term bodily injury caus Entergy Louisiana has an agreement extending.through the year.

ton whle employed at a nuclear t

I that was in place fromn 1988 to 2031 to purchase energy generated by a hydroelectric facility known a

as the Vidalia project) Entergy Louisiana made payments under. the'.

assessment. exposure to each react contract of approximatelyS 115.1 million in 2005, S 147.7 million in applied if such claims exceed the 2004, and $112.6 million in 2003. If themaximum percentage (94%).fnds.

This contingent premium a.

of the energy is 'made available. to Entergy Louisiana, current.

the Nuclear. Wbrker Tort progran production projections 'would require estimated payments of for 2008.

approximately $130"4rmillion in 2006, and a total ofS3.4 billion for,'

the years 2006 throulh 203 1. Entergy Louisiana currently recovers the costs of the purchased energy through its fuel adjustment clause.

In an LPSC-appr'ov'ed settlement related to tax benefits from the tax treatment of the Vidalia contract, Entergy Louisiana agreed to cred-it rates by $11 milli0ol each year for up to ten years, beginning in.:

October 2002. The provisions' of the settlement 'also provide that-the LPSC shall not recognize or use Entergy Louisiana's use of the.

cash benefits from, the tax treatment'in, setting any of Entergy Louisiana's rates. Thetrefore, to the extent Entergy Louisiana's use of the proceeds would ordinarily have reduced its rate base, no change in rate base sliall be reflected for ratemaking purposes.

82 I

insurance for the public in the ident. The costs of this insurance industry. Originally passed, by tly amended in 2005, the Price-wer plants to show evidence of f a nuclear accident. This protec-urance underwritten by American s liability insurance coverage of is not sufficient to cover claims econd level, Secondar'y Financial' try-wide aggregate limitation' of' stically-sponsored terrorist 'acts.

for foreign-sponsored terrorist acts.

al Protection level, each nuclear remium, equal to its proportionate, primary level, up to a maximum per incident. This consists of a ective premium plus a five percent f needed, at a rate that is presently udear power reactor. There are no d terrorism limitations.

re participating in the Secondary 103 operating reactors and one of the maximum.'retrospective rrpower industryand the number" es over $10 billion in insurance.

c in the event of a nuclear power f the nuclear power reactors, and 1 reactor (10% of Grand Gulf is which would share on a pro-rata am assessment under the Price-

ontingent liability exists for all use of a previous Nuclear Wbrker ed by exposure to nuclear radia-power plant) insurance program 1998. The maximum premium or is $3 million and will only be program's accumulated reserve.

ssessment feature will expire with I's expiration, which is scheduled J.

• ~1

'I

.1 I

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued 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 December 31, 2005, Entergy was insured against such losses per the following structures:

U.S. Utility Plants (ANO I and 2, Grand Gulf, River Bend, and Iraterford 3) i Primary Layer (per plant) - $500 million per occurrence

" Excess Layer (per plant) - $100 million per occurrence

" Blanket Layer (shared among the U.S. Utility plants) -

$1.0 billion per occurrence

" Total limit - $1.6 billion per occurrence

" Deductibles:

S S5.0 million per occurrence - Turbine/generator damage

$5.0 million per occurrence - Other than turbine/

generator damage 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) - S500 million per occurrence

• Blanket Layer (shared among all plants) - $615 million per occurrence

" Total limit - SI. 115 billion per occurrence

• Deductibles:

$2.5 million per occurrence - Turbine/generator damage

• $2.5 million per occurrence - Other than turbine/

generator damage 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 December 31, 2005:

Indian Point 2 and 3

• $4.5 million weekly indemnity

• $490 million maximum indemnity

• Deductible: 12 week waiting period FitzPatrick and Pilgrim (eacb plant has an individual policy witb the noted parameters)

• S4.0 million weekly indemnity

• $490 million maximum indemnity

• Deductible: 12 week waiting period Ien-ont 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 acci-dental outage insurance programs, Entergy nuclear plants could be subject to assessments should losses exceed the accumulated funds available from NEIL. As of December 31, 2005, the maximum amounts of such possible assessments per occurrence were S52.5 million for the U.S. Utility plants and $66.7 million for the Non-Utility Nuclear plants.

Entergy maintains property insurance for its nuclear units in excess of the Nuclear Regulatory Commission's (NRC's) minimum requirement of $1.06 billion per site for nuclear power plant licensees. NRC regulations provide that the proceeds of this insur-ance must be used, first, to render the reactor safe and stable, and second, to complete decontamination operations. Only after pro-ceeds 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 S3.24 billion plus the additional amounts recovered for such losses from reinsur-ance, indemnity, and any other sources applicable to such losses.

There is no aggregate limit involving one or more acts of foreign-sponsored terrorism.

NoN-NUCLEAR PROPERTY INSURANCE Entergy's non-nuclear property insurance program provides cover-age up to $400 million on an Entergy system-wide basis, subject to a $20 million per occurrence self-insured retention, for all risks cov-erage for direct physical loss or damage, including boiler and machinery breakdown. Covered property generally includes power plants, substations, facilities, inventories, and gas distribution-related properties. Excluded property generally includes above-ground transmission and distribution lines, poles, and towers. The primary property program (excess of the deductible) is placed through Oil Insurance Limited ($250 million layer) with the excess program

($150 million layer) placed on a quota share basis through under-

,writers at Lloyds (50%) and Hartford Steam Boiler Inspection and Insurance Company (50%). There is an aggregation limit of $I billion for all parties insured by OIL for any one occurrence. Coverage is in place for Entergy Corporation, Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans.

In addition to the OIL program, Entergy has purchased additional coverage. for some of its non-regulated, non-generation assets through Zurich American. This policy serves to buy-down the

$20 million deductible and is placed on a scheduled location basis.

The applicable deductibles are $100,000 or $250,000 as per the schedule provided to underwriters.

NUCLEAR DECOMMISSIONING AND OTIIER RETIREMENT COSTS 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. For Entergy; these asset retirement obligations consist of its liability for decommissioning its nuclear power plants.

83

I

" I"ENTERGY CORPORATION AND NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued These liabilities are recorded at their fair values (which are the SFi present values of the estimated future cash outflows) in the period in of$

which they are inctrred, with an accompanying addition to the I

recorded cost of the 'long-lived asset. The asset retirement obliga-bus tion is accreted each year through a charge to expense, to reflect the.

liab time value of money for this present value obligation. The amounts whi added to the carrying amounts of the long-lived assets will be depre-ass ciated over the useful lives of the assets.

of t In accordance with ratemaking treatment and as required by nec SFAS 71, the deprecIation provisions for the domestic utility com-the panies and System Energy include a component for removal costs pre that are not asset reurement obligations under SFAS 143. In accor-

- SF/

dance with regulatory accounting principles, Entergy has recorded I

a regulatory asset f0z* certain of its domestic utility companies and nes System Energy of $162.9 million as of December 31, 2005 and cos

$86.9 million as of December 31, 2004 to reflect an estimate of asa incurred but uncolle cted removal costs previously recorded a's a tiox component of accumulated depreciation. The decommissioning and rev retirement cost liability for certain of the domestic utility companies (S1 and System Energy includes a regulatory liability of $22.8 million as of the December 31, 2005 and S34.6 million as of December 31, 2004 repre-I senting an estimate ofecollected but not yet incurred removal costs.

sioi The cumulative decommissioning and retirement cost liabilities wit and expenses recorded in 2005 by Entergy were as follows (in millions):

ed resi Liabilities, Change In LUabiliities lial as of Implementation Cash Flow as of SIC Dec. 31,2004 Accretion of FIN 47 Estimate Spending Dec.31,2005 U. S.

to

Utility, SI,328.0i S88.2 S27.8

$(282.2)

S1,161.8 dar Non-Utility app Nuclear S 738.3ý

$59.2 S 0.9 S (26.0)

S(10.3)

S 762.1 resi

,1 liat In addition, an insignificant amount of removal costs associated with

'reg non-nuclear power pfIants are also included in the decommissioning I

line item on the balatnce sheet. Entergy periodically reviews and its updates estimated decommissioning costs. The actual decommis-dec sioning costs may vary from the estimates because of regulatory resi requirements, changes in technology, and increased costs of labor,.

bili materials, and eqpment. During 2004 and 2005, Entergy updated plai decommissioning cost studies for ANO I and 2, River Bend, Grand I

Gulf, Waterford, ind'a non-utility plant.

47, In the first quarterof 2004, Entergy Arkansas recorded arevision int In the firs r

to its estimated decommissioning cost liability in accordance with a of new decommissioning cost study for ilNO I and 2 as a result of ret revised decommissioning costs and changes in assumptions regard-are ing the timing of when the decommissioning of the plants will me begin. The revised estimate resulted in a $107.7 million reduction in dis its decommissioning liability, along with a $19.5 million reduction.

whi in utility plant and an' S88.2 million reduction in the related regula-de(

tory asset.

for In the third quarte1J of 2004, Entergy Gulf States recorded a revi-rec sion to its estimated decommissioning cost liability in accordance

-net with a new decommissioning cost study for River Bend that reflect-'-'

ing ed an expected life extension for the plant.. The revised estimate of resulted in a S166.4 nrillion reduction in decommissioning liability, se' along with a $31.3 miilion reduction in utility plant, a S49.6 million:

resi reduction in non-utility property, a S40.1 millionreduction in the reg related regulatory asset, and a regulatory liability of S17.7 million.

me For the portion of Riher Bend not subject to cost-based ratemaking,

• ril the revised estimate risulted in the elimination of the asset retire-seg ment cost that had been recorded at the time of adoption'of the 84 SUBSIDIARIES 2005 I

AS 143 with-the remainder recorded as miscellaneous income

27.7 million (S17 million net-of-tax).

in the third"quarter of 2004, Entergy's Non-Utility Nuclear iness recorded a reduction of S20.3 million in'decommissioning ility to reflect changes in assumptions regarding the timingof" en decommissioning of a plant will begin. Entergy considered the imptions as jart of recent studies evaluating the economic effect he plant in its region. The revised estimate resulted in miscella-us income of S20.3 million ($11.9 million net-of-tax), reflecting excess of the reduction in the liability over the amount of unde-ciated asset retirement cost recorded at the time of 'adoption of

'.5 143.,

n the first quarter of 2005, Entergy's Non-Utility Nuclear busi-s recorded a reduction'of S26.0 million in its decommissioning t liability in conjunction with a new decommissioning cost study result of revised decommissioning costs and changes in assump-ns regarding the timing of the decommissioning of a plant. The.

ised estimate resulted in miscellaneous income of $26.0 million 5.8 million net-of-tax), reflecting the excess of the reduction in.

liability over the amount of undepreciated assets.

n the second quarter of 2005, Entergy Louisiana recorded a revi-n to its estimated decommissioning cost liability in accordance ha new decommissioning cost study for W.\\aterford 3 that reflect-an expected, life extension for the plant. The revised estimate

.Ited in a $153.6 million reduction in its decommissioning-ility, along -with a $49.2 million reduction in utility plant and a 1.44 million reduction in the related regulatory asset.

n the third quarter of 2005, EntergyArkansas recorded a revision ts estimated decommissioning cost liability for ANO 2 in accor-ice with the receipt of approval by the NRC of Entergy Arkansas' lication for a life extension for the unit. The revised estimate ulted in an: S87.2 million reduction in its decommissioning iility, along. with a corresponding reduction in the, related ulatory asset.

n the third quarter of 2005, System Energy recorded a revision to.

estimated decommissioning cost liability in accordance with a new oommissioning cost study for Grand Gulf; The revised estimate ulted in a $41.4 million reduction in the decommissioning cost lIa-ty for Grand Gulf, along with a $39.7 million reduction in utility nt and a $1.7 millionreductioni in the related regulatory asset.

n December 2005, Enter-gy implemeiited FASB Interpretation "Accounting for Conditional Asset Retirement Obligations - an,

erpretation of FASBI Statement No. 143", (FIN 47), effective as, that date, which irequired the recognition of additional asset rement obligations other than nuclear decommissioning which,-

conditional in nature. -The obligations recognized upon imple-ntation primarily represent Enterigy's obligation to remove and pose of asbestos at many of its non-nuclear ginerating units if and en those units are retired from commercial'service and dismafi-I. For. the U.S. Utility business, the implementation'of FIN 47.

the rate-regulated business of the domestic utility companies was orded in' regulatory assets, with no resulting effect on Entergy's income. Eniergy recorded these regulatory assets because exist-rate mechanisms in each jurisdiction allow the recovery in rates the ultimate, costs of asbestos removal, either through cost of vice or in rate base, from current and future customers. As a lt of this treatnent' FIN 47 was-earnings neutral to the rate- "

ulated business of the domestic utility companies. Upon imple-*

ntation of FIN 47 in December 2005, assets increased by $28.8 lion and liabilities increased by $30.3 million for the U.S. Utility'.'.

ment as a result'of recording the asset retirement obligations at ir fair values of $30.3 million' as determined under FIN 47, I

I%

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued increasing utility plant by $2.7 million, increasing accumulated depreciation by $1.8 million, and recording the related regulatory assets of S27.9 million. The implementation of FIN 47 for portions of Entergy Gulf States not subject to cost-based ratemaking decreased earnings by S0.9 million net-of-tax. If Entergy had applied FIN 47 (luring prior periods, the following impacts would have resulted:

December 31,2004 December 31, 2003 tksset retirement obligations actually recorded S2,066,277

$2,215,490 Pro forma effect of FIN 47 S 29,399 S

27,708 Asset retirement obligations - pro forma

$2,095,676

$2,243,198 The impact on net income for each of the years ended December 31, 2004 and 2003 would have been immaterial.

For the Indian Point 3 and FitzPatrick plants purchased in 2000, NITA retained the decommissioning trusts and the decommissioning liability. NI'TA and Entergy executed decommissioning agreements, which specify their decommissioning obligations. NYPA has the right to require Entergy to assume the decommissioning liability provided that it assigns the corresponding decommissioning trust, up to a specified level, to Entergy. If the decommissioning liability is retained by NIPA, Entergy will perform the decommissioning of the plants at a price equal to the lesser of a pre-specified level or the amount in the decommissioning trusts. Entergy believes that the amounts available to it under either scenario are sufficient to cover the future decommissioning costs without any additional contribu-tions to the trusts.

Entergy maintains decommissioning trust funds that are commit-ted to meeting the costs of decommissioning the nuclear power plants. The fair values of the decommissioning trust funds and asset retirement obligation-related regulatory assets of Entergy as of December 31, 2005 are as follows (in millions):

Regulatory Decommissioning Trust Asset U. S. Utility

$1,136.0 S271.7 Non-Utility Nuclear

$1,470.8 S

The Energy Policy Act of 1992 contains a provision that assesses domestic nuclear utilities with fees for the decontamination and decommissioning (D&D) of the DOE's past uranium enrichment operations. Annual assessments in 2005 were $4.5 million for Entergy Arkansas, $1.1 million for Entergy Gulf States, $1.7 million for Entergy Louisiana, and $1.9 million for System Energy. The Energy Policy Act calls for cessation of annual D&D assessments not later than October 24,2007. At December 31, 2005, one year of assessments was remaining. D&D fees are included in other current liabilities and other non-current liabilities and, as of December 31, 2005, recorded liabilities were $4.5 million for Entergy Arkansas,

$1.1 million for Entergy Gulf States, $1.7 million for Entergy Louisiana, and $1.7 million for System Energy. Regulatory assets in the financial statements offset these liabilities, with the exception of Entergy Gulf States' 30% non-regulated portion. These assess-ments are recovered through rates in the same manner as fuel costs.

CASIIPOINT BANKRUPTCY In 2003 the domestic utility companies entered an agreement with CashPoint Network Services (CashPoint) under which CashPoint was to manage a network of payment agents through which Entergy's utility customers could pay their bills. The payment agent system allows customers to pay their bills at various commercial or governmental locations, rather than sending payments by mail. Approximately one-third of Entergy's utility customers use payment agents.

On April 19, 2004, CashPoint failed to pay funds due to the domestic utility companies that had been collected through payment agents. The domestic utility companies then obtained a temporary restraining order from the Civil District Court for the Parish of Orleans, State of Louisiana, enjoining CashPoint from distributing funds belonging to Entergy; except by paying those funds to Entergy. On April 22, 2004, a petition for involuntary Chapter 7 bankruptcy was filed against CashPoint by other creditors in the United States Bankruptcy Court for the Southern District of New York. In response to these events, the domestic utility companies expanded an existing contract with another company to manage all of their payment agents. The domestic utility companies filed proofs of claim in the CashPoint bankruptcy proceeding in September 2004. Although Entergy cannot precisely determine at this time the amount that CashPoint owes to the domestic utility companies that may not be repaid, it has accrued an estimate of loss based on current information. If no cash is repaid to the domestic utility companies, an event Entergy does not believe is likely, the current estimate of maximum exposure to loss is approximately $25 million.

HARRISON COUNTY PLANT FIRE On May 13, 2005, an explosion and fire damaged the non-nuclear wholesale assets business' Harrison County power plant. A cata-strophic failure and subsequent natural gas escape from a nearby 36-inch interstate pipeline owned and operated by a third party is believed to have caused the damage. Current estimates are that the cost to clean-up the site and reconstruct the damaged portions of the plant will be approximately S52 million and take until the sec-ond quarter 2006 to be completed. The plant's property insurer has acknowledged coverage, subject to a S200 thousand deductible.

Entergy owns approximately 61% of this facility. Entergy does not expect the damage caused to the I tarrison County' plant to have a material effect on its financial position or results of operations.

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, and/or other protected characteristics.

Entergy Corporation and these subsidiaries are vigorously defend-ing these suits and deny any liability' to the plaintiffs. Nevertheless, no assurance can be given as to the outcome of these cases.

85

ENTERGY CORPORATION AND'SUBSIDIARIEs. 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued.'.-'

NOTE 9. LEASES.

SALE AND LEASEBACK TRANSACTIONS GENERAL In 1988 and 1989, System Entergy and Entergy Louisiana, respec-.

As of December 31, 2005, Entergy had capital leases and noni-can-tively, sold and leased back portions of their ownership interests.

celable operating leases for equipment, buildings, vehicles, and fuel in Grand Gulf and.Waterford 3 for 26 1/2-year and 28-year lease storage facilities (excluding nuclear fuel leases and the Grand Gulf terms, respectively. Both companies have options to terminate the and W*aterford 3"sale: and leaseback transactions) with minimum -

leases, to repurchase the sold interests,'or to renew the leases at lease payments as follows (in thousands):

the end of their terms.

" Under System Energy's sale and leaseback arrangements, letters of Operating Capital credit are required to be maintained to secure certain amounts payable Year Leases..

Leases

" for the benefit of the equity investors by System Energy under the 2006j S94,53

~leases.

The current letters of credit are effective until May 2009.

2007 77,026

.3,495

" - " Entergy Louisiana did not exercise its option. to repurchase the.

2008 63,081 1,307-udvdd neet 2009 51,692

-37 undivided i nterts in Waterford 3 in 1994. As a result, Entergy 2010 1,692 237 Louisiana was required to provide collateral for the equityportion Years the0eafter 196,312" 2,331 of certain amounts payable by Entergy Louisiana under the leases.

Such collateral was in the form of a new series offion-interest bear-Minimumn lease payments 519,339 13,354-Less:mount repseny gintrs t

519,3 ing first mortgage. bonds in the aggregate principal amount of Less: ALmount representing interest

-3,403.....

Present,alue of net*

$208.2 million issued by Entergy Louisiana in September 1994.

minimum lease pay)ments S519,339

$S 9,951 InJuly 1997, Ente'rgy Louisiana caused the Wlaterford 3 lessors to issue $307.6 million aggregate principle amount of.Waterford 3 Total rental expenses for all leases (excluding nuclear fuel leases Secured Lease Obligation Bonds, 8.09% Series due 2017, to refinance and the Grand Gulf and Waterford 3 sale"and leaseback transac

" the outstanding bonds originally issued to finance the purchase of tions) amounted to $71.2 million in 2005, $81.3 million in 2004, and the undivided interests by the lessors. In May 2004, System Eniergy

$84.3 million in 2003!

caused the Grand Gulf lessors to refinance the outstanding bonds that they had issued to finance-the purchase of their undivided NUCL-EAR FUELLEASES

-interest in Grand Gulf. Both refinancings are at lower interest rates, As of December 31, 2005, arrangements to lease nuclear fuel existed and Entergy Louisiana's and System Energy's lease payments have in an aggregate amount up to $150 million for Entergy Arkansas, been reduced to reflect the lower interest costs.

$105 million for.Entergy Gulf States, $80 million for Entergy As of December 31, 2005, Entergy Louisiana and System Energy As of December' had future minimum lease paymients, recorded as long-term debt.

Louisana, and $11I0 million for System Energy. As oDembr31, 2005, the unrecovered'cost base of nuclear fuel leases amounted t (reflecting an implicit'rate of 7.45% and 5.02%, respectively) as follows

('~~m thousands): :--"".

annroximatelv $92.2 million for Enterov Arkansnas. $5S.2 million for Cm thousads):-

Entergy Gulf States, $58.5 million for Entergy Louisiana, and $87.5 million for System Energy. The lessors finance the acquisition and&

ownership of nuclear fuel through loans made under revolving cred-it agreements, the issuance of commercial paper, and the issuance of intermediate-term notes. The. credit agreements, for Entergy Arkansas, Entergy Gdulf States, Entergy Louisiana, and System Energy each have a termination date of October 30, 2006. The ter-mination dates may, b4 extended from time to time with the consent of the lenders. The intermediate-term notes issued pursuant to these fuel lease arrangements have varying maturities through February 15, 2009: It is expected that additional financing under the leases will be arranigea as needed to acquire additional fuel, to pay interest, and to pay maturing debt. However, if such additional financing cannot be arranged, the lessee in each case must repurchase sufficient nuclear fuel to allow the lessor to meet its obligations in accordance with the fuel lease.

Lease payments are lased on nuclear fuel uise. The total nuclear fuel lease payments (prncipal and interest) as well as the separate interest component charged to operations by the domestic utility companies and System Energy were $135.8 million (cmduding interest of $12.9 million) in 2005, S146.6 million' (including interest of $12.8 million) in 2004, and

$142.0 million (indudinrg interest of $11.8 million) in 2003.

86 Enteroy System Year Louisiana:

Energy 2006 S S 18,261 S

S 46,019 2007 -

'18,754 46,552 2008 22,606 47,128

.2009 "-

32,452 47,760

.2010-r 35,138 48,569 Years thereafter 298,924 253,833 Minimum lease payments 426,135, 489,861-Less: Amount representing interest 178,410 125,055 Present.value ofnet minimum lease payments.$S247,725 S364,806

?

1..~.

,.,............_'..J

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued NOTE 10. RETIREMENT, OTHER POSTRETIREMENT BENEFITS, AND DEFINED CONTRIBUTION PLANS QUALIFIED PENSION PLANS Entergy has seven qualified pension plans covering substantially all of its employees: "Entergy Corporation Retirement Plan for Non-Bargaining Employees," "Entergy Corporation Retirement Plan for Bargaining Employees," "Entergy Corporation Retirement Plan II for Non-Bargaining Employees," "Entergy Corporation Retirement Plan II for Bargaining Employees," "Entergy Corporation Retirement Plan III," "Entergy Corporation Retirement Plan IV for Non-Bargaining Employees," and "Entergy Corporation Retirement Plan IN" for Bargaining Employees." Except for the Entergy Corporation Retirement Plan III, the pension plans are noncontributory and pro-vide pension benefits that are based on employees' credited service and compensation during the final years before retirement. The Entergy Corporation Retirement Plan III includes a mandatory employee contribution of 3% of earnings during the first 10 years of plan participation, and allows voluntary contributions from 1% to 10% of earnings for a limited group of employees. Entergy Corporation and its subsidiaries fund pension costs in accordance with contribution guidelines established by the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended. The assets of the plans include common and preferred stocks, fixed-income securities, interest in a money market fund, and insurance contracts. As of December 31, 2005 and 2004, Entergy recognized an additional minimum pension liability for the excess of the accumulated benefit obligation over the fair market value of plan assets. In accordance with SFAS 87, an offsetting intangible asset, up to the amount of any unrecognized prior service cost, was also recorded, with the remain-ing offset to the liability recorded as a regulatory asset reflective of the recovery mechanism for pension costs in the U.S. Utility's juris-dictions or to other comprehensive income for Entergy's non-regulated business. Entergy's domestic utility companies' and System Energy's pension costs are recovered from customers as a component of cost of service in each of its jurisdictions. Entergy uses a December 31 measurement date for its pension plans. As a result of the Entergy New Orleans bankruptcy filing, Entergy has discontinued the consolidation of Entergy New Orleans retroactive to January 1, 2005, and is reporting Entergy New Orleans' results under the equity method of accounting.

COMPONENTS OF QUALIFIED NET PENSION COST Total 2005, 2004, and 2003 qualified pension costs of Entergy Corporation and its subsidiaries, including amounts capitalized, included the following components (in thousands):

2005 2004 2003 Service cost - benefits earned during the period S 82,520 S 76,946

$ 70,337 Interest cost on projected benefit obligation 155,477 148,092 134,403 Expected return on assets (159,544)

(153,584)

(155,460)

Amortization of transition asset (662)

(763)

(763)

Amortization of prior service cost 4,863 5,143 5,886 Recognized net loss 35,604 21,687 6,399 Curtailment loss 14,864 Special termination benefits 32,006 Net pension costs S 118,258 S 97,521

$ 107,672 QUALIFIED PENSION OBLIGATIONS, PLAN ASSETS, FUNDED STATUS, AMOUNTS NOT YET RECOGNIZED AND RECOGNIZED IN TIlE BALANCE SHEET AS OF DECEMBER 31, 2005 AND 2004 (IN TIIOUSANDS):

2005 2004 Change in Projected Benefit Obligation (PBO)

Balance at beginning of year

$2,555,086 S2,349,565 Service cost 82,520 76,946 Interest cost 155,477 148,092 Amendments 6,467 3,709 Actuarial loss 211,194 171,146 Employee contributions 1,032 1,212 Benefits paid (117,768)

(117,234)

Balance at end of year

$2,894,008

$2,633,436 Change in Plan Assets Fair value of assets at beginning of year SI,841,929 S1,744,975 Actual return on plan assets 137,885 170,964 Employer contributions 131,801 72,825 Employee contributions 1,032 1,212 Benefits paid (117,768)

(117,234)

Fair value of assets at end of year

$1,994,879

$1,872,742 Funded status S (889,129)

S(760,694)

Amounts not yet recognized in the balance sheet Unrecognized transition asset (662)

Unrecognized prior service cost 29,393 29,053 Unrecognized net loss 713,285 542,391 Accrued pension cost recognized in the balance sheet

$(156,451)

S (189,912)

Amounts recognized in the balance sheet Accrued pension cost S (156,451)

S (189,912)

Additional minimum pension liability (406,463)

(244,280)

Intangible asset 24,159 26,167 Accumulated other comprehensive income (before taxes) 24,243 10,781 Regulatory asset 358,061 207,332 Net amount recognized S(156,451)

S(189,912) 87

ENTERGY CORPORATION NOTES to CONSOLIDATED FINANCIAL STATEMENTS cont, OTHER POSTRETIREMENT BENEFITS.

Entergy also currendty provides health care and life insurance bene-fits for retired empl6iees. Substantially all domestic employees may become eligible for tHese benefits if they reach retirement age while still working for Entergy. Entergy uses a December 31 measurement date for its postrenremnent benefit plans.

Effective January :1, 1993, Entergy adopted SFAS 106, 'which required a change ftrom a cash method to an accrual method of accounting for postretirement benefits other than' pensions. At January 1, 1993, the actuarially determined accumulated postretire-;

ment benefit obligation (APBO) earned by' retirees and ac *,tive employees was estim.ated to be approximately $241.4 million for Entergy. (other thanlEnteigy Gulf States) and S128, million for Entergy Gulf States..Such obligations are being amortized over a*.

20-year period that began in 1993. For the most part, the domestic*

utility companies and System Energy recover SFAS 106 costs from customers and are required to fund postretirement benefits collected in rates to an external trust.

COMPONENTS OF NET OTHER POSTRETIREMENT BENEFIT COST Total 2005, 2004, and 2003 other postretirement benefit costs of Entergy Corporation and its subsidiaries, including amounts capitalized and deferred, included the following components (in thousands):

2005 2004' 2003 AND SUBSIDIARIES 2005

-OTIHER POSTRETIREMENT BENEFIT OBLIGATIONS,'

PLAN ASSETS, FUNDED STATUS, AND AMOUNTS NOT YET RECOGNIZED AND RECOGNIZED IN TIlE BALANCE SHEET AS OF DECEMBER'31, 2005 AND 2004 (IN THOUSANDS):

2005 2004 Change in APBO Balance at beginining of year S 928,217 S 941,803 Service cost 37,310 30,947 Interest cost 51,883 53,801 Actuarial loss 98,041 73,890 Benefits paid (60,031)

(66,456)

Plan amendments (64,200)

(60,231)

Plan participant contributions 6,749 9,312 Balance at end of year S 997,969 S 983,066 Change in Plan Assets Fair value of assets at beginning of year Actual return on plan assets Employer conutibutions Plan participant contributions-

$ 214,005 15,003 58,790 6,749 S. 227,446 15,550 63,399" 9,312 Benefits paid-(60,031)

(66,455)

Fair value of assets.

at end ofyear S 234.516 S 249,252 Funded status S(763,453)

S(733,814)

Service cost - benefits earned during the period S37,310 S30,947.

$ 37,799 Interest cost onAPBO 51,883 53,801 52,746 Expected return on assets (17,402)

(18,825)

(15,810)

Amortization of.'

transition obligation-3,368 9,429 15,193 Amortization of prior service cost

]

(13,738)

(5,222)

(925)

Recognized net (gain)/loss 22,295 15,546 12,369 Curtailment loss

.:. 4 57,958' Special termination benefits 5,44 Net other postretiremen.

benefit cost S

S83,716 S585,676

'SI64,774 a.

-,.mounms not yet recognmzea in the balance sheet Unrecognized transition obligation

• Unrecognized prior service cost 15,176 (66,105) 5,594 (39,560)

÷ Unrecognized net loss 403,252 391,940 Accrued other postretirement benefit cost recognized in the balance sheet 5(411,130)

S(375,840)

QUALIFIED PENSION AND OTHER POSTRETIREMENT PLANS' ASSETS Entergy's qualified pension and postretirement plans weighted-average asset allocations by asset category at December 31, 2005 and 2004 are as follows:

Pension?

Postretirement 2005

- 2004 2005 2004*

Domestic Equity Securities 45%.

.46%

37%

38%

International Equity Securities.

21%

21%

15%

14%

. Fixed-Income Securities 32%

31%

47%

47%*

Other 2%

2%

1%

1%

I I

Entergy's trust asset investment strategy is to invest the assets in a

-manner whereby long-term earnings on the assets (plus cash contri-butions) provide adequate funding for retiree benefit payments. The mix of assets is based on an optimization study that identifies asset allocation targets in order to achieve the maximum return for an acceptable level of risk, while minimizing the expected contributions and pension and postretirement expense.

In the optimization study, Entergy formulates assumptions (or hires a consultant to provide such analysis) about characteristics, such as expected asset class investment returns, volatility (risk), and correlation coefficients among the various asset classes. The future

• market assumptions used in the optimization study are determined by examining historical market characteristics of the various asset classes, and making adjustments to reflect future conditions expected to prevail over the study period.-

88

ENTERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued The optimization analysis utilized in Entergy's latest study produced the following approved asset class target allocations.

Pension Postretirement Domestic Equity Securities 45%

37%

International Equity Securities 20%

14%

Fixed-Income Securities 31%

49%

Other (Cash and GACs) 4%

0%

These allocation percentages combined with each asset class' expected investment return produced an aggregate return expecta-tion for the five years following the study of 7.6% for pension assets, 5.4% for taxable postretirement assets, and 7.2% for non-taxable postretirement assets. These returns are not inconsistent with Entergy's disclosed expected pre-tax return on assets of 8.50% over the life of the respective liabilities.

Since precise allocation targets are inefficient to manage security investments, the following ranges were established to produce an acceptable economically efficient plan to manage to targets:

Pension Postretirement Domestic Equity Securities 45% to 55%

32% to 42%

International Equity Securities 15% to 25%

9% to 19%

Fixed-Income Securities 25% to 35%

44% to 54%

Other 0% to 10%

0% to 5%

ACCUMULATED PENSION BENEFIT OBLIGATION The accumulated benefit obligation for Entergy's qualified pension plans was S2.5 billion and S2.3 billion at December 31, 2005 and 2004, respectively.

ESTIMATED FUTURE BENEFIT PAYMENTS Based upon the assumptions used to measure Entergy's qualified pension and postretirement benefit obligation at December 31, 2005, and including pension and postretirement benefits attributable to estimated future employee service, Entergy expects that benefits to be paid over the next ten years will be as follows (in thousands):

ADDITIONAL INFORMATION The change in the qualified pension plans' minimum pension liability included in other comprehensive income and regulatory assets was as follows for 2005 and 2004 (in thousands):

2005 2004 Increase/(decrease) in the minimum pension liability included in:

Other comprehensive income (before taxes)

S 13,462

$ (4,578)

Regulatory assets S150,729 S 73,311 ACTUARIAL AsSUMIPTIONS The assumed health care cost trend rate used in measuring the APBO of Entergy was 12% for 2006, gradually decreasing each successive year until it reaches 4.5% in 2012 and beyond. The assumed health care cost trend rate used in measuring the Net Other Postretirement Benefit Cost of Entergy was 10% for 2005, gradually decreasing each successive year until it reaches 4.5% in 2011 and beyond. A one percentage point change in the assumed health care cost trend rate for 2005 would have the following effects (in thousands): _

1 Percentage Point Increase Impact on the sum ot Impact on service costs and the APBO Interest cost 1 Percentage Point Decrease Impact on the sum of Impact on service costs and the APBO Interest cost Year(s) 2006 2007 2008 2009 2010 2011-2015 Estimated Future Benefits Payments Pension Postretirement S118,291

$ 58,936

$120,343 S 63,280

$123,592 S 66,551

$128,281 S 69,397

$134,532 S 72,545 S840.503 5405.161 Estimated Future Medicare Subsidy Receipts S 4,241 S 4,928 S 5,618 S 6,249 S 6,810 S45,328 Entergy Corporation S101,814

$12,727

$(92,042)

S(10,998)

The significant actuarial assumptions used in determining the pension PBO and the SFAS 106 APBO as of December 31, 2005, 2004, and 2003 were as follows-2005 2004 2003 Weighted-average discount rate:

Pension 5.90%

6.00%

6.25%

Other postretirement 5.90%

6.00%

6.71%

Weighted-average rate of increase in future compensation levels 3.25%

3.25%

3.25%

The significant actuarial assumptions used in determining the net periodic pension and other postretirement benefit costs for 2005, 2004, and 2003 were as follows:

2005 2004 2003 Weighted-average discount rate:

Pension 6.00%

6.25%

6.75%

Other postretirement 6.00%

6.71%

6.75%

Weighted-average rate of increase in future compensation levels 3.25%

3.25%

3.25%

Expected long-term rate of return on plan assets:

Taxable assets 5.50%

5.50%

5.50%

Non-taxable assets 8.50%

8.75%

8.75%

CONTRIBUTIONS Entergy expects to contribute $349 million (excluding about $1 million in employee contributions) to its qualified pension plans in 2006.

$107 million of this contribution was originally planned for 2005, however it was delayed as a result of the Katrina Emergency Tax Relief Act. Entergy expects to contribute $60 million to other postretirement plans in 2006.

Entergy's remaining pension transition assets are being amortized over the greater of the remaining service period of active participants or 15 years which ended in 2005, and its SFAS 106 transition obligations are being amortized over 20 years ending in 2012.

89

ENTERGY CORPORATION. AND' SUBSIDIARIES 2005 NOTES to CONSOLIDATED FIN.ANCIAL STATEMENTS continued VOLUNTARY SEVERANCE PROGRAM contribution discussed above. The As part of an initiative to achieve productivity improvements with a the employing Entergy subsidiary goal of reducing costs, primarily in the Non-Utility Nuclear and.

w in 'an amount equal to 75% of U.S. Utility businesses, in the second half of 2003 Entergy offered a tions, up to 6% of their eligibl voluntary severance program to employees in various departments, shares of Entergy Corporation Approximately 1,100 employees, including 650 employees in

• direct their company-matchini nuclear operations fr§m the Non-Utility Nuclear and U.S. Utility

. Entergy Corporation's commo businesses, accepted the offers. As a result of this program, in the

- in an amount equal to 50% of fourth quarter 20031 Entergy recorded additional pension and dons, up to 6% of'their eligibl postretirement costs Cincluding amounts capitalized) of $110.3 mil-

"employees direct their comipag lion for special termination benefits and plan curtailment chargesp charges.

.investment funds.

These amounts are inimuded in the net pension cost and net postre-tirement benefit cost for the year ended December 31, 2003.

Entergy also sponsors the Say I

and Subsidiaries 11 (establishedi MEDICARE PRESCRIPTION DRUG, IMPROVEMENT Corporation and 'Subsidiariesr AND MIODERNIZATION ACT OF 2003 AD ASavings Plan of Entergy Corpo In December 2003, tl*e President signed the Medicare Prescription lished in 2002) to which matchin Drug, Improvement and Modernization Act of 2003 into law. The plans are defined contribution pl Act introduces a prescription drug benefit cost under Medicare as defined by each plan, of Enti (Part D), starting in 2006, as well as federal subsidy to employers December 31,2005, employees who provide a retiree prescription drug benefit that is at least actu-of Entergy Corporation and Sub arially equivalent to Medicare Part D.

transferred into the System Saviu The actuarially, estimated effect of future Medicare subsidies merged into the System Savings reduced the Decerhber 31, 2005 and 2004 Accumulated Entergy's subsidiaries' contri Postretirement Benefit Obligation by S176 million and S161 million, plans collectively were 33.8 mill respectively, and reduced the 2005 and 2004 other postretirement and $31.5 million in 2003. The benefit cost by S24.3 million and $23.3 million, respectively.

to the System Savings Plan.

to-

.1..

NON-QUALIFIED PENSION PLANS NOTE 11. BUSINESS SEGM Entergy also sponsors non-qualified, non-contributory defined ben-Entergy's reportable segments a efit pension plans tlat provide benefits to certain executives.

Utility and Non-Utility Nuclear.

Entergy recognized n.et periodic pension cost of $16.4 million in distributes, and sells electric 2005, $16.4 million in 2004, and S14.5 million in 2003. The projected Louisiana, Mississippi, and Texa benefit obligation was $142 million and S141 million as of service in portions of Louisiana December 31, 2005 ard 2004, respectively. There are SO.4 million operates five nuclear power plan' in plan assets for: a " re-merger Entergy Gulf States plan. The ing electricpower produced by t accumulated benefit obligation was $133 million and $130 million "All Other" includes the parent ci as of December 31, 2005 and 2004, respectively. As of December 31, other business activity, including 2005, Entergys. additional minimum pension liability for the non-segment, the Competitive Retail qualified pension plans was $63.1 million. This liability was offset by the proceeds of sales of previous a $13.6 million intangible asset, $38.1 million regulatory asset, and Commodity Services segment an $11.4 million charge to accumulated other comprehensive ment prior to 2005, but it did nc income before taxes.

for a reportable segment in 20C Entergy-Koch's businesses in 2C DEFINED CONTRIBUTION PLANS the Energy Commodity Services Entergy sponsors thefSavings Plan of Entergy Corporation and thresholds in the foreseeable fui Subsidiaries (System Savings Plan). The System Savings Plan is a tion in the tables below has bel defined contribution plan covering eligible employees of Entergy Commodity Services segnient in and its subsidiaries. The employing Entergy subsidiary makes of the Entergy New Orleans ban matching contributions for all non-bargaining and certain bargaining tinued the consolidation of Ent employees to the System Savings Plan in an amount equal to 70%

January 1, 2005, and is report of the participants!, basic contributions, up to 6% of their'eligible under the equity method of acco' earnings per pay period. The 70% match is allocated to investments as directed by the employee.

Through January 31, 2004, the System Savings Plan provided that the employing Entergy subsidiary make matching contributions in the following manner for all non-bargaining and certain bargain-ing employees. The employing Entergy subsidiary continues to make matching contrib'utions in the following manner for all other bargaining employees who don't receive the 70% matching 1

90

~1II System Savings Plan provides that make matching contributions:

the participants' basic contribu-e earnings per pay period, in common stock if the employees g contribution to the purchase of:

n stock; or the participants' basic contribu-e earnings per pay period, if the' y-matching contribution to other tngs Plan of Entergy Corporation

.n 2001), Savings Plan of Entergy V (established in 2002), and, the ration and Subsidiaries V (estab-° g contributions are also made. The lans that cover eligible employees, ergy and its subsidiaries. Effective participating in the Savings Plan sidiaries V (Savings Plan V) were igs Plan when Savings Plan V Was Plan.

butions to defined contribution ion in 2005, $32.9 million in 2004,,

majority of the contributions were ENT INFORMATION s of December 31, 2005 are U.S.

'U.S. Utility generates, transmits, power in portions of Arkansas, s, and provides natural gas utility

a. Non-Utility Nuclear owns and ts and is primarily focused on sell-hose plants to wholesale customers.

ompany, Entergy Corporation, and the Energy Commodity Services Services business, and earnings on ly-owned businesses. The Energy as presented as a reportable seg-t meet the quantitative thresholds I5 and 2004, and with the sale of 304,' management does not expect segment to meet the quantitative ure. The 2004 and 2003 informa-en restated to include the Energy the All Other column. As a result kruptcy filing, Entergy has discon-ergy New Orleans retroactive to ng Entergy New Orleans, results unting in the U.S. Utility segment.

ENTERGY CORPORATION AND SUBSIDIARIES 200S NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued Entergy's segment financial information is as follows (in thousands):

Non-Utility U.S. Utility Nuclear*

All Other*

Eliminations Consolidated 2005 Operating revenues S 8,526,943

$1,421,547 S 237,735 S (79,978)

Sl0,106,247 Deprec., amort. & decomm.

867,755 117,752 13,991 999,498 Interest and dividend income 75,748 66,836 78,185 (70,290) 150,479 Equity in earnings of unconsolidated equity affiliates 765 220 985 Interest and other charges 364,665 50,874 130,302 (70,237) 475,604 Income taxes (benefits) 405,662 163,865 (10,243) 559,284 Loss from discontinued operations (44,794)

(44,794)

Net income (loss) 681,767 282,622 (40,544)

(87) 923,758 Preferred dividend requirements 22,007 3,475 (55) 25,427 Earnings (loss) applicable to common stock 659,760 282,622 (44,019)

(32) 898,331 Total assets 25,242,432 4,887,572 3,477,169 (2,755,904) 30,851,269 Investments in affiliates - at equity 150,135 428,006 (281,357) 296,784 Cash paid for long-lived asset additions 1,285,012 160,899 11,230 945 1,458,086 2004 Operating revenues S 8,142,808 S1,341,852 S 265,051 S (64,190)

S 9,685,521 Deprec., amort. & decomm.

915,667 106,408 21,028 1,043,103 Interest and dividend income 40,831 63,569 60,430 (55,195) 109,635 Equity in loss of unconsolidated equity affiliates (78,727)

(78,727)

Interest and other charges 383,032 53,657 96,229 (55,142) 477,776 Income taxes (benefits) 406,864 142,620 (184,179) 365,305 Loss from discontinued operations (41)

(41)

Net income (loss) 666,691 245,029 21,384 (55) 933,049 Preferred dividend requirements 23,283 297 (55) 23,525 Earnings applicable to common stock 643,408 245,029 21,087 909,524 Total assets 22,937,237 4,531,604 2,423,194 (1,581,258) 28,310,777 Investments in affiliates - at equity 207 512,571 (280,999) 231,779 Cash paid for long-lived asset additions 1,152,167 242,822 15,626 (5) 1,410,610 2003 Operating revenues S 7,584,857 1I,274,983 S 210,910 S (38,036)

$ 9,032,714 Deprec., amort. & decomm.

890,092 87,825 17,954 995,871 Interest and dividend income 43,035 36,874 45,651 (38,226) 87,334 Equity in earnings (loss) of unconsolidated equity affiliates (3) 271,650 271,647 Interest and other charges 419,111 34,460 90,295 (38,225) 505,641 Income taxes 341,044 88,619 67,770 497,433 Loss from discontinued operations (14,404)

(14,404)

Cumulative effect of accounting change (21,333) 154,512 3,895 137,074 Net income 492,574 300,799 157,094 950,467 Preferred dividend requirements 23,524 23,524 Earnings applicable to common stock 469,050 300,799 157,094 926,943 Total assets 22,402,314 4,171,777 3,572,824 (1,619,527) 28,527,388 Investments in affiliates - at equity 211 1,081,462 (28,345) 1,053,328 Cash paid for long-lived asset additions 1,233,208 281,377 54,358 1,568,943 Busineses marked witb *are referred to as the 'competithe businesses,",ith the exception of the parent company, Entergy Corporation.

Eliminations are primarily intersegment activity.

91

NOES IENTERGY CORPORATI ON A NOTES io CONSOLIDATED FINANCIAL STATEMENTS contin In the fourth quarter of 2005, Entergy decided to divest the retail electric portion ofthe Competitive Retail Services business operating in the ERCOT region of Texas. Due to this planned divestiture, activ-ity from this business1 is reported as discontinued operations in the Consolidated Statements of Income. In connection with the planned sale, an impairmenrt reserve of $39.8 million ($25.8 million net-of-tax) was recorded for the remaining net book value of the Competitive Retail Services business' information technology systems.

Revenues and pre-'ax income (loss) related to the Competitive Retail Services business' discontinued operations were as follows (in thousands):

2005 2004 2003 Operating revenues.,

$654,333 S438,203 S162,206 Pre-tax income (loss)

S (68,845)

S 5 562 S(21,763)

Assets and liabilities related to the Competitive Retail Services business' discontinued operations were as follows (in thousands):

ND SUBSIDIARIEs 2005 ted NOTE 12. EQUITY METHOD INVESTMENTS As of December 31, '2005, Entergy owns investments in the following companies that it accounts for under the equity method of accounting:

I Ownershin I Descrintion Ownership Entergy New Orleans, Inc.

100% o0 of comm nership A" regulated public utility-on stock-company that generates, trans-mits, distributes, and sells electric power to retail and wholesale customers. As a result of Entergy New Orleans' bankruptcy filing in September 2005, Entergy deconsolidated Entergy New

- Orleans and reflects Entergy New Orleans' financial results under the equity me'thod of accounting retroactive to '

January 1, 2005. See Note 16 for further discussion of the December31; 2005 2004 Current assets S 89,579 S 85,572 -

Other property and investments-15,095 5',061 Property, plant and equipment - net 19,587 27,867 Deferred debits and other assets 20,903 15,263 Total assets

$145,164 S133,763 Current liabilities S 26,036 S 32,552 Non-current liabilities 35,884

.,-.6,298-Equity '

83,244.

94,913 Total liabilities and equity S145,164 S133,763 Also, in the fourth q*arter of 2004, Entergy recorded a charge of approximately S55' million ($36 million net-of-tax), as a result of.

an impairment of, the value of the Warren Power plant. Entergy concluded that the svalue of the plant, which is owned in the non-nuclear wholesale assets business, was impaired. Entergy reached this conclusion based" on valuation studies prepared in connection with the sale 'of preferred stock in a subsidiary in the non-nuclear wholesal 1 assets business.'

GEOGRAPIIC AREAS For the years euded December 31, 2005, 2004, and 2003, Entergy derived less than 1% of its revenue from outside of the United States.

1'.

As 'of December 31, 2005 and '2004 Entergy had almost no long-lived assets located outside of the United States.

9 bankruptcy proceeding.

Entergy-Koch, LP 50% partnership Engaged in two major busi-interest nesses: energy commodity marketing and trading.-

through Entergy-Koch Trading, and gastransporta-tion and storage through Gulf South Pipeline.

Entergy-Koch sold both of these businesses in the fourth quarter of 2004, and Entergy-Koch is no

'longer an operating entity.

RS Cogen LLC 50% member Co-generation project that, interest produces power and steam on an industrial and merchant basis in the Lake Charles, Louisiana area.

Top Deer 50% member Wind-powered electric interest generation joint venture.

Folloxving is a reconciliation of Entergy's investments in equity affiliates (in thousands):

2005 -

2004 2003 Beginning of year

$231,779 Deconsolidation of Entergy New

- Orleans, effective January 1, 2005 154,462 Additional investments Income (loss) from the investments 985 Other income Distribu tions received

' (80,901)

• Dispositions and other adjustments (9,541)

S1,053,328 - S 824,209

.157,020 (78,727) 6,232 (888,260)

(17,814) 4,668 271,647 45,583 (105,142) 12,363 End of year S296,784 - S 231,779 51,053,328 2.

ENTFERGY CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued The following is a summary of combined financial information reported by Entergy's equity method investees (in thousands):

2005 2004 2003 Income Statement Items Operating revenues S 721,410 S 270,177

$585,404 Operating income S

9,526 S(II1,535)

S207,301 Net income S

1,592 S 739,858")

S172,595 Balance Shecet Items Current assets

$ 415,586 S 540,386 Non-current assets S 1,498,465

$ 418,038 Current liabilities

$ 544,030

$180,009 Non-current liabilities

$ 999,346

$ 463,899 (I) lncdudes gains recorded by Entergv-Koch on the sales of its energy trading and pipeline lusinesses.

RELATED-PARTY TRANSACTIONS AND GUARANTEES See Note 16 to the consolidated financial statements for a discussion of the Entergy New Orleans bankruptcy proceedings and activity between Entergy and Entergy New Orleans.

During 2004 and 2003, Entergy procured various services from Entergy-Koch consisting primarily of pipeline transportation serv-ices for natural gas and risk management services for electricity and natural gas. The total cost of such services in 2004 and 2003 was approximately $9.5 million and $15.9 million, respectively. There were no related party transactions between Entergy-Koch and Entergy in 2005. Entergy Louisiana and Entergy New Orleans entered into purchase power agreements with RS Cogen, and pur-chased a total of S61.2 million, S43.6 million, and $26.0 million of capacity and energy from RS Cogen in 2005, 2004, and 2003, respectively. Entergy's operating transactions with its other equity method investees were not material in 2005, 2004, or 2003.

In the purchase agreements for its energy trading and the pipeline business sales, Entergy-Koch agreed to indemnify the respective purchasers for certain potential losses relating to any breaches of the sellers' representations, warranties, and obligations under each of the purchase agreements. Entergy Corporation has guaranteed up to 50% of Entergy-Koch's indemnification obligations to the purchasers. Entergy does not expect any material claims under these indemnification obligations, but to the extent that any are asserted and paid, the gain that Entergy expects to record in 2006 may be reduced.

During the fourth quarter of 2004, an Entergy subsidiary pur-chased from a commercial bank holder $16.3 million of RS Cogen subordinated indebtedness, due October 2017, bearing interest at LIBOR plus 4.50%. The debt was purchased at a discount of approximately $2.4 million that was to be amortized over the remaining life of the debt. In June 2005, 100% of the S16.0 million balance of the subordinated indebtedness was sold to a lending insti-tution for 100.75% ofpar.

NOTE 13. ACQUISITIONS AND DISPOSITIONS ASSET ACQUISITIONS In June 2005, Entergy Louisiana purchased the 718 MAV Perryville power plant located in northeast Louisiana for $162 million from a subsidiary of Cleco Corporation. Entergy received the plant, mate-rials and supplies, SO2 emission allowances, and related real estate.

The LPSC approved the acquisition and the long-term cost-of-service purchased power agreement under which Entergy Gulf States will purchase 75 percent of the plant's output.

ASSET DISPOSITIONS Entergy-Koch Businesses In the fourth quarter of 2004, Entcrgy-Koch sold its energy trading and pipeline businesses to third parties. The sales came after a review of strategic alternatives for enhancing the value of Entergy-Koch, LP. Entergy received S862 million of cash distributions in 2004 from Entergy-Koch after the business sales, and Entergy ultimately expects to receive total net cash distributions exceeding SI billion, comprised of the after-tax cash from the distributions of the sales proceeds and the eventual liquidation of Entergy-Koch.

Entergy currently expects the net cash distributions that it will receive will exceed its equity investment in Entergy-Koch, and expects to record a $60 million net-of-tax gain when it receives the remaining cash distributions, which it expects will occur in 2006.

Other In January 2004, Entergy sold its 50% interest in the Crete project, which is a 320MWNV power plant located in Illinois, and realized an insignificant gain on the sale.

In the fourth quarter of 2004, Entergy sold undivided interests in the Warren Power and the IHarrison Count), plants at a price that approximated book value.

NOTE 14. RISK MANAGEMENT AND FAIR VALUES MARKET AND COMMODITY RISKS In the normal course of business, Entergy is exposed to a number of market and commodity risks. Market risk is the potential loss that Entergy may incur as a result of changes in the market or fair value of a particular instrument or commodity. All financial and commodity-related instruments, including derivatives, are subject to market risk. Entergy is subject to a number of commodity and market risks, including:

Type of Risk Primary Affected Segments Power price risk U.S. Utility, Non-Utility Nuclear Energy Commodity Services Fuel price risk U.S. Utility, Non-Utility Nuclear Energy Commodity Services Foreign currency exchange rate risk U.S. Utility; Non-Utility Nuclear Energy Commodity Services Equity price and interest U.S. Utilit); Non-Utility Nuclear rate risk - investments 93

E NTERGY CORPORATION *AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continuled'."

Entergy manages these risks through both conftractual arrange-derivative financial instrum ments and derivatives. Contractual risk management tools include'.

Considerable judgment is requi

'*long-term power andi fuel purchase agreements, capacity contracts, of fair value. Therefore, estimai and tolling agreements. Entergy also uses a variety of commodity amounts that Entergy could r and financial derivau.ives, including natural gas. and electricity In addition, gains or losses real futures, forwards, swaps, and options; foreign currency forwards;

'regulated businesses may be r and interest rate swaps as a part of its overall risk management strat

", do not necessarily accrue to the

• egy. Except for the. energy-trading activities conducted through':

Entergy considers the carry December 2004 by Entergy-Koch, Entergy enters into deriv;atives, instruments classified as currer

" only to manage natural risks inherent in its physical or financial able estimate of their fair val assets or liabilities.

these instruments. Addition Entergy's exposure to market risk is determined by a number of instruments and their fair valu factors, including the size, term, composition, and diversification consolidated financial statemet

• of positions held,; as well as markei volatility' and-liquidity. For instruments such' as options, the time period during which the:

NOTE 15. DECOMMISSIO option may be exercised and the relationship between the current

• Entergy holds debt and equity market price of the underlying instrument and the option% contractual ' sale, in nuclear decommission strike or exercise pnce also affects the level of market risk. A significant'

-at December 31, 2005. and factor influencing thg overall level of market risk to which Entergy.

(in millions):

is exposed is its use' of hedging techniques to mitigate such risk..'

Entergy manages market risk by actively monitoring compliance.'

with stated risk management policies as.well as monitoring the effectiveness of its hedging policies and strategies. Entergy's risk' 2005

,management policies, limit the amount of total'net exposure and:'

Equity These

Debt Securities' rolling net exposure during the stated periods,. These policies,"

Total including related rist, limits, are regularly assessed to ensure their-. "

approp riateness given Entergy's objectives.

r 2004 ledgng Drivativ

Equity, t g eigDebt Securities Entergy classifies substantially all of the following types of derivative "

'Total instruments held bk it consolidated businesses as cash flow hedges:

Total nstrument

-usiness The fair value and gross u Instrument '

Business Segment.

ents is based on market, quotes...

red in developing some of the estimates tes are not necessarily indicativeof the ealize' in a current market exchange. -

lized'on financial instruments held by eflected in future rates and therefore benefit or detriment of stockholders.'

ing amounts of most of its financial ft assets and liabilities to be a reason-ue because of the short maturity of al' information regarding financial es is included in Notes 5 and 6 to the

'Its.

'NING TRUST FUNDS

'securities, classified as available-for-ng trust accounts. The securities held 2004 are summarized-a' follows Total' Total Unrealized Fair Value Gains Losses SI,502,."

$280.

$12 1,105 20 t0 52,607

5300, S22 S 995' 5166 517 1,457" 33

.6 52,452 S199 523 nrealized losses of available-for-sale Natural gas and electriciky

.futures and forwards ti Foreign currency forwards Non-Utility Nuclear, Energy Commodity Services, Competitive Retail Services U.S. Utility, Non-Utility Nuclear equity and debt securities, summarized by investment type and, length of time that. the 'securities have been inma continuous loss' position, are as'follows'at December 31, 2005 (in millions):

Eou"t Secriie Cash flow hedges Iwith net unrealized losses of approximate S391 million at December 31, 2005 are scheduled to mature duri 2006. Net losses t6taling approximately S218 million were realiz during 2005 on the maturity of cash flow hedges. Unrealized gai or losses result fron'l hedging power output at the' Non-Utili Nuclear' power stations and foreign currency hedges related Euro-denominated nnucl'ar fuel acquisitions. The related'gains losses from hedgizig pwoer are included in revenues when realiie The realized gains or'losses from foreign currency transactions a included in the cost of capitalized fuel. The maximum length of tif over which Entergy Is currently hedging the variability in futu

.cash flows for forecasted transactions' at December,31, 2005 approximately three ;pars. The ineffective portion of the change the value of Entergys cash flow hedges during 2005, 2004, and 204 was insignificant.

ly ng*.

ed" nsitv-Gross Unrealized Gross Unrealized.

Fair Value Losses Fair Value

Losses, Lessdthan 12 months S 27 5 1 425 S 6 More than 12 months 104 11I" 116 4

Total

$131 S12

$ $541' 510 to or

'Entergy evaluates these unrealized gains and losses at the end of

.d. '

each period to determine whether an other than temporary impair-re '

ment has occurred. This'analysis considers the length of time that a ne

" security has been in a loss position,'the current performance of that re

'j security, and whether decommissioning costs are recovered in'rates; is,

Due to the regulatory treatment of decommissioning collections,.

in' and trust fund earnings, Entergy Arkansas, Entergy Gulf States, 03: '

Entergy Louisiana, and System Energy record regulatory assets'or liabilities for unrealized gains and losses on trust investments. For the unregulated portion of River Bend, Entergy Gulf States has.

recorded an offsetting amount of unrealized gains or losses in other.

deferred credits. No significant impairments were recorded in 2005.

er-

- and 2004 as a result of these evaluations.

,ly"!

Fair Values Financial Instrume The estimated fair val mined using bid price recognized investmen its ue of Entergys financial instruments is dete reported by dealer markets and by national t banking firms. The estimated fairi value I

of I

""aI 94

ENTER;Y CORPORATION AND SUBSIDIARIES 2005 NOTES to CONSOLIDATED FINANCIAL STATEMENTS concluded The fair value of debt securities, summarized by contractual maturities, at December 31, 2005 and 2004 are as follows (in millions):

2005 2004 Less than 1 year 80 S 134 1 year - 5 years 357 592 5 years - 10 years 382 425 10 years - 15 years 116 158 15 years - 20 years 73 60 20 years +

97 88 Total

$1,105

$1,457 During the year ended December 31, 2005, the proceeds from the dispositions of securities amounted to $50 million with gross gains of $0.7 million and gross losses of $2.3 million, which were reclassified out of other comprehensive income into earnings during the period. During the year ended December 31, 2004, the proceeds from the dispositions of securities amounted to $37 million with gross gains of $0.7 million and gross losses of $0.7 million, which were reclassified out of other comprehensive income into earnings during the period.

NOTE 16. ENTERGY NEW ORLEANS BANKRUPTCY PROCEEDING Because of the effects of Hurricane Katrina, on September 23, 2005, Entergy New Orleans filed a voluntary petition in the United States Bankruptcy Court for the Eastern District of Louisiana seeking reorgan-ization relief under the provisions of Chapter 11 of the United States Bankruptcy Code (Case No. 05-17697). Entergy New Orleans contin-ues to operate its business as a debtor-in-possession under the jurisdiction of the bankruptcy court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the bankruptcy court.

In September 2005, Entergy New Orleans, as borrower, and Entergy Corporation, as lender, entered into the Debtor-in-Possession (DIP) credit agreement, a debtor in possession credit facility to provide funding to Entergy New Orleans during its busi-ness restoration efforts. On December 9, 2005, the bankruptcy court issued its final order approving the DIP credit agreement, including the priority and lien status of the indebtedness under the agreement. The credit facility provides for up to $200 million in loans. The facility enables Entergy New Orleans to request funding from Entergy Corporation, but the decision to lend money is at the sole discretion of Entergy Corporation. As of December 31, 2005, Entergy New Orleans had outstanding borrowings of $90 million under the DIP credit agreement.

Entergy owns 100 percent of the common stock of Entergy New Orleans, has continued to supply general and administrative services, and has provided debtor-in-possession financing to Entergy New Orleans. Uncertainties surrounding the nature, timing, and specifics of the bankruptcy proceedings, however, have caused Entergy to deconsolidate Entergy New Orleans and reflect Entergy New Orleans' financial results under the equity method of accounting retroactive toJanuary 1, 2005. Because Entergy owns all of the common stock of Entergy New Orleans, this change will not affect the amount of net income Entergy records resulting from Entergy New Orleans' operations for any current or prior period, but will result in Entergy New Orleans' net income for 2005 being presented as "Equity in earnings (loss) of unconsolidated equity affiliates" rather than its results being included in each individual income statement line item, as is the case for periods prior to 2005.

Entergy reviewed the carrying value of its investment in Entergy New Orleans to determine if an impairment had occurred as a result of the storm, the flood, the power outages, restoration costs and changes in customer load. Entergy determined that as of December 31, 2005, no impairment had occurred because management believes that recovery is probable. Entergy will continue to assess the carrying value of its investment in Entergy New Orleans as developments occur in Entergy New Orleans' recovery efforts.

Entergy's results of operations for 2005 include $207.2 million in operating revenues, primarily from sales of power by Entergy con-solidated subsidiaries to Entergy New Orleans, and $117.5 million in purchased power, primarily from purchases of power by Entergy consolidated subsidiaries from Entergy New Orleans. As stated above, however, because Entergy owns all of the common stock of Entergy New Orleans, the deconsolidation of Entergy New Orleans does not affect the amount of net income Entergy records resulting from Entergy New Orleans' operations.

NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)

Operating results for the four quarters of 2005 and 2004 were (in thousands):

Operating Operating Net Revenues!O Income" Income 2005 First Quarter

$2,110,182

$311,008 S178,620 Second Quarter

$2,445,389 S515,573 S292,789 Third Quarter S2,898,259

$654,339 S356,388 Fourth Quarter S2,652,417 S311,069 S 95,961 2004 First Quarter S2,169,983 S379,020

$213,016 Second Quarter S2,379,668

$491,267

$271,011 Third Quarter S2,832,642

$570,316

$288,047 Fourth Quarter

$2,303,228

$209,569

$160,975 (a) Operating revenues are lower by $102,461 in the first quarter 2005 and $110,597 in the second quarter 2005 due to the deconsolidation of Entergy New Orleans retroactive toj7anuaty 1, 2005. Operating revenues are lower by $110,771 in the firet quarter 2005, $153,533 in the second quarter 2005, $231,472 in the third quarter 2005, $81,566 in the first quarter 2004, $105,429 in the second quarter 2004, and $130,939 in the third quarter 2004 due to the treatment of a portion of the Competitive Retail Services business as a discontinued operation.

(0) Operating income is lower by $12,521 in the first quarter 2005 and $17,934 in the second quarter 2005 due to the deconsolidation of Entergy New Orleans retroactive toj anuary 1, 2005. Operating income is lower (higher) by $(l,850) in the firnt quarter 2005, $(3,897) in the second quarter 2005, $(10,502) in the third quarter 2005, $(186) in the first quarter 2004, $3,045 in the second quarter 2004, and

$1, 156 in the third quarter 2004 due to the treatment of a portion of the Competitive Retail Services business as a discontinued operation.

EARNINGS PER AVERAGE COMMON SIHARE 2005 2004 Basic Diluted Basic Diluted First Quarter

$0.80

$0.79

$0.90 SO.88 Second Quarter

$1.36

$1.33

$1.16

$1.14 Third Quarter

$1.68

$1.65

$1.24 S1.22 Fourth Quarter SO.43

$0.42 SO.71

$0.69 95