View source for BVY 05-057, 2004 Annual Report, and, Securities and Exchange Commission Form 10-K Submittal

{{Adams
| number = ML051570549
| issue date = 05/25/2005
| title = 2004 Annual Report, and, Securities and Exchange Commission Form 10-K Submittal
| author name = Kansler M
| author affiliation = Entergy Nuclear Northeast, Entergy Nuclear Operations, Inc
| addressee name = 
| addressee affiliation = NRC/Document Control Desk, NRC/FSME
| docket = 05000003, 05000247, 05000271, 05000286, 05000293, 05000333
| license number = DPR-005, DPR-026, DPR-035, DPR-059
| contact person = 
| case reference number = -RFPFR, BVY 05-057, ENO 2.05.040, JPN-05-008, NL-05-074
| document type = Annual Report, Financial Assurance Package, Letter type:BVY
| page count = 548
}}

=Text=
{{#Wiki_filter:Entergy Nuclear Northeast Entergy Nuclear Operations, Inc.
Enrtgyt 440 Hamilton Avenue White Plains, NY 10601 Tel 914 272 3200 Fax 914 272 3205 Michael R. Kansler President May 25, 2005 JPN-05-008 NL-05-074 ENO 2.05.040 BVY 05-057 U.S. Nuclear Regulatory Commission ATTN: Document Control Desk Washington, D.C. 20555-0001

==Subject:==
James A. FitzPatrick Nuclear Power Plant Docket No. 50-333 Indian Point Nuclear Generating Units No. 1, 2 and 3 Docket No. 50-003, 50-247 and 50-286 Pilgrim Nuclear Power Station Docket No. 50-293 Vermont Yankee Nuclear Power Station Docket No. 50-271 2004 Annual Report, and, Securities and Exchanqe Commission Form 1O-K Submittal

==Dear Sir or Madam:==

In accordance with 10 CFR 50.71(b), 10 CFR 72.80 (b) and 10 CFR 140.15 (b) (1), this letter transmits (Attachment 1) the Entergy Corporation 2004 Annual Report and the corresponding Securities and Exchange Commission Form 10-K. This submittal is made on behalf of each nuclear unit in the Entergy Nuclear Operations, Inc. system.

There are no commitments contained in this letter.
contact Ms. Charlene Faison at 914-272-3378. : As stated cc: Next page 2

cc:
Mr. Samuel J. Collins                      Senior Resident Inspector's Office Regional Administrator, Region I           Pilgrim Nuclear Power Station U.S. Nuclear Regulatory Commission        U.S. Nuclear Regulatory Commission 475 Allendale Road                         600 Rocky Hill Road - Mail stop 66 King of Prussia, PA 19406                  Plymouth, MA 02360 Resident Inspector's Office                Mr. Richard Ennis, Project Manager Indian Point Unit 3 Nuclear Power Plant     Project Directorate I U.S. Nuclear Regulatory Commission          Division of Licensing Project Management P.O. Box 337                               Office of Nuclear Reactor Regulation Buchanan, NY 10511                         U.S. Nuclear Regulatory Commission Mail Stop 0-8-Bl Senior Resident Inspector's Office         Washington, DC 20555 James A. FitzPatrick Nuclear Power Plant U.S. Nuclear Regulatory Commission          Mr. Patrick Milano, Sr. Project Manager P.O. Box 136                                Project Directorate I Lycoming, NY 13093                          Division of Licensing Project Management Office of Nuclear Reactor Regulation Mr. John Boska, Project Manager             U.S. Nuclear Regulatory Commission Project Directorate I                       Mail Stop O-8-C2 Division of Licensing Project Management   Washington, DC 20555 Office of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission           Mr. Peter Smith Mail Stop 0-8-Bl                            President Washington, DC 20555                        NYSERDA 17 Columbia Circle USNRC Resident Inspector                    Albany, NY 12203 Vermont Yankee Nuclear Power Station 320 Governor Hunt Road                      Mr. Paul Eddy P.O. Box 157                                NYS Department of Public Service Vernon, Vermont 05354                       3 Empire State Plaza Albany, NY 12223 Senior Resident Inspector's Office Indian Point Unit 2 Nuclear Power Plant     Mr. Michael Webb, Project Manager U.S. Nuclear Regulatory Commission          Project Directorate IV P.O. Box 59                                 Division of Licensing Project Management Buchanan, NY 10511                          Office of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Mr. David O'Brien, Commissioner              Mail Stop 0-7-Dl Department of Public Service                 Washington, DC 20555 112 State Street - Drawer 20 Montpelier, VT 05620 3

bh ATTACHMENT 1 2004 Annual Report and 2004 Form 10-K 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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Entergy Corporation and Subsidiaries 2004 HIGHLIGHTS
                                                                                                % CHANGE       2003   % CHANGE      2002 FINANCIAL RESULTS (in millions, except percentages and per share amounts)
Operating revenues                                                               $10,124          10.1%        $9,195    10.7%     $8,305 Earnings applicable to common stock                                              5 910             (1.8%)      S 927     54.8%     S 599 Earnings per share Basic                                                                          S 4.01            (2.0%)      S 4.09    52.0%     S 2.69 Diluted                                                                        $ 3.93            (2.0%)      S 4.01    51.9%    S 2.64 Average shares outstanding (in millions)
Basic                                                                             226.9               -       226.8     1.7%      223.0 Diluted                                                                           231.2               -       231.1     1.7%      227.3 Return on average common equity                                                   10.70%           (4.6%)     11.21%     42.8%     7.85%
Net cash flow provided by operating activities                                   $ 2,929          46.0%        52,006    (8.1%)   52,182 U.S. UTILITY ELECTRIC OPERATING DATA Retail kilowatt-hour sales (in millions)                                          102,225           2.3%       99,968    (1.6%)  101,613 Peak demand (in megawatts)                                                         21,174           5.0%       20,162    (1.3%)   20,419 Retail customers - year end (in thousands)                                          2,662           1.2%        2,631     1.3%      2,598 TOTAL EMPLOYEES - YEAR END                                                         14,425         (2.4%)      14,773     (5.3%)   15,601
                                                        .. aw ENTERGY CORPORATION and SUBSIDIARIES 2004                                      TABLE OF CONTENTS Entergy Corporation is an integrated energy company engaged primarily in electric power production and retail distribution operations.
Entergy owns and operates power plants with approximately 30,000 megawatts of electric generating capacity, and it is the second-largest nuclear generator in the United States. Entergy delivers electricity to 2.7 million utility customers in Arkansas, Louisiana, Mississippi, and Texas. Entergy has annual revenues of more than $10 billion and approximately 14,000 employees.
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Entergy Corporation and Subsidiaries 2004 Finding shareholderl value in the d etails.                                                      \
I       Iur focus in 2004 was on execution driven by fundamental points of view of our competitive, regulatory, and financial markets.
We believe keeping a clear focus on both the forest and the trees is the only way to earn our customers' business, attract and retain the best employees, generate strong cash flow, and deliver superior total returns to our shareholders.
In this year's annual report, we celebrate forests, trees, and the animal life they support. A forest habitat is an incredibly rich, complex system of plants and animals working and evolving together to sustain life. We think there are some striking parallels between the instinctive behaviors highlighted in the following pages and those we emphasize in our company.
Entergy Corporation and Subsidiaries 2004 To Our Stakeholders:
WIn         2004, we were honored for the second consecutive results and they guide the decisions we make to deliver long-term growth and completed in fourth quarter 2004 with cash proceeds expected to exceed year to receive the Edison    value to our owners.                      S1 billion, of which the majority of the Electric Institute award in recognition       The year 2004 turned out to be more    proceeds were received in 2004.
of the highest total shareholder return    challenging for us than expected with        In August 2004, we announced a share over the last five years for large-cap     the exceptionally mild weather, the poor  repurchase program of up to $1.5 billion electric utilities. From October 1999 to   operating results of Entergy-Koch         and by year end we had completed September 2004, our shareholders           Trading, and the failure to obtain rate   roughly one-third of the buyback realized a 149 percent return on their     relief in Texas.                          program. In October 2004, the Board of investment while the S&P Electric             Yet, we also had a number of           Directors raised Entergy's dividend 20 Utilities Index returned 42 percent.       successes last year. In November 2004,    percent to $2.16 per share on an annual We begin with that simply because       we completed the sale of Entergy-Koch     basis. This follows a 29 percent increase being the leader in generating consistent  Trading - our trading joint venture with  in 2003. Even with the increase, our shareholder returns is one of our          Koch Energy, Inc. - to Merrill Lynch. dividend payout ratio of 48 percent is overarching long-term aspirations. Our     Our point of view on the trading          below our internally imposed cap of 60 point-of-view driven business model        business has changed dramatically since   percent payout and well under the and the hundreds of decisions made and     we created EKT in 2001. At that time,     industry average, providing us the actions taken by our employees are all     we faced impending deregulation and       opportunity to continue to grow the designed to deliver superior long-term     we were planning a large merchant         dividend in the future.
returns. Winning this particular award,    generation build-out program. With           We are confident we have significant then, is validation once again that our    those commodity price risks               financial resources to make sound strategies are working, our employees      substantially eliminated, it became clear investments in our utilities and nuclear are performing, our customers are well-    that EKT was inherently of more value     business even as we return available cash served, and our shareholders are reaping   to a natural owner like a large financial to our shareholders through the buyback the rewards.                               entity than it was to us. That point of   and higher dividends.
view was validated in the sale of EKT        For 2004, Entergy produced a Financial Results for 2004                 and the subsequent sale of the Gulf       one-year total return to shareholders Our long-term aspirations guided the        South Pipeline to a subsidiary of Loews  of 22 percent versus 27 percent for actions we took in delivering 2004         Corporation - transactions that were      the S&P Electric Utilities Index -
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a performance that ranked sixth out of         service to customers while passing the 20-member S&P Electric Utilities           lower-cost generation savings on to Index. While our one-year performance          utility customers are efficient is below our long-term aspiration to           mechanisms to align the economic deliver top-quartile shareholder returns,      interests of public utilities, customers, we are confident that the actions taken        and shareholders. We have incentive in 2004 support our continued leadership       rate structures in place at Entergy in creating value for our shareholders.        Mississippi and Entergy New Orleans. In a pending rate case for       'We were honoredfor the second consecutive 2004: Our Points of View                       Entergy Louisiana, we have filed           year to receive the Edison ElectricInstitute In spite of more adversities than              testimony proposing a formula rate         award in recognition of the highest total expected, 2004 was a year of solid             plan. And in a pending rate case for       shareholderreturn over the lastfive years."
progress consistent with our point-of-         Entergy Gulf States - Louisiana, the view driven business model. Based on           LPSC has advanced a procedural market knowledge and sophisticated             schedule for a global settlement that analysis, we developed clear points of         includes such a formula rate plan view in 2004 and then acted decisively.        and would resolve 12 open dockets.
Here are a few examples:                       Our point of view in Texas has We remain convinced that                    evolved along with changes in the performance-based incentives that           regulatory direction there. While we allow utilities to earn a higher return     have pursued Retail Open Access on equity by providing excellent            since 1999, we now believe that there
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Entergy Corporation and Subsidiaries 2004 A REVIEW               OF OUR ASPIRATIONS
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As in the last two years, we continue to report progress against our ongoing long-term aspirations.
___   a_                   I With the sale of Entergy-Koch Trading, our number of aspirations now stands at five.
A S P I R A T IO N S                                  PROGRESS               IN     2004 Entergy will be the consistent industry leader in         We were once again recognized for the highest total shareholder return.                                 total shareholder return over the last five years in aM                                                                           EEl's index of large-cap shareholder-owned
                                                                                                                                                            -    -1 electric utilities.
An Entergy will be recognized as an environmental            We continue to set and meet voluntary standards p                            1  leader, not only in generation, but among all U.S.        to stabilize COemissions from our generating industrial companies, and will demonstrate                facilities and strive to meet or beat all environmental the advantage of environmental excellence in              standards. For the third year in a row, Entergy was achieving financial results.                              named to the Dow Jones Sustainability Index.
Entergy will be one of five or fewer key                  We are recognized for our operational expertise owner/operators in a highly consolidated nuclear          in nuclear. We push for continuous improvement in industry - the best of the best - who operate             safety first and then productivity. Six of our nuclear safe, secure, low-cost plants, and we will be             sites have achieved OSHA VPP Star status - the
                                                                                                                                                                 =  a demonstrating new nuclear technologies that               highest industrial safety rating for a work site.
                                -j produce far greater value.
Entergy's utilities will be recognized for industry-leading satisfaction, and for a comprehensive We continue to invest in our utilities to improve performance, reliability, and customer service.
aI approach to meeting the particular needs of               In 2004, we raised a record $1.7 million in Customer
          ------      a-low-income customers.                                     Assistance Funds - from employees, customers, and shareholders - to help meet the needs of a_
_                       I elderly and disabled customers living in poverty.
Entergy's goal of an accident-free work                   We still are not satisfied with our overall safety environment will be internalized as more than an          performance. Although in 2004 we improved our a&             _ nft-- -       11
                                     .aspiration." Nothing less is good enough.               industry-standard safety measure by six percent lakdaMMOMB022-, ,        -   - j and decreased the number of employee lost-time
                            -_    I accidents to 10 from 29 in 2003.
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Entergy Corporation and Subsidiaries 2004 is little likelihood that the Public          utility customers. Inherent in our Utility Commission of Texas will              Generation Supply Plan are reduced approve ROA any time in the near              exposure to gas prices and overall fuel future for Entergy. As a result,              savings - both of which can lower our we filed a general rate case in               customers' electricity bills. In 2004, August 2004 to recover the cost of            we worked diligently with local and investments we have made since our            federal regulators in order to continue last general rate case and to ensure we       to implement the competitive bidding     'feeting our environmental, are able to maintain the high quality         process, fully execute our Generation      safety, and socialperformance service and reliability that our              Supply Plan, and ultimately deliver       goals is as importantto customers currently receive. Our last         savings to our customers. We are on        us as meeting ourfinancial base rate increase in Texas was more          track to close on the purchase of the      expectations.
than 13 years ago - in 1991. We were          Cleco Corporation's Perryville plant extremely disappointed when our case          in mid-2005 and, in the meantime, was dismissed without a hearing and           our customers continue to benefit the PUCT failed to act on our request        from the power purchase agreement for a rehearing of the order to dismiss       that remains in place.
the case. We are currently pursuing an       We sold forward additional output appeal in district court as well as          from our unregulated nuclear fleet legislative action to get the appropriate     and, in doing so, we raised the rate relief our case supports.               average price of our portfolio of On the federal front, we continue to         energy contracts by almost $4 per believe that the market power screen          MWh. In addition, we continued to administered by FERC is substantially        improve productivity in our                 Robert v.d. Luft flawed and we worked hard in 2004            unregulated nuclear fleet. When the         Chairman to demonstrate why in multiple               majority of labor contracts came up filings. The operation of the nation's        for renewal in 2004, we were able to power transmission grid is both               negotiate changes in the work rules to complex and of critical importance.          improve the efficiency of plant Our utilities worked with FERC in             operations and continue to move 2004 to advance a proposal for an             operating costs closer to those in our Independent Coordinator of                    regulated nuclear fleet. We also Transmission - an approach that we            completed uprates at FitzPatrick and think is less costly and considerably         Indian Point 2, increasing the total more practical than other alternatives.       capacity of our unregulated fleet to More importantly it supports the              4,058 MW from 3,955 MW at the reliability objectives and criteria           end of 2002.
necessary for the operation of a high-        We believe sustainable development is voltage power grid.                           vital to our fiuture as a company and a Using our comprehensive Generation            society. We are one of the cleanest Supply Plan, we continue to look for          power generators in the U.S. In 2004, opportunities to purchase energy and          we met our voluntary standard for capacity to mitigate our capacity             CO 2 emissions for the fourth shortfall and meet the needs of our           consecutive year. We will not be Entergy Corporation and Subsidiaries 2004 satisfied until we have an accident-free    provide solid growth going forward.
work environment. And we continued
* Growth in nuclear will come from to work with regulators, agencies, and      greater availability of attractive advocates to better meet the needs of       nuclear transactions as owners of low-income residents in our service         underperforming nuclear assets move territory. Meeting our environmental,       to lower their costs or improve safety, and social performance goals is     operations. We believe the market for as important to us as meeting our           potential transactions presents financial expectations.                     opportunities. Also, we will complete uprate projects at Waterford 3 and
'Its the extraordinaryefforts of       In total, our progress in 2004 can just     Indian Point 3 and we expect to everyone at Entergy -from our      as easily be measured in what we didn't        obtain approval to place in service the Boardmembers to our linemen -      do as in what we did. We remained              50 MW uprate that was completed at that drive ourlong-term results."  disciplined with our capital and kept a        Vermont Yankee last year. In addition, careful eye on the amount of risk we           we believe we have a longer-term want to hold as a company. We did not          opportunity to transform our Northeast enter into any transactions that did not       asset portfolio into a more integrated meet our risk and return hurdles.              business by adding other types of Instead, we chose to return cash to our        generation that are more dispatchable shareholders through both a stock              or a short position that matches up repurchase program and a higher                with our low-cost, reliable, base-load dividend. And our credit standing              nuclear output.
improved significantly as both Moody's and Standard & Poor's raised our credit        While we cannot give a preview of ratings. After thorough analysis            the precise mix of opportunities that J. Wayne Leonard                  (confirmed with the benefit of 20/20        will result in the future, we can assure ChiefExecutive Officer            hindsight), we believe this was the best    you that we will apply the same use of available cash in 2004.              discipline and capital stewardship we have applied in the past to ensure our Growing the Business                        risk and return criteria are met. And if With the sale of EKT and an absence of      our opportunity set becomes limited, we nuclear transactions in 2004, the question  will return cash to owners through share naturally arises - how will we grow         repurchases or through dividend shareholder value?                          increases, just as we are doing today.
In our utilities, growth will come          Bottom line, we believe our long-from increased demand, improved          term growth aspiration of five to six rate structures, and our Generation      percent is very achievable. And that Supply Plan. We believe demand           belief holds not just for today, but also growth in our service territory will     for tomorrow with whatever tomorrow continue at a modest one to two          brings. With our dynamic business percent annual rate. However, coupled    model, we are confident we can succeed with new rate structures that include    in a wide range of market conditions.
performance-based incentives, we         Our point-of-view approach is believe the utility business can         inherently flexible, enabling us to adjust Entergy Corporation and Subsidiaries 2004 and adapt to our habitat - the                Entergy recently won its seventh           It's the extraordinary efforts of competitive, regulatory, and financial     consecutive Edison Electric Institute      everyone at Entergy - from our Board markets where we conduct business.         emergency award for help it sent to        members to our linemen - that drive Florida last hurricane season. Entergy     our long-term results. We thank each of The Forest and The Trees                   is the only utility in the nation to win   them for their dedication to our company, Business models are important but          either EEI's "Emergency Assistance         our customers, and our shareholders in models do not drive results. It's the      Award" or 'Emergency Response              2004 and in the years to come.
hundreds of critical decisions made        Award' every year they have been every day by our employees that drive      offered. Entergy won the award due to results. As a company, we link the big     its outstanding efforts in helping Florida picture to the daily decisions made        utilities restore electric service in the across our business. We keep our eyes      wake of the destruction levied by four on both the forest and the trees.          massive hurricanes over a five-week        Robert v.d. Luft, Our employees execute and manage       period in 2004.                            Chairman the details - they proactively work to        We'd also like to recognize a few keep power lines clear. They respond        individuals who tend to the big picture to customer calls quickly and               for our company - the forest. In 2004, knowledgeably. Every customer is            Don Hintz, our former president and treated with respect, unique to their       current member of our Board, received     J. Wayne Leonard, specific needs. Our employees operate       the Platts Lifetime Achievement Award     ChiefExecutive Officer safely - taking fill advantage of both     for his vision and career achievements.
extensive training and well-documented     We believe Don's many contributions -
procedures. They maintain and upgrade      both to our company and our industry -
our equipment to reduce outages and        have been invaluable, particularly in minimize our CO2 emissions. Our            nuclear power where his insights and employees take all of these actions on a   creativity led to a renaissance over the daily - almost routine - basis. Their      past decade. We appreciate his commitment and hard work is second         continued guidance and vision as a to none.                                   Board member.
In addition, we want to recognize the      Finally, we would like to acknowledge truly extraordinary - non-routine -        and appreciate the contributions of three efforts our employees made in 2004 to      departing members of our Board of restore power to thousands of people       Directors. Wm. Clifford Smith has after an unusually active hurricane        served on our Board for more than season. Not only did employees labor       20 years. Paul W. Murrill and Bismark long hours to restore service to our       A. Steinhagen have both served since customers, they also contributed to        1993. Each of these individuals has emergency restoration efforts across       provided insightful guidance to our the Southeastern U.S. In each and every    company. We thank them for their year, our employees tend to all the        contributions - too numerous to list -
critical details of our business - the     and wish them the best in all their trees - with talent, pride, and a          future endeavors.
can-do spirit.
Entergy Corporation and Subsidiaries 2004 Entergy Corporation Observantand Decisive WIn        the last six years we have worked hard to build an organization that can of Directors, received the Platts Lifetime Achievement Award, marking the fourth Platts supply dean, affordable electricity to                Global Energy Award for our company.
our customers, provide a safe, productive working environment to our employees, and deliver                           Point-of-View Driven Actions top-quarile returns to our shareholders over                        We made several decisions and took actions the long term.                                                      consistent with our point of view of the markets for The choices we make as we operate our business                   retail and wholesale energy. Based on extensive are guided by our long-term aspirations. For                        market analysis, we concluded that our energy example, we have consistently made investments in                   trading business - Entergy-Koch Trading - was assets that improve our customer service and                        worth more to a financial entity than it was to us.
reliability, the safety of our operations, our impact               As a result, we sold EKT and Gulf South Pipeline on the environment, and our cost position. As a                     in two separate transactions that will produce total result, we are in a strong position to grow our future              cash proceeds to Entergy of more than SI billion.
earnings the right way - by continuing to deliver                   We also continued to harvest value from our non-the most reliable, affordable service we can to                     nuclear assets business with the January 2004 sale of our customers.                                                      our interest in a natural gas-fired power plant located While our past actions have been recognized, we                  in Crete, Illinois. We sold a portion of three other continually strive for more. Last year for the second               generating plants, resulting in lower operational consecutive year, Entergy was recognized again. We                  spending for this business.
received the Edison Electric Institute award in                        In another point-of-view driven action, we recognition of the highest total shareholder return                 initiated a S1.5 billion stock repurchase program and over the last five years for large-cap electric                     increased our annual dividend by 20 percent, from utilities. In addition, Don Hintz, former president                  51.80 to S2.16 per share. Given our disciplined of Entergy and now a member of our Board                            approach to capital investments and strong cash r                                                            ,.;,                                                    .
y               \J A WELL-INFORMED                             VIEW Acute vision leads to a well-informed point of view. We use deep market knowledge and sophisticated analysis to develop our points of view. It's a dynamic process - we adapt as market conditions change - and it results in clear decision-making. The best example in 2004? Our decision to maximize shareholder return through the sale of Entergy-Koch Trading and Gulf South Pipeline.
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Entergy Corporation and Subsidiaries 2004 flows, we concluded that we can return       improved credit standing at both the available cash to our shareholders and still operating subsidiary and corporate level.
DIS CIPLINE,                     have the flexibility to invest in the long-  In 2004, both Moody's and Standard &
SECURITY,                      term growth of our business.                 Poor's raised our credit ratings.
AND        FUTUREI                  We continue to take action to RETURN S                     substantially lower risks across all our     An Eye for Growth businesses by improving operations,          We continue to strategically review all Saving for the future - whether       strengthening regulatory relationships,      aspects of our business and our markets it's nuts or dollars - requires     and better managing our cash flows.          in order to maintain a clear and current discipline. At Entergy, we take      We continued to improve our cash flow        point of view. It's a dynamic approach a disciplined approach to        interest coverage - defined as 12-months     that enables us to adapt as market managing cash, investing capital,      cash flow from operating activities plus     conditions change. And in our current and conserving risk. We will not       12-months rolling interest paid, divided     point of view, we see exciting compromise our standards to          by interest expense - realizing more         opportunities to grow in our utility and meet an appetite lor short-term       than a 95 percent improvement since          nuclear businesses. For example:
results. Instead, we invest to build    1999. Our continued success in producing
* In the utility, our Generation financial security, meet our long-     strong cash flows is an important               Supply Plan enables us to purchase term aspiration of five to six      element contributing to our significantly       power and invest in more efficient percent average annual earnings growth, and deliver top-quartile total shareholder return.                                                                                        t           .
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Entergy Corporation and Subsidiaries 2004 power generation assets to both meet        We continue to institute training and     TOTAL SHAREHOLDER RETURN 2000-2004, %
our capacity shortfall and displace our  procedures to help us reach our goal of 21 older, less efficient generation. This   an accident-free work environment.
flexible approach to generation drives   We also continue to strive to meet the savings for our customers and            needs of our low-income customers earnings growth for our shareholders. through internal operational initiatives,                          71
* In nuclear, we will expand our efforts to execute transactions that have consistently driven growth for us in and we fight the bigger war against poverty through external advocacy and regulatory initiatives.
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ETR           S&P          S&P the past - including both plant             In 2004, we were honored to                                     Electric     500 Utilities acquisitions and management service      be included in the Dow Jones agreements - or through other            Sustainability Index once again - for the    TOTAL SHAREHOLDER RETURN 2004, %
innovative ventures.                     third consecutive year. We are proud to                            27 be one of only three U.S. electric utilities 22 We've done more than simply identify     included in the index. DJSI-listed opportunities to grow - we are poised to    companies must not only demonstrate act when the timing is right. We have       strong financial performance, but must                                          11 made the infrastructure investments,        also show outstanding leadership in developed operational expertise, and        environmental and social commitment.
cultivated strong relationships with           In September 2004, Community customers, regulators, and suppliers.       Action Partnership, a national                       ETR           S&P          S&P These are all strengths we can utilize in   organization dedicated to fighting                                 Electric     500 Utilities executing and integrating both utility      poverty, honored our CEO Wayne Entergy ranks number one in its peer and nuclear asset acquisitions and other    Leonard with its first-ever Corporate group for total shareholder return for the types of transactions. Above all, we        Champion Award, recognizing his              past five-year period and number six for remain disciplined - we seize only those    corporate leadership in addressing the       one-year return. We are confident 2004 opportunities that have the potential to    multiple causes of poverty.                  results support our continued leadership in generate profitable long-term growth.          Entergy recently received Edison          creating value for our shareholders.
Electric Institute's first-ever Our Nest                                    Advocacy Excellence Award for our            CASH PROVIDED TO SHAREHOLDERS
                                                                                          $ nillions While we have a sharp focus on growth,      comprehensive campaign to forestall we also believe that growth must be                                                                                          1.276 efforts calling for the closure of our sustainable. A clean environment, a safe    Indian Point nuclear facilities in New workplace, and a strong economy - to        York following the September I1th be a world-class organization, we believe   terrorist attacks. Entergy employees Entergy must be a leader in all.            volunteered hundreds of hours to We continue to set and meet voluntary educate the public, media, and standards to stabilize our CO 2 emissions governmental entities on the safety and at year-2000 levels. In 2004, our CO2 security of Indian Point as well as the            00       01    02        03  04 emissions were 28 percent lower than vital role the facility plays in delivering   In the last five years, we provided nearly year-2000 levels. We have met our target each year since we established our          energy to New York. Our campaign for         $3 billion in available cash to our shareholders through dividend payouts and stock repurchases.
voluntary standards in 2000.                 Indian Point began in January 2002 and We believe we have the financial capacity to continues today.                             make sound investments in our businesses even as we return cash to our shareholders.
Entergy Corporation and Subsidiaries 2004 Utility Resourceful and Driven fter making significant investments to              result, we saw a 48 percent decrease in outage improve both customer service and                   frequency over this same period and a 39 percent reliability, our utilities are now in               decrease in outage duration. Our regulatory outage position to advocate positive new regulatory rate                 complaints dropped from 535 in 1998 to 81 in 2004, structures and our Generation Supply Plan. Both                   a decrease of 85 percent.
can deliver financial benefits to our customers and                  Of special note in 2004 was the recognition shareholders, and we believe they present a well-                 received by three of our distribution networks for engineered model for growth in our utility business.              the safety of their operating environment. In 2004, our Chalmette, New Orleans East, and Riverlake Customer Service and Reliability                                  East distribution networks achieved OSHA The utility business requires a daily commitment                  Voluntary Protection Program Star status, OSHA's to the basics - customer calls that are well-answered,            highest possible industrial safety rating for a work site.
generating plants that are well-operated and                      While this recognition is a terrific achievement in maintained, along with transmission lines with                    any case, it is especially noteworthy here because it enough capacity and flexibility to meet our                       marks the first time any utility distribution network customers' varying demand for power. At Entergy,                  has ever been recognized by OSHA with VPP Star we realize that investing in the basics is the only way           status. The safety of our work environment and our to meet our customers' expectations for reliable,                 employees is vital to our ability to effectively serve affordable service. With this as our operating                    our customers.
mentality, we have been able to improve consistently each year on a variety of customer service and                    Building Positive Rate Structures reliability measures.                                             In 2004, we pursued opportunities to recover past In 2004, we invested more than S1 billion of our               investments and improve returns at Entergy capital dollars in the utility business - a consistent            Louisiana, Entergy Gulf States - Louisiana, and level of investment we have made since 1998. As a                 Entergy Gulf States - Texas.
                                                               .j_
BUILDING              EXPERTISE We operate our utility and nuclear businesses with an obsessive attention to detail. We stay on top of the basics - the customer call well-answered, fuel savings that drive lower retail energy bills, and intensive training. Operational expertise enables us to deliver excellent service, improve productivity, and provide a sound design for lasting success.
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Entergy Corporation and Subsidiaries 2004 OUTAGE FREQUENCY
* In January 2004, Entergy Louisiana           In addition to state regulatory actions, averagenumberper customer peryear filed a S167 million rate case that      we are also actively pursuing positive Down 48%
included resources from our              regulatory outcomes with FERC.
3.54                                   Generation Supply Plan and               While the majority of these actions are reliability investments. The potential   not expected to have an impact on our 1.85                    rate increase to customers would be      future earnings, we are still fighting for largely offset by estimated fuel savings the best possible outcomes for our that would result from securing          customers. Why? Because we know that capacity under our Generation Supply     in order to build lasting value for our 98             04                      Plan. Discussions indude a formula       shareholders, we must operate in a rate plan and are ongoing with a         regulatory environment that enables us OUTAGE DURATION                                     potential decision expected around       to deliver the best possible value to average minutesper customerperyear                  the end of first quarter 2005.           our customers.
Down 39%
* Entergy Gulf States - Louisiana              Long term, we believe the incentive 278                                   requested a $22 million rate increase    rate structures in place at Entergy in May 2002. In January 2005, a          Mississippi and Entergy New Orleans 169                    procedural schedule for a global         are excellent models. They include settlement proposal was advanced.        financial incentives to the utility upon The settlement proposal resolves 12      meeting performance hurdles in areas open dockets and includes a formula      such as reliability, customer service, and rate plan. The current timeline calls    the customers' overall cost of power.
98            04                      for the Commission to consider the       By aligning shareholder interests with global settlement proposal in            customer interests, these structures drive REGULATORY OUTAGE COMPLAINTS                        March 2005.                              the right behaviors and the right results.
Down 85%
* Entergy Gulf States - Texas filed for 535                                   a S68 million rate increase in August    A Comprehensive Supply Plan 2004 after the move to Retail Open       The gap between our utility-owned Access was delayed. The Public           capacity and our demand load profile is Utility Commission of Texas              dose to four gigawatts. To dose that dismissed our case in October and        gap, we have developed a comprehensive 81 failed to act on our request for         Generation Supply Plan that prescribes 1                       rehearing, effectively dismissing our    both the contract purchase of power as 98            04                      case by operation of law. That's         well as acquisition of generation assets.
something we have to change and we         The merchant generation capacity We aspire to industry-leading customer satisfaction inour utilities and we steadily        will work aggressively and relentlessly  within our service territory is invest inour operations to improve reliability.      to resolve this situation. We are       approximately 19 GW - ample capacity Since 1998, our investments have delivered an        currently pursuing an appeal in a       to both meet our four GW-capacity improvement inboth the average frequency and        Texas district court as well as          shortfall and displace some of our less the average duration of outages, and inthe legislative action to get our case      efficient, older units. We believe number of regulatory outage complaints.
back on track to create financial        contracting for or purchasing a portion stability and certainty for Entergy     of our generation requirements from Gulf States -Texas.                     merchant generators creates opportunities to lower our customers' rates.
Entergy Corporation and Subsidiaries 2004 In 2004, we took the following steps to      Our commitment to executing our implement our Generation Supply Plan:       Generation Supply Plan is driven by our desire to do what is right for our                     STRONG
* We pursued regulatory approvals of customers. In 2004, many consumers               RELATIONSHIPS the 718 MW Perryville plant purchase from Cleco Corporation.         experienced higher electricity bills as a We expect to be able to close this       result of escalating fuel costs. We strive      Our future depends on maintaining purchase in mid-2005 and in the          to minimize the impact of fuel costs on         strong, healthy relationships with interim, we continue to purchase 100     our customers by sourcing more than              a number of stakeholders - first percent of the output of Perryville      50 percent of our utility generation from        among them, our customers. In under a power purchase agreement         nuclear and by acquiring highly efficient       2004, customer service improved that extends through the date of the     sources through our Generation Supply            with call center abandoned calls acquisition's dose.                      Plan. We will also consider liquefied             down by eight percent and call
* We continued to pursue approval on        natural gas, or LNG, in addition to solid       answer times down by 24 percent the resources in our Requests for        fuel generation such as coal and nuclear          compared to 2003. We are also Proposals. While the transparency of     plants. Our ongoing evaluation of these              working to strengthen our our RFP process is currently being       alternatives is based on economics,             relationships with local, state, and contested at FERC before an              environmental impacts, and other                 federal regulators as well as the administrative law judge, we continue    customer benefits.                                  thousands of employees and to believe the process is fair to all        Our goal is to continue to be                shareholders who have invested concerned. We expect a decision          resourceful builders of shareholder value          their time and money with us.
around mid-2005 from the                 driven by our customers' need for            .                                      .
administrative law judge.                reliable and affordable power.
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                                            .4, Entergy Corporation and Subsidiaries 2004 Nuclear Strong and Vigilant
[I       n just five years, Entergy Nuclear has acquired five plants, created a Upon acquiring each unit in our Northeast fleet, we focused first on improving the safety of the plant S200 million business, and grown                     and then on improving the capacity factor through as-reported earnings from six cents per share in                  the material condition of the plant. On an ongoing 1999 to S1.06 per share in 2004 - a compound                      basis, we push for continuous improvement to move annual growth rate of 78 percent. And we believe                  our Northeast fleet to the performance levels of our the future can be just as promising. Far from being               regulated fleet. It's an operating approach that has threatened, we believe nuclear must continue to                   delivered consistently strong results since 1999 and grow as a percent of U.S. generation as it offers the             last year was no different.
best possible combination of safe, clean, and                        In 2004, Entergy plants continued to deliver low-cost energy.                                                  excellent performance metrics. The average INPO The operational expertise of our nuclear team is               Index for Entergy plants was 96.7 percent - up well-recognized in the industry and has led to a new              more than 25 percent since 1999. Outage duration revenue stream from service contracts - including                 averaged 29 days, compared to 43 days in 1999, and management services at the Cooper Nuclear Station,                our forced loss rate improved to 1.69 percent from license renewal services, and nuclear decommissioning.            10.00 percent in 1999.
In our nuclear business, we believe our operational                  In addition we continue to drive production costs strength can enable us to drive growth over and                   in our Northeast fleet down to levels closer to our above the intrinsic growth rate.                                  regulated fleet and to the industry average. Average production costs declined from $29 per MWh prior Safety and Security Followed by Productivity                      to Entergy ownership to $20 per MVWh in 2004, We own 10 nuclear plants at eight sites - five in                 and are expected to be below $19 per MWh by 2006.
our regulated utilities and five in the Northeast -               Production costs in our regulated fleet remained making us the second-largest nuclear operator in the              constant at $15 per MWh.
U.S. In every one of our nuclear plants, we put safety and security concerns above all else.
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                                                          -r SAFETY AND                  SECURITY                FIRST We put safety first inour nuclear operations and inour utilities. Our goal is to have an accident-free work environment - nothing less is good enough. And we are fiercely protective of this goal - pursuing productivity improvements only when safety is assured.
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Entergy Corporation and Subsidiaries 2004 Nuclear Milestones                         record in the country. FitzPatrick was Of special note in 2004 is the recognition selected from more than 150 nominees OUR NEST,                           several of our plants received for their   for accomplishments in the areas of OUR WORLD                            safe and efficient operations. Our James   safety, performance, and costs.
A. FitzPatrick plant in New York              In Arkansas, our ANO Unit 2 was We have made a conscious               received OSHA Voluntary Protection         the winner of the Nuclear Energy decision to support sustainable          Program Star status recognition   -        Institute Top Industry Practice award development, meaning we               OSHA's highest possible industrial         for an innovative inspection technique consciously integrate environmental,        safety rating for a work site. We now      endorsed by the Nuclear Regulatory social, and safety concerns into          have six nuclear plant sites that have     Commission for one-time use. It our daily decision-making. We           achieved VPP Star status.                  provided data as reliable as visual have voluntarily committed to              To-date, our operating team at          inspection while saving an estimated stabilize greenhouse gas emissions          FitzPatrick has worked more than           $3.6 million in outage costs as well as from our plants and we are             10 million labor-hours without a single    10 days of additional outage downtime.
aggressively pursuing solutions           lost-time occurrence - a remarkable        And it prevented additional radiation to meet the needs of our low-           achievement. In addition, FitzPatrick      exposure for our outage workers.
income customers. We take these            also received the Platts Power magazine's     The Entergy Nuclear License commitments just as seriously as           2004 Marmaduke award for achieving         Renewal team also won an NEI Top we do our financial commitments            the best operations and maintenance        Industry Practice award for an to our shareholders and lenders.
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Entergy Corporation and Subsidiaries 2004 internet-based work management              use insights from our ongoing relationship NUCLEAR NORTHEAST PRODUCTION COSTS system that permits team members to         with Merrill Lynch to keep our point of
                                                                                       $/MWh work on the same license renewal            view unbiased and current, enabling us     Down 31 %
project at the same time from multiple      to determine the optimal portion of our                   29 locations. Entergy Nuclear, partnering      output to sell forward.                                                20 with Framatome, is the nation's largest contract provider of license renewal        Opportunities Follow Capability services to the U.S. nuclear power          In 2003, we signed a first-of-its-kind industry.                                   service contract with the Nebraska Public Power District to operate its                      Before       2004 Intrinsic Growth                                                                                      ETR Cooper Nuclear Station. Since then,                      Ownership We pursue uprates when economically         the NRC has noted improved                 2004 Regulated Fleet = $15 per MWh attractive to increase the capacity and     performance and recently closed output of our nuclear plants. As a          a Cooper confirmatory action letter.       NUCLEAR NORTHEAST general rule of thumb, a 100 MW uprate                                                 CAPACITY FACTORS A 5100 million capital improvement in our Nuclear Northeast fleet with an      program is on schedule. The NPPD Up 19%                      92
$800 per KW capital investment and a        Board of Directors approved proceeding                    77 market price for power of $40 per MVWh      with the NRC's operating license yields approximately six cents in earnings  renewal process. And in 2004, Cooper per share.                                  had its longest run in plant history.
In 2004, we implemented plant               Clearly, in one year Cooper has uprates at FitzPatrick and Indian           undergone a remarkable turnaround. We Point 2, bringing the total capacity of                                                              Before        2004 are proud of what we have been able to                   ETR our Northeast fleet to 4,058 MW. In                                                                  Ownership accomplish and believe our capabilities 2005, we expect to complete uprates at                                                 2004 Regulated Fleet = 95%
as a nuclear operator will provide similar Waterford 3 and Indian Point 3, and we      opportunities in the very near future.
In the past five years, we have driven will work to resolve regulatory hurdles to     All nuclear owners are facing significant performance Improvement in our place in service the 50 MW uprate we        heightened regulatory scrutiny and we      Northeast non-regulated nuclear fleet. We completed at Vermont Yankee in 2004.        believe that will motivate many small-     continue to target the performance levels We proactively engage in selling         scale plant owners to exit the business. achieved by our regulated nuclear fleet.
power generated by the Northeast fleet      Today, there are more than 30 small-through forward contracts. At the end       scale plants operating in the U.S. that of 2004, 95 percent of the planned          have either production costs greater       SOURCES OF GENERATION than $20 per MWh, low capacity generation for 2005 was under contract,                                                     Coal                             Gas/Oil factors, event issues, low regulatory           194      f                       29%
89 percent for 2006, and 69 percent for scores, or all of the above. We believe 2007 at average prices per MWh of $39, this segment of the market has good
$40, and 542 respectively. That's up potential for future plant sales or significantly from year-end 2003 when       management services contracts. In the average contract prices per MWh were        meantime, we will further develop the                                       Nuclear 537, $36, and $36 for 2005, 2006, and                                                                                   520%6 already strong operational expertise that 2007 respectively. Going forward, we will   got us here.                               Entergy's utility generating fleet isone of the cleanest inthe nation. Almost 80 percent of Entergy's power comes from clean nuclear fuel and natural gas generation.
Entergy Corporation and Subsidiaries 2004 Looking to the Future Survival of the Species e remain committed to using our                      In our nuclear business, we have the opportunity to:
long-term aspirations as a guide for
* Execute new service agreements in the U.S. and developing our strategies and guiding                evaluate opportunities in other markets.
our execution. In particular, we work to identify and
* Acquire additional nuclear assets in the U.S.
act on strategic opportunities that will enable us to
* Increase capacity through uprates.
achieve our stated financial aspirations:
* Sell our output forward under a comprehensive
* Earnings growth of eight to ten percent in 2005                    hedging plan to better optimize our pricing.
and 2006 and five to six percent in the longer term.
* Transform our asset portfolio into a business by
* Return on invested capital of nine percent.
adding other types of generation or a short position.
* A net debt to net capital ratio of less than 50 percent.
We also continue to evaluate merger and
* Continuous improvement in credit ratings and acquisition opportunities as they become available business profile position.
* Consistent dividend increases.                                  along with other capital investment opportunities to grow our business. In addition, we continually Our current objectives include several strategic              evaluate the opportunity to return cash to shareholders opportunities that may advance our aspirations.                   through dividends and share repurchases.
Some will materialize and some will not.                             We believe the opportunities we have identified -
In our utilities, we have the opportunity to:                 along with the decisions made and actions taken in
* Recover ongoing investments in our rate base in                 2004 - will lead to continued growth in 2005 and the order to improve reliability and service.                     years ahead, in keeping with our financial aspirations.
* Earn incentives under performance-based rate structures and incentive regulation.
* Acquire generating capacity under our Generation Supply Plan.
el                                                              PF THE        FOREST           AND THE TREES In every action we take - from the sale of Entergy-Koch Trading to the capital investment to upgrade atransmission line - we are guided by decisive points of view based on extensive market knowledge and sophisticated analysis. We link the big picture to the everyday execution of hundreds of details across our business.
N Entergy Corporation and Subsidiaries 2004 A. *'
FORWARD-LOOKING INFORMATION From time to time, Entergy makes statements concerning its expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. Such statements are 'forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.
Although Entergy believes that these forward-looking statements and the underlying assumptions are reasonable, it cannot provide assurance that they will prove correct. Except to the extent required by the federal securities laws, Entergy undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Forward-looking statements involve a number of risks and uncertainties, and there are factors that could cause actual results to differ materially from those expressed or implied in the statements. Some of those factors (in addition to others described elsewhere in this report and in subsequent securities filings) include:
* resolution of pending and future rate cases and               potential stranded costs, the establishment of a negotiations, including various performance-based            regional transmission organization that includes rate discussions, and other regulatory proceedings,          Entergy's utility service territory, and the including those related to Entergy's System                  application of market power criteria by FERC Agreement and Entergy's utility supply plan
* changes in regulation of nuclear generating
* Entergy's ability to manage its operation and                 facilities and nuclear materials and fuel, including maintenance costs, particularly at its Non-Utility           possible shutdown of Indian Point or other Nuclear generating facilities                                nuclear generating facilities
* the performance of Entergy's generating plants,               puncertainty regarding the establishment of interim and particularly the capacity factors at its nuclear          or permanent sites for spent nuclear fuel storage and disposal                                               CONTENTS generating facilities
* prices for power generated by Entergy's
* resolution of pending or future applications for       22 Five-Year Summary of Selected Financial and unregulated generating facilities, the ability to             license extensions or modifications of nuclear            Operating Data extend or replace the existing purchased power                generating facilities 23 Managements Financial agreements for those facilities, including the
* changes in law resulting from proposed                    Discussion and Analysis Non-Utility Nuclear plants, and the prices and                energy legislation 46 Report of Management availability of power Entergy must purchase for its
* changes in environmental, tax, and other laws, including requirements for reduced emissions           46 Report of Independent utility customers                                                                                                       Registered Public
* Entergy's. ability to deveop and execute on a point           of sulfur, nitrogen, carbon, mercury, and                 Accounting Firm of view regarding prices of electricity, natural gas,         other substances                                       47 Report of Independent
* the economic climate, and particularly growth in          Registered Public and other energy-related commodities                                                                                    Accounting Firm
* changes in the financial mafkets, particularly those          Entergy's service territory variations in weather and the occurrence of            47 Internal Control Over affecting the availability of capital and Entergy's                                                                     Financial Reporting ability to refinance existing debt, execute its share         hurricanes and other storms and disasters 48 Consolidated Statements repurchase program, and fund investments and                  oadvances in technology                                   of Income acquisitions
* the potential effects of threatened or actual 49 Consolidated Statements
  *actions of rating agencies, including changes in the           terrorism and war                                        of Retained Earnings, the effects of Entergy's strategies to reduce current    Comprehensive Income, ratings of debt and preferred stock, and changes in
* and Paid-In Capital the rating agencies' ratings criteria                          tax payments 52 Consolidated Statements
* changes in inflation and interest rates
* the effects of litigation and government                 of Cash Flows
* Entergy's ability to purchase and sell assets at               investigations 54 Notes to Consolidated attractive prices and on other attractive terms
* changes in accounting standards, corporate               Financial Statements
* volatility and changes in markets for electricity,             governance, and securities law requirements natural gas, uranium, and other energy-
* Entergy's ability to attract and retain talented related commodities                                           management and directors
* changes in utility regulation, including the begin-ning or end of retail and wholesale competition, the ability to recover net utility assets and other Entergy Corporation and Subsidiaries 2004 FIVE-YEAR 

==SUMMARY==
OF SELECTED FINANCIAL and OPERATING DATA K,
Inthousands, except percentages and per share amounts                        2004                 2003                 2002                   2001              2000 SELECTED FINANCIAL DATA AS REPORTED:
Operating revenues                                                  510,123,724           S 9,194,920         S 8,305,035            S 9,620,899       510,022,129 Income before cumulative effect of accounting changes                                      S    933,049           S 813,393          S 623,072              S    727,025      S    710,915 Earnings per share before cumulative effect of accounting changes Basic                                                           S        4.01                 3.48        S        2.69          S         3.18             3.00 s
Diluted                                                                   3.93                 3.42        S        2.64          S         3.13    S        2.97 Dividends declared per share                                        S         1.89                1.60        S        1.34          S         1.28    $        1.22 Book value per share, year-end                                              38.25                38.02        S       35.24          S       33.78             31.89 Common shares outstanding At year-end                                                           216,829              228,898              222,422               220,733            219,605 Weighted average - basic                                              226,864              226,804              223,047               220,944            226,580 Weighted average - diluted                                            231,194              231,146              227,303               224,734            228,541 Total assets                                                        128,310,777           528,527,388         127,504,366            125,910,311       125,451,896 Long-term obligations("                                             S 7,180,291           S 7,497,690         S 7,488,919            S 7,743,298       S 8,214,724 Preferred stock                                                     S 382,756             S 355,189           S 358,664              S 360,522         S 400,446 Long-term debt (excluding currently maturing debt)                               S 7,016,831           S 7,322,940         S 7,308,649            S 7,321,028       5 7,732,093 Return on average common equity                                           10.70%               11.21%                7.85%                 10.04%             9.62%
Net cash flow provided by operating activities                      S 2,929,319           5 2,005,820         S 2,181,703            S 2,215,548       5 1,967,847 DOMESTIC UTILITY ELECTRIC REVENUES:
Residential                                                         S 2,841,517           S 2,682,802         S 2,439,590            S 2,612,889       S 2,524,529 Commercial                                                             2,045,382            1,882,060           1,672,964              1,860,040          1,699,699 Industrial                                                             2,311,185            2,081,781           1,850,476              2,298,825          2,177,236 Governmental                                                             199,631              194,998              179,508               205,054            185,286 Total retail                                                        7,397,715            6,841,641           6,142,538              6,976,808          6,586,750 Sales for resale                                                         388,899              371,646              330,010                395,353           423,519 Other                                                                    145,963              183,888              173,866               (127,334)          209,417 Total                                                           S 7,932,577           57,397,175          56,646,414             S 7,244,827       S 7,219,686 DOMESTIC UTILITY ELECTRIC SALES:
(Milions of KWh)
Residential                                                                32,896               32,817              32,581                  31,080           31,998 Commercial                                                                 26,468               25,863              25,354                  24,706           24,657 Industrial                                                                 40,293               38,637              41,018                  41,577           43,956 Governmental                                                                2,568                2,651                2,678                  2,593             2,605 Total retail                                                         102,225                99,968             101,631                  99,956          103,216 Sales for resale                                                            8,624                9,248                9,828                  8,896             9,794 Total                                                                110,849              109,216              111,459                108,852           113,010 (a) Includes long-term debt (excluding currently maturing debt), preferredstock with sinkingfuna preferred securities ofsubsidiary trusts andpartnership,and noncurrentcapital lease obligations.
                                                                                                                                                                                                                                                      /I

Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS 1_/                                                                                                                                                         I Entergy Corporation is an investor-owned public utility holding                 RESULTS OF OPERATIONS company that operates primarily through three business segments.                Earnings applicable to common stock for the years ended U. S. U T I L I T Y generates, transmits, distributes, and sells             December 31, 2004, 2003, and 2002 by operating segment are as electric power in a four-state service territory that includes               follows (in thousands):
portions of Arkansas, Mississippi, Texas, and Louisiana, including the City of New Orleans; and operates a small                      Operating Segment                     2004         2003           2002 natural gas distribution business.                                           U.S. Utility                      $643,408    $469,050      S 583,251
* NON-UTILITY NUCLEAR owns andoperates five nuclear                             Non-Utility Nuclear                245,029     300,799        200,505 power plants located in the northeastern United States and sells             Energy Commodity Services            3,481     180,454       (145,830) the electric power produced by those plants to wholesale                     Parent &Other                       17,606     (23,360)        (38,566) customers. This business also provides services to other nuclear               Total                           5909,524    $926,943      S 599,360 power plant owners.
* ENERGY COMMODITY SERVICES includes Entergy-Koch                                  Following is a discussion of Entergy's income before taxes and Entergy's non-nuclear wholesale assets business. Entergy-                according to the business segments listed above. Earnings for 2004 Koch engaged in two major businesses: energy commodity                       include a 597 million tax benefit that resulted from the sale marketing and trading through Entergy-Koch Trading, and gas                  of preferred stock and less than 1% of the common stock in transportation and storage through Gulf South Pipeline.                      a subsidiary in the non-nuclear wholesale assets business; and a Entergy-Koch sold both of these businesses in the fourth quarter             536 million net-of-tax impairment charge in the non-nuclear of 2004, and Entergy-Koch is no longer an operating entity. The              wholesale assets business, both of which are discussed below.
non-nuclear wholesale assets business sells to wholesale                         Earnings for 2003 include the $137.1 million net-of-tax customers the electric power produced by power plants that it                cumulative effect of changes in accounting principle that increased owns while it focuses on improving performance and exploring                 earnings in the first quarter of 2003, almost entirely resulting from sales or restructuring opportunities for its power plants.                   the implementation of Statement of Financial Accounting Such opportunities are evaluated consistent with Entergy's                    Standards (SFAS) 143. Earnings were negatively affected in the market-based point-of-view. The non-nuclear wholesale assets                 fourth quarter of 2003 by voluntary severance program expenses of business terminated new greenfield power development activity                 5122.8 million net-of-tax. As part of an initiative to achieve in 2002.                                                                      productivity improvements with a goal of reducing costs, primarily in the Non-Utility Nuclear and U.S. Utility businesses, in the Following are the percentages of Entergy's consolidated revenues                 second half of 2003 Entergy offered a voluntary severance and net income generated by these segments and the percentage of                 program to employees in various departments. Approximately total assets held by them:                                                       1,100 employees, including 650 employees in nuclear operations
                                                         %of Revenue                 from the Non-Utility Nuclear and U.S. Utility businesses, Segment                                      2004         2003        2002       accepted the offers.
U.S. Utility                                    81           82         82          Earnings for 2002 were negatively affected by net charges Non-Utility Nudear                              13           14         14       ($238.3 million net-of-tax) reflecting the effect of Entergy's Energy Commodity Services                        2            2          4       decision to discontinue additional greenfield power plant Parent & Other                                  4             2         -       development and asset impairments resulting from the deteriorating economics of wholesale power markets principally in the United
                                                        %of Net Income               States and the United Kingdom. The net charges are discussed Segment                                      2004        2003        2002       more filly below in the Energy Commodity Services discussion.
U.S. Utility                                   72           52         97       See Note 11 to the consolidated financial statements for further Non-Utility Nuclear                            26           32         32       discussion of Entergy's business segments and their financial results Energy Commodity Services                       -           19        (23)      in 2004,2003, and 2002.
Parent & Other                                  2           (3)        (6)
                                                        % of Total Assets Segment                                      2004        2003        2002 U.S. Utility                                   80           79         79 Non-Utility Nudear                             16           15         16 Energy Commodity Services                       3             7         8 Parent & Other                                  1            (1)       (3)
Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued lI                                                                                                                                                    K U.S. UTILITY                                                                    The volume/weather variance resulted primarily from increased The increase in earnings for the U.S. Utility for 2004 from                  usage, partially offset by the effect of milder weather on sales
   $469 million to $643 million was primarily due to the following.             during 2004 compared to 2003. Billed usage increased a total of
* the $107.7 million (S65.6 million net-of-tax) accrual in 2003 of           2,261 GWh in the industrial and commercial sectors.
the loss that would be associated with a final, non-appealable               The summer capacity charges variance was due to the decision disallowing abeyed River Bend plant costs. Refer to              amortization in 2003 at Entergy Gulf States and Entergy Louisiana Note 2 to the consolidated financial statements for more details          of deferred capacity charges for the summer of 2001. Entergy Gulf regarding the River Bend abeyed plant costs;                              States' amortization began in June 2002 and ended in May 2003.
* lower other operation and maintenance expenses primarily due               Entergy Louisiana's amortization began in August 2002 and ended to $99.8 million ($70.1 million net-of-tax) of charges recorded           in July 2003.
in 2003 in connection with the voluntary severance program;                  Base rates increased net revenue due to a base rate increase at
* the $21.3 million net-of-tax cumulative effect of a change in              Entergy New Orleans that became effective in June 2003.
accounting principle that reduced earnings at Entergy Gulf                   The deferred fuel cost revisions variance resulted primarily from States in the first quarter of 2003 upon implementation of                a revision in 2003 to an unbilled sales pricing estimate to more SFAS 143. See 'Critical Accounting Estimates - SFAS 143"                  closely align the fuel component of that pricing with expected below for discussion of the implementation of SFAS 143;                   recoverable fuel costs at Entergy Louisiana. Deferred fuel cost
* miscellaneous other income of $27.7 million (pre-tax) in 2004              revisions also decreased net revenue due to a revision in 2004 to the resulting from a revision of the decommissioning liability for            estimate of fuel costs filed for recovery at Entergy Arkansas in the River Bend, as discussed in Note 8 to the consolidated                    March 2004 energy cost recovery rider.
financial statements;                                                        The price applied to unbilled sales variance resulted from a
* higher net revenue; and                                                    decrease in fuel price in 2004 caused primarily by the effect of
* lower interest charges.                                                    nuclear plant outages in 2003 on average fuel costs.
The decrease in earnings for the U.S. Utility for 2003 from               Gross OperatingRevenues and Regulatory Credits - Gross operating
   $583 million to $469 million was primarily due to:                           revenues include an increase in fuel cost recovery revenues of
* the $107.7 million (S65.6 million net-of-tax) accrual in 2003 of           $475 million and $18 million in electric and gas sales, respectively, the loss that would be associated with a final, non-appealable           primarily due to higher fuel rates in 2004 resulting from increases in decision disallowing abeyed River Bend plant costs;                       the market prices of purchased power and natural gas. As such, this
   * $99.8 million ($70.1 million net-of-tax) of charges recorded in            revenue increase is offset by increased fuel and purchased 2003 in connection with the voluntary severance program; and              power expenses.
* the $21.3 million net-of-tax cumulative effect of a change in                 Other regulatory credits increased primarily due to the following:
accounting principle that reduced earnings at Entergy Gulf
* cessation of the Grand Gulf Accelerated Recovery Tariff that States in the first quarter of 2003 upon implementation of                   was suspended in July 2003; SFAS 143. See 'Critical Accounting Estimates - SFAS 143"
* the amortization in 2003 of deferred capacity charges for below for discussion of the implementation of SFAS 143.                      summer 2001 power purchases at Entergy Gulf States and Entergy Louisiana; Partially offsetting the decrease in earnings in 2003 were higher net
* the deferral in 2004 of $14.3 million of capacity charges related revenue and lower interest charges.                                             to generation resource planning as allowed by the Louisiana Public Service Commission (LPSC);
Net Revenue
* the deferral in 2004 by Entergy Louisiana of $11.4 million 2004 Comparedto 2003                                                            related to the voluntary severance program, in accordance with Net revenue, which is Entergy's measure of gross margin, consists of            a proposed stipulation entered into with the LPSC staff; and operating revenues net of: 1) fuel, fuel-related, and purchased power
* the deferral in August 2004 of $7.5 million of fossil plant expenses and 2) other regulatory credits. Following is an analysis of           maintenance and voluntary severance program costs at Entergy the change in net revenue comparing 2004 to 2003 (in millions):                 New Orleans as a result of a stipulation approved by the Council of the City of New Orleans (City Council or Council).
2003 net revenue                                             $4,214.5 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                                              U4,244.0 Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued 2003 Compared to 2002                                                          Other regulatory credits decreased primarily due to the Net revenue, which is Entergy's measure ofgross margin, consists of        APSC-approved March 2002 settlement agreement mentioned operating revenues net of: 1) fuel, fuel-related, and purchased power      above, which increased other regulatory credits in 2002 to offset other operation and maintenance expenses of $159.9 million expenses and 2) other regulatory credits. Following is an analysis of related to the December 2000 ice storms. The decrease was the change in net revenue comparing 2003 to 2002 (in millions):
partially offset by the asset retirement obligation mentioned above, which increased other regulatory credits in 2003 to offset the 2002 net revenue                                              34,209.6 increases in depreciation and decommissioning expenses.
Base rate increases                                                66.2 Base rate decreases                                               (23.3)   Other Income Statement Variances Deferred fuel cost revisions                                       56.2    2004 Comparedto 2003 Asset retirement obligation                                        42.9     Other operation and maintenance expenses decreased from 31.613 Net wholesale revenue                                              23.2    billion in 2003 to 31.569 billion in 2004 primarily due to voluntary March 2002 Arkansas settlement agreement                        (154.0)    severance program accruals of 399.8 million in 2003 partially offset Other                                                              (6.3)   by an increase of $30.5 million as a result of higher customer 54,214.5     service support costs in 2004 and an increase of approximately 2003 net revenue 333 million as a result of higher benefits costs in 2004. Entergy expects benefit costs to continue to increase in 2005. See "Critical Base rates increased net revenue due to base rate increases at         Accounting Estimates - Pension and Other Retirement Benefits" Entergy Mississippi and Entergy New Orleans that became                     and Note 10 to the consolidated financial statements for further effective in January 2003 and June 2003, respectively. Entergy Gulf         discussion of benefit costs.
States implemented base rate decreases in its Louisiana jurisdiction            Depreciation and amortization expenses increased from effective June 2002 and January 2003. The January 2003                      3797.6 million in 2003 to 3823.7 million in 2004 primarily due to base rate decrease of 322.1 million had a minimal impact on net             higher depreciation of Grand Gulf due to a higher scheduled income due to a corresponding reduction in nuclear depreciation             sale-leaseback principal payment in addition to an increase in plant and decommissioning expenses associated with the change in                  in service.
accounting estimate to reflect an assumed extension of River                    Other income (deductions) changed from (336.0 million) in 2003 to $108.9 million in 2004 primarily due to the following:
Bend's useful life.
* the 3107.7 million accrual in the second quarter of 2003 for the The deferred fuel cost revisions variance was due to a revised loss that would be associated with a final, non-appealable unbilled sales pricing estimate made in December 2002 and further               decision disallowing abeyed River Bend plant costs. See Note 2 revision of that estimate in the first quarter of 2003 to more dosely           to the consolidated financial statements for more details align the fuel component of that pricing with expected recoverable             regarding the River Bend abeyed plant costs; fuel costs at Entergy Louisiana.
* a reduction in the decommissioning liability for River Bend in The asset retirement obligation variance was due to the                     2004, as discussed in Note 8 to the consolidated financial implementation of SFAS 143, 'Accounting for Asset Retirement                   statements; and Obligations," adopted in January 2003. See 'Critical Accounting
* a 310 million reduction in the loss provision for an Estimates - Nuclear Decommissioning Costs" for more details on                 environmental clean-up site.
SFAS 143. The increase was offset by increased depreciation and decommissioning expenses and had an insignificant effect                   Interest on long-term debt decreased from 3433.5 million in 2003 to $390.7 million in 2004 primarily due to the net retirement on net income.
and refinancing of long-term debt in 2003 and the first six months The increase in net wholesale revenue was primarily due to an           of 2004. See Note 5 to the consolidated financial statements for increase in sales volume to municipal and cooperative customers.           details on long-term debt.
The March 2002 settlement agreement variance reflects the absence in 2003 of the effect of recording the ice storm settlement        2003 Comparedto 2002 approved by the Arkansas Public Service Commission (APSC) in               Other operation and maintenance expenses decreased from 31.679 2002. This settlement resulted in previously deferred revenues at          billion in 2002 to 31.613 billion in 2003 primarily due to decreased Entergy Arkansas per the transition cost account mechanism being            expenses at Entergy Arkansas. The March 2002 settlement recorded in net revenue in the second quarter of 2002. The decrease         agreement that became final in the second quarter of 2002, was offset by a corresponding decrease in other operation and               allowing Entergy Arkansas to recover a large majority of 2000 and 2001 ice storm repair expenses through the previously-maintenance expenses and had a minimal effect on net income.
collected transition cost account amounts, increased Entergy Arkansas' expenses by 3159.9 million in 2002. This increase in Gross Operating Revenues and Regulatory Credits - Gross operating revenues include an increase in fuel cost recovery revenues of              expenses in 2002 was offset by a regulatory credit resulting in no
 $682 million and 353 million in electric and gas sales, respectively,       effect on net income. The decrease was partially offset by an increase of 399.8 million in benefit costs as a result of voluntary primarily due to higher fuel rates in 2003 resulting from increases in the market prices of purchased power and natural gas. As such, this         severance program accruals in 2003.
revenue increase was offset by increased fuel and purchased power expenses.
25-
                                                                                                                                                 /K

Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued Decommissioning expense increased from $30.5 million in 2002
* miscellaneous income resulting from a reduction in the to $92.5 million in 2003 primarily due to the implementation of                decommissioning liability for a plant, as discussed in Note 8 SFAS 143, 'Accounting for Asset Retirement Obligations.' The                   to the consolidated financial statements.
increase in decommissioning expense was offset by increases in other regulatory credits and interest and dividend income and had            Partially offsetting this increase were the following:
an insignificant effect on net income.
* higher income taxes, which increased from $88.6 million in Depredation and amortization expenses increased from $769.8                 2003 to $142.6 million in 2004; and million in 2002 to $797.6 million in 2003 primarily due to an
* higher depreciation expense, which increased from $34.3 increase in plant in service. The increase was also due to                     million in 2003 to $48.9 million in 2004, due to additions to the implementation of SFAS 143. The increase in depreciation and               plant in service.
amortization expense due to SFAS 143 implementation was offset by increases in other regulatory credits and interest and dividend income and has an insignificant effect on net income.
Other income (deductions) changed from $47.6 million in 2002 to (536.0 million) in 2003 primarily due to a decrease "In the fourth quarter of 2004, Entergy-Koch sold its in "miscellaneous - net" as a result of a $107.7 million accrual in the second quarter of 2003 for the loss that would be associated                        energy trading and pipeline businesses to third parties.
with a final, non-appealable decision disallowing abeyed                                 The sales came after a review of strategic alternatives River Bend plant costs. See Note 2 to the consolidated financial statements for more details regarding the River Bend abeyed plant                            for enhancing the value of Entergy-Koch, LP."
costs. The decrease was partially offset by an increase in interest and dividend income as a result of the implementation of SFAS 143.
Interest on long-term debt decreased from $462.0 million in 2002 to $433.5 million in 2003 primarily due to the redemption and          2003 Comparedto 2002 refinancing of long-term debt.                                              The increase in earnings for Non-Utility Nuclear from $200.5 million to $300.8 million was primarily due to the $154.5 million NON-UTILITY NUCLEAR                                                          net-of-tax cumulative effect of a change in accounting principle Following are key performance measures for Non-Utility Nuclear.             recognized in the first quarter of 2003 upon implementation of SFAS 143. See 'Critical Accounting Estimates - SFAS 143" below 2004         2003       2002      for discussion of the implementation of SFAS 143. Income before Net MW in operation at December 31        4,058       4,001       3,955      the cumulative effect of accounting change decreased by $54.2 Average realized price per MWh           $41.26      $39.38     $40.07       million. The decrease was primarily due to $83.0 million Generation in GWh for the year           32,524      32,379     29,953       ($50.6 million net-of-tax) of charges recorded in connection with Capacity factor for the year                92%        92%         93%      the voluntary severance program. Except for the effect of the voluntary severance program, operation and maintenance expenses Results of Operations                                                        in 2003 per MWh of generation were in line with 2002 operation 2004 Comparedto 2003                                                         and maintenance expenses.
The decrease in earnings for Non-Utility Nuclear from
$300.8 million to $245.0 million was primarily due to                        ENERGY COMMODITY SERVICES the $154.5 million net-of-tax cumulative effect of a change in               Sales of Entergy-Koch Businesses accounting principle that increased earnings in the first quarter            In the fourth quarter of 2004, Entergy-Koch sold its energy trading of 2003 upon implementation of SFAS 143. See 'Critical                       and pipeline businesses to third parties. The sales came after a Accounting Estimates - SFAS 143" below for discussion of the                review of strategic alternatives for enhancing the value of Entergy-implementation of SFAS 143. Earnings before the cumulative effect            Koch, LP. Entergy received $862 million of cash distributions in of accounting change increased by $98.7 million primarily due to            2004 from Entergy-Koch after the business sales, and Entergy the following:                                                              ultimately expects to receive total net cash distributions exceeding
* lower operation and maintenance expenses, which decreased                  S1 billion, comprised of the after-tax cash from the distributions of from $681.8 million in 2003 to $595.7 million in 2004,                    the sales proceeds and the eventual liquidation of Entergy-Koch.
primarily resulting from charges recorded in 2003 in connection           Entergy currently expects that it will receive the remaining cash with the voluntary severance program;                                     distributions in 2006, and expects that the net cash distributions
* higher revenues, which increased from $1.275 billion in 2003 to           will exceed its equity investment in Entergy- Koch. Entergy expects
   $1.342 billion in 2004, primarily resulting from higher contract          to record a $60 million net-of-tax gain when the remainder of the pricing. The addition of a support services contract for the              proceeds are received in 2006.
Cooper Nuclear Station and increased generation in 2004 due In the purchase agreements for the energy trading and the to power uprates completed in 2003 and fewer planned and pipeline business sales, Entergy-Koch has agreed to indemnify the unplanned outages in 2004 also contributed to the higher respective purchasers for certain potential losses relating to any revenues; and breaches of the sellers' representations, warranties, and obligations 26 -

Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued under each of the purchase agreements. Entergy Corporation has               * $204.4 million of the charges resulted from the write-off of guaranteed up to 50% of Entergy-Koch's indemnification                          Entergy Power Development Corporation's equity investment in obligations to the purchasers. Entergy does not expect any material             the Damhead Creek project and the impairment of the values of claims under these indemnification obligations, but to the extent               its Warren Power power plant and its Crete and RS Cogen that any are asserted and paid, the gain that Entergy expects to                projects. This portion of the charges reflected Entergy's estimate record in 2006 may be reduced.                                                  of the effects of reduced spark spreads in the United States and the United Kingdom. Damhead Creek was sold in December Results of Operations                                                           2002, resulting in net income of $31.4 million; 2004 Comparedto 2003                                                         * $39.1 million of the charges related to the restructuring of the The decrease in earnings for Energy Commodity Services from                     non-nuclear wholesale assets business, which was comprised of
   $180.5 million to $3.5 million was primarily due to:                            $22.5 million of impairments of administrative fixed assets,
* earnings from Entergy's investment in Entergy-Koch were                       $10.7 million of estimated sublease losses, and $5.9 million of
      $254 million lower in 2004, primarily as a result of Entergy-                employee-related costs; Koch's trading business reporting a loss from its operations in           *$32.7 million of the charges resulted from the write-off of 2004; and                                                                    capitalized project development costs for projects that would
* Entergy recorded a charge in 2004 of approximately $55 million                not be completed; and (S36 million net-of-tax) as a result of an impairment of the
* a gain of $25.7 million ($15.9 million net-of-tax) realized on value of the Warren Power plant, which is owned in the                       the sale in August 2002 of an interest in projects under non-nuclear wholesale assets business. Entergy concluded that                development in Spain.
the plant is impaired based on valuation studies prepared in connection with the Entergy Asset Management stock sale PARENT & OTHER discussed below.
Results of Operations 2004 Comparedto 2003 Partially offsetting the decrease in earnings is a tax benefit resulting The increase in earnings for Parent & Other from a $23.4 million from the sale of preferred stock and less than 1% of the common loss to $17.6 million in earnings was primarily due to the following-stock of Entergy Asset Management, an Entergy subsidiary. In
* realization of S16.7 million of tax benefits related to the December 2004, an Entergy subsidiary sold the stock to a third Entergy-Koch investment; and party for $29.75 million. The sale resulted in a capital loss for
* Entergy's competitive retail business earned a very small profit tax purposes of $370 million, producing a net tax benefit of in 2004 compared to reporting a $14.4 million loss in 2003.
   $97 million that Entergy recorded in the fourth quarter of 2004.
2003 Comparedto 2002 2003 Compared to 2002 The loss from Parent & Other decreased in 2003 from The increase in earnings for Energy Commodity Services in 2003                $38.6 million to $23.4 million primarily due to lower income from a $145.8 million loss to $180.5 million in earnings was tax expense.
primarily due to net charges recorded to operating expenses in 2002, as discussed below. Higher earnings from Entergy's                  INCOME TAXES investment in Entergy-Koch also contributed to the increase in               The effective income tax rates for 2004, 2003, and 2002 were earnings. The income from Entergy's investment in Entergy-Koch               28.2%, 37.9%, and 32.1%, respectively. See Note 3 to the was $73 million higher in 2003 primarily as a result of higher               consolidated financial statements for a reconciliation of the federal earnings in its trading business.
statutory rate of 35.0% to the effective income tax rates. The lower In 2002, Entergy recorded charges to reflect the effect of                effective income tax rate in 2004 is primarily due to the tax benefits Entergy's decision to discontinue additional greenfield power plant resulting from the Entergy Asset Management stock sale development and to reflect asset impairments resulting from                  discussed above.
the deteriorating economics of wholesale power markets principally in the United States and the United Kingdom. The net charges of $428.5 million ($238.3 million net-of-tax) consisted of the following-
* The power development business obtained contracts in October 1999 to acquire 36 turbines from General Electric. Entergy's rights and obligations under the contracts for 22 of the turbines were sold to an independent special-purpose entity in May 2001. $178.0 million of the charges, including an offsetting net-of-tax benefit of $18.5 million related to the subsequent sale of four turbines to a third party, was a provision for the net costs I     resulting from cancellation or sale of the turbines subject to purchase commitments with the special-purpose entity; IIII-                                                                       27 -
6I

Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS                                       continued LIQUIDITY AND CAPITAL RESOURCES                                                     Note 5 to the consolidated financial statements provides more This section discusses Entergy's capital structure, capital spending            detail concerning long-term debt.
plans and other uses of capital, sources of capital, and the cash flow              In May 2004, Entergy Corporation replaced its 364-day bank activity presented in the cash flow statement.                                  credit facility with two separate facilities, a new 364-day credit facility and a three-year credit facility. The three-year credit CAPITAL        STRUCTURE                                                        facility, which expires in May 2007, has a borrowing capacity Entergy's capitalization is balanced between equity and debt, as                of $965 million, of which $50 million was outstanding at shown in the following table. The reduction in the debt to capital              December 31, 2004.
percentage from 2002 to 2003 is the result of reduced debt                          In December 2004, Entergy Corporation refinanced the 364-day outstanding in the U.S. Utility and Non-Utility Nuclear businesses,             bank credit facility by entering into a five-year credit facility. The and an increase in shareholders' equity, primarily due to increased             five-year credit facility, which expires in December 2009, has a retained earnings.                                                              borrowing capacity of $500 million, none of which was outstanding 2004     2003    2002      at December 31, 2004.
Net debt to net capital at the end of the year     44.7%    45.3%   47.7%           Entergy also has the ability to issue letters of credit against the Effect of subtracting cash from debt                2.7%     2.2%    4.1%       total borrowing capacity of both credit facilities, and $50 million of Debt to capital at the end of the year             47.4%    47.5%   51.8%       letters of credit had been issued against the three-year facility at December 31, 2004.
Net debt consists of debt less cash and cash equivalents. Debt                      Entergy Corporation's credit facilities require it to maintain a consists of notes payable, capital lease obligations, preferred stock           consolidated debt ratio of 65% or less of its total capitalization, and with sinking fund, and long-term debt, including the currently                  maintain an interest coverage ratio of 2 to 1. If Entergy fails to meet maturing portion. Capital consists of debt, common shareholders'                these limits, or if Entergy or the domestic utility companies default equity, and preferred stock without sinking fund. Net capital                   on other indebtedness or are in bankruptcy or insolvency consists of capital less cash and cash equivalents. The preferred               proceedings, an acceleration of the credit facilities' maturity stock with sinking fund is included in debt pursuant to SFAS 150,               dates may occur.
which Entergy implemented in the third quarter of 2003. The 2002                    Capital lease obligations, including nuclear fuel leases, are a minimal part of Entergy's overall capital structure, and are discussed ratio does not reflect that type of security as debt, but does include it in net capital, which is how Entergy presented those securities              further in Note 9 to the consolidated financial statements.
Following are Entergy's payment obligations under those leases prior to implementation of SFAS 150. Entergy uses the net debt to (in millions):
net capital ratio in analyzing its financial condition and believes it 2008- After provides useful information to its investors and creditors in                                                             2005     2006        2007     2009      2009 evaluating Entergy's financial condition.                                       Capital lease payments, Long-term debt, including the currently maturing portion, makes                including nuclear fuel leases          $136      5143           $3      $2        $3 up over 90% of Entergy's total debt outstanding. Following are Entergy's long-term debt principal maturities as of December 31,                    Notes payable, which include borrowings outstanding on credit 2003 and 2004 by operating segment. The figures below include                   facilities with original maturities of less than one year, were less than principal payments on the Entergy Louisiana and System Energy                   SI million as of December 31, 2004. Entergy Arkansas, Entergy sale-leaseback transactions, which are included in long-term debt               Louisiana, Entergy Mississippi, and Entergy New Orleans each on the balance sheet (in millions):                                             have 364-day credit facilities available as follows:
Long-term                                                     2008-   After                                      Expiration         Amount of        Amount Drawn as Debt Maturities              2004    2005     2006    2007    2009    2009      Company                                Date              Facility     of Dec. 31, 2004 As of December 31,2003                                                          Entergy Arkansas               April 2005         585 million U.S. Utility              5450    $355     S 28     $573 S 721    54,305      Entergy Louisiana              April 2005         515 million(O                      -
Non-Utility Nuclear          74      72       76      80      40     173 Entergy Mississippi            May 2005           525 million Energy Commodity Entergy New Orleans            April 2005         $14 million()                      -
Services                     -        -       -        -      -        -
Parent and Other              -      60        -        -    539     301      (a) Tbe combined amount borrowed by Entergy Louisianaand Entergy New Orleans under thesefacilities at any one time cannot exceed $15 million.
Total                     $524     $487     $104    $653 $1,300   $4,779 As of December 31, 2004 Operating Lease Obligations and Guarantees U.S. Utility                  -   $359     S 27     S 98 S 749    $4,880 Non-Utility Nuclear           -      77       76      80      40     173      of Unconsolidated Obligations Energy Commodity                                                              Entergy has a minimal amount of operating lease obligations and Services                     -        -       -        -      -        -     guarantees in support of unconsolidated obligations. Entergys Parent and Other              -      60        -      50     539     301      guarantees in support of unconsolidated obligations are not likely to Total                         -   $496      $103    $228 $1,328   $5,354      have a material effect on Entergy's financial condition or results Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued of operations. Following are Entergy's payment obligations as of                         CAPITAL EXPENDITURE PLANS AND OTHER USES OF CAPITAL December 31, 2004 on non-cancelable operating leases with a term                         Following are the amounts of Entergy's planned construction over one year (in millions):                                                             and other capital investments by operating segment for 2005 through 2007 (in millions):
2008-     After 2005        2006    2007      2009     2009 Planned construction Operating lease payments                599        586     569     S100      5210        and capital investments                    2005         2006      2007 Maintenance Capital:
The operating leases are discussed more thoroughly in Note 9 to the                       U.S. Utility                            S 734       S 699      S 763 consolidated financial statements.                                                        Non-Utility Nudear                          72           72        60 Energy Commodity Services                    3           4         6 Summary of Contractual Obligations                                                        Parent and Other                             11          19        11 of Consolidated Entities (in millions)                                                                                               820          794       840 Capital Commitments:
2006-  2008-      After                  U.S. Utility                               571          349       201 Contractual Obligations                2005      2007    2009      2009       Total       Non-Utility Nuclear                          90          67        43 Long-term debtu'                    S 496     S 331 51,328 55,354          57,509         Energy Commodity Services                     -           -         -
Capital lease payments(2)           S   136 S 146 S         2 S       3    S 287          Parent and Other                              -           -         -
Operating leases(2)                 S 99 S 155 S 100 S 210                 S 564                                                     661          416       244 Purchase obligations(3)             51,160 $1,402 S 962 51,156             54,680        Total                                    51,481      51,210     51,084 (1) Long-term debt is discussed in Note S to the consolidatedfinancial statements.
Maintenance Capital refers to amounts Entergy plans to spend on routine capital projects that are necessary to support reliability (2) Capital lease payments include nuclearfuel leases. Lease obligations are discussedin Note 9 to the consolidatedfinancialstatements.                           of its service, equipment, or systems and to support normal (3) Purchaseobligationsrepresent the minimum purchase obligation or cancellation customer growth.
chargeforcontractualobligations to purchasegoodsor services. Approximately              Capital Commitments refers to non-routine capital investments 99% of the totalpertainstofuel andpurchasedpower obligations that are                for which Entergy is either contractually obligated, has recoveredin the normal course of business through variousfuel cost recovery Board-approval, or is otherwise required to make pursuant to a mechanisms in the US. Utility business.
regulatory agreement or existing rule or law. Amounts reflected in In addition to these contractual obligations, Entergy expects to con-                    this category include the following:
tribute $185.9 million to its pension plans and 563.3 million
* Replacement of the Arkansas Nuclear One Unit 1 (ANO 1) to other postretirement plans in 2005.                                                      steam generators and reactor vessel closure head. Management estimates the cost of the ANO 1 project to be approximately
                                                                                            $235 million, of which approximately $96 million has been incurred through 2004. 5115 million is expected to be incurred in 2005, with the remainder expected to be spent in 2006.
                     "Assuming regulatory approval by the                                   Entergy expects the replacement to occur during a planned LPSC, Entergy Louisiana expects to                                    refueling outage in 2005. Entergy Arkansas filed with the APSC in January 2003 a request for a declaratory order that the close its acquisition of the 718 MW investment in the replacement is in the public interest. The Perryville power plant in mid-2005."                                  APSC issued the requested order in May 2003. This order is analogous to the order received in 1998 prior to the replacement of the Arkansas Nuclear One Unit 2 (ANO 2) steam generators.
Capital Funds Agreement
* Purchase of the Perryville power plant in Louisiana. In January 2004, Entergy Louisiana signed a definitive agreement to Pursuant to an agreement with certain creditors, Entergy acquire the 718 MW Perryville power plant for S170 Corporation has agreed to supply System Energy with sufficient million.The agreement has subsequently been amended to allow capital to:
the current plant owner to retain the interconnection facilities
* maintain System Energy's equity capital at a minimum of 35%
associated with the plant, resulting in a decrease in the of its total capitalization (excluding short-term debt);
acquisition price to $162 million. As a result of the amended
* permit the continued commercial operation of Grand Gulf; terms, the Federal Energy Regulatory Commission (FERC) d pay in full all System Energy indebtedness for borrowed money issued an order in October 2004 disclaiming jurisdiction over when due; and the acquisition. This order currently is subject to rehearing by
* enable System Energy to make payments on specific System FERC. The plant is owned by a subsidiary of Cleco Energy debt, under supplements to the agreement assigning Corporation, which subsidiary submitted a bid in response to System Energy's rights in the agreement as security for the Entergy's Fall 2002 request for proposals for supply-side specific debt.
29 -
                                                                                                                                                             --- Y_

Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued I
resources. The signing of the agreement followed a voluntary          Dividends and Stock Repurchases Chapter 11 bankruptcy filing by the plant's owner. Entergy            Declarations of dividends on Entergy's common stock are made at expects that Entergy Louisiana will own 100 percent of the            the discretion of the Board. Among other things, the Board Perryville plant, and that Entergy Louisiana will sell 75 percent     evaluates the level of Entergy's common stock dividends based upon of the output to Entergy Gulf States under a long-term cost-of-       Entergy's earnings, financial strength, and future investment service power purchase agreement. In addition, Entergy                opportunities. At its October 2004 meeting, the Board increased Louisiana and Entergy Gulf States executed an interim power           Entergy's quarterly dividend per share by 20%, to $0.54. In 2004, purchase agreement with the plant's owner through the date of         Entergy paid approximately $428 million in cash dividends on its the acquisition's closing (as long as that occurs by December         common stock.
2005) for 100 percent of the output of the Perryville power              In accordance with Entergy's stock-based compensation plan, plant. In April 2004, the bankruptcy court approved Entergy           Entergy periodically grants stock options to its employees, which Louisiana's agreement to acquire the plant. In March 2004,            may be exercised to obtain shares of Entergy's common stock.
Entergy Gulf States and Entergy Louisiana filed with the According to the plan, these shares can be newly issued shares, LPSC for its approval of the acquisition and long-term cost-of-       treasury stock, or shares purchased on the open market. Entergy's service power purchase agreement. Entergy is seeking approval         management has been authorized to repurchase on the open market from the LPSC of cost recovery for the acquisition, giving            shares up to an amount sufficient to fund the exercise of grants consideration to the need for the power and the prudence of           under the plans. In addition to this authority, the Board has Entergy Louisiana and Entergy Gulf States in engaging in the          approved a program under which Entergy will repurchase up to transaction. Hearings are scheduled for March 2005. Assuming          $1.5 billion of its common stock through 2006. The amount of regulatory approval by the LPSC, Entergy Louisiana expects            repurchases under the program may vary as a result of material the Perryville acquisition to dose in mid-2005.                       changes in business results or capital spending, or as a result of
* Transmission expansion designed to address immediate load              material new investment opportunities. In 2004, Entergy growth needs and to provide improved transmission flexibility         repurchased 16,631,800 shares of common stock under both for the southeastern Louisiana and Texas regions of Entergy's         programs for a total purchase price of S1.018 billion.
service territory. Entergy expects to spend $170 million on high voltage transmission infrastructure to be completed in phases         Public Utility Holding Company Act (PUHCA) between mid-2005 to mid-2007.                                          Restrictions on Uses of Capital
* Purchase of additional generation supply sources within the Entergy's ability to invest in electric wholesale generators and U.S. Utility's service territory.
foreign utility companies is subject to the Securities and Exchange
* Nuclear power plant uprates, dry cask spent fuel storage, and Commission's (SEC) regulations under PUHCA. As authorized by license renewals.
the SEC, Entergy is allowed to invest earnings in electric wholesale generators and foreign utility companies in an amount equal to From time to time, Entergy considers other capital investments        100% of its average consolidated retained earnings. As of December as potentially being necessary or desirable in the future, including 31, 2004, Entergy's investments subject to this rule totaled additional nuclear plant power uprates, generation supply assets,
                                                                           $2.7 billion constituting 55.9% of Entergy's average consolidated various transmission upgrades, environmental compliance                  retained earnings.
expenditures, or investments in new businesses or assets. Because no Entergy's ability to guarantee obligations of Entergy's contractual obligation, commitment, or Board-approval exists to non-utility subsidiaries is also limited by SEC regulations under pursue these investments, they are not included in Entergy's PUHCA. In August 2000, the SEC issued an order, effective planned construction and capital investments. These potential through December 31, 2005, that allows Entergy to issue up to investments are also subject to evaluation and approval in               $2 billion of guarantees for the benefit of its non-utility companies.
accordance with Entergy's policies before amounts may be spent. In In February 2005, Entergy requested that the SEC increase this addition, Entergy's capital spending plans do not include spending       limit to $4 billion.
for transmission upgrades requested by merchant generators, other Under PUHCA, the SEC imposes a limit equal to 15% of than projects currently underway.
consolidated capitalization on the amount that may be invested in Estimated capital expenditures are subject to periodic review and
                                                                           'energy-related" businesses without specific SEC approval. Entergy modification and may vary based on the ongoing effects of business has made investments in energy-related businesses, including restructuring, regulatory constraints, environmental regulations, business opportunities, market volatility, economic trends, and the      power marketing and trading. Entergy's available capacity to ability to access capital.                                               make additional investments at December 31, 2004 was approximately $1.9 billion.
Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued
<I SOURCES OF CAPITAL.                                                           The short- and long-term securities issuances of Entergy Entergy's sources to meet its capital requirements and to fund            Corporation also are limited to amounts authorized by the potential investments include:                                             SEC. Under its current SEC order, and without further SEC
* internally generated funds;                                             authorization, Entergy Corporation cannot incur additional
* cash on hand ($808 million as of December 31, 2004);                    indebtedness or issue other securities unless (a) Entergy
* securities issuances;                                                   Corporation and each of its public utility subsidiaries maintain
* bank financing under new or existing facilities; and                    common equity ratios of at least 30% and (b) the security to
* sales of assets.                                                        be issued (if rated) and all outstanding securities of Entergy Corporation that are rated, are rated investment grade.
The majority of Entergy's internally generated funds come from             The long-term securities issuances of Entergy Gulf States, the U.S. Utility. Circumstances such as weather patterns, price           Entergy Louisiana, Entergy Mississippi, and System Energy also fluctuations, and unanticipated expenses, including unscheduled            are limited to amounts authorized by the SEC. Under the current plant outages and storms, could affect the level of internally             SEC orders of Entergy Gulf States, Entergy Louisiana, and generated funds in the future. In the following section, Entergy's         Entergy Mississippi, and without further SEC authorization, the cash flow activity for the previous three years is discussed.              issuer cannot incur additional indebtedness or issue other securities Provisions within the Articles of Incorporation or pertinent           unless (a) it and Entergy Corporation maintain a common equity indentures and various other agreements relating to the long-term         ratio of at least 30% and (b) the security to be issued (if rated) and debt and preferred stock of certain of Entergy Corporation's               all outstanding securities of the issuer (other than preferred stock of subsidiaries restrict the payment of cash dividends or other              Entergy Gulf States), as well as all outstanding securities of Entergy distributions on their common and preferred stock. As of                   Corporation, that are rated, are rated investment grade.
December 31, 2004, Entergy Arkansas and Entergy Mississippi had restricted retained earnings unavailable for distribution to           CASH FLOW ACTIVITY Entergy Corporation of $394.9 million and $68.5 million, respec-          As shown in Entergy's Statements of Cash Flows, cash flows for the tively. Additionally, PUHCA prohibits Entergy Corporation's sub-           years ended December 31, 2004, 2003, and 2002 were as follows sidiaries from making loans or advances to Entergy Corporation.           (in millions):
Al debt and common and preferred stock issuances by the domes-tic utility companies and System Energy require prior regulatory                                                       2004       2003        2002 approval and their preferred stock and debt issuances are also sub-       Cash and cash equivalents at beginning of period                  S 692      S 1,335    S 752 ject to issuance tests set forth in corporate charters, bond inden-Cash flow provided by (used in):
tures, and other agreements. The domestic utility companies and Operating activities                      2,929      2,006      2,181 System Energy have sufficient capacity under these tests to meet           Investing activities                     (1,140)    (1,783)     (1,388) foreseeable capital needs.                                                  Financing activities                      (1,672)     (869)       (213)
The short-term borrowings of Entergy's subsidiaries are limited        Effect of exchange rates on to amounts authorized by the SEC. The current limits authorized             cash and cash equivalents                     (1)        3           3 are effective through November 30,2007. In addition to borrowing           Net increase (decrease) in from commercial banks, Entergy's subsidiaries are authorized under          cash and cash equivalents                    116      (643)        583 the SEC order to borrow from Entergy's money pool. The money               Cash and cash equivalents pool is an inter-company borrowing arrangement designed to                  at end of period                        S 808      S 692      S 1,335 reduce Entergy's subsidiaries' dependence on external short-term borrowings. Borrowings from the money pool and external                    Operating Cash Flow Activity borrowings combined may not exceed the SEC authorized limits.             2004 Comparedto 2003 As of December 31, 2004, Entergy's subsidiaries' aggregate                 Entergy's cash flow provided by operating activities increased in authorized limit was $1.6 billion and the aggregate outstanding           2004 primarily due to the following:
borrowing from the money pool was $151.6 million. There were no
* The U.S. Utility provided $2,208 million in cash from operating borrowings outstanding from external sources. Under the SEC                  activities compared to providing S1,675 million in 2003. The order and without further SEC authorization, the domestic utility             increase resulted primarily from the receipt of intercompany companies and System Energy cannot issue new short-term                       income tax refunds from the parent company, Entergy indebtedness unless (a) Entergy Corporation and the issuer each              Corporation. Income tax refunds/payments contributed maintain common equity of at least 30% of its capital and (b) with            approximately $400 million of the increase in cash from the exception of money pool borrowings, the debt security to be               operating activities in 2004. Improved recovery of fuel costs and issued (if rated) and all outstanding securities of the issuer and            a reduction in interest paid also contributed to the Entergy Corporation that are rated must be rated investment grade.            increase in 2004.
See Note 4 to the consolidated financial statements for further discussion of Entergy's short-term borrowing limits.
Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued I2
* The Non-Utility Nuclear business provided $415 million
* The Non-Utility Nuclear segment provided $183 million in in cash from operating activities compared to providing                      operating cash flow in 2003 compared to providing
      $183 million in 2003. The increase resulted primarily from                   $282 million in 2002 primarily due to higher tax payments and lower intercompany income tax payments and increases in                      unplanned outages.
generation and contract pricing that led to an
* Operating cash flow used by the investment in Entergy-Koch, increase in revenues.                                                        LP decreased by $6 million in 2003. This decrease in cash flow
* Entergy's investment in Entergy-Koch, LP provided                             used was due to the receipt of $100 million in dividends from
      $526 million in cash from operating activities compared to                   Entergy-Koch in 2003. Almost entirely offsetting the dividends using $41 million in 2003. Entergy received dividends from                   received was an increase in tax payments related to Entergy's Entergy-Koch of $529 million in 2004 compared to                             investment in Entergy-Koch due to increased income from
      $100 million in 2003. In addition, tax payments related to the               the investment.
investment were higher in 2003 because the investment had higher net income in 2003.                                                Partially offsetting the decrease in cash flow in 2003 was an increase
* The non-nuclear wholesale assets business used $46 million in              due to the parent company providing $209 million in operating cash cash from operating activities compared to using $70 million              flow in 2003 compared to using $439 million in 2002 primarily due in 2003. The decrease in cash used resulted primarily from a              to the payment that Entergy Corporation made to Entergy one-time $33 million payment in 2003 related to a generation              Louisiana in 2002 pursuant to the tax accounting election made by contract in the non-nuclear wholesale assets business.                    Entergy Louisiana.
* The parent company, Entergy Corporation, used $146 million                    In 2001, Entergy Louisiana changed its method of accounting in cash from operating activities in 2004 compared to providing           for tax purposes related to its wholesale electric power contracts.
The most significant of these is the contract to purchase power from
      $209 million in 2003 primarily due to higher intercompany the Vidalia project (the contract is discussed in Note 8 to the income tax payments.
consolidated financial statements). The new tax accounting method has provided a cumulative cash flow benefit of approximately As discussed in Note 3 to the consolidated financial statements, in
                                                                                $790 million through 2004, which is expected to reverse in the years 2003, the domestic utility companies and System Energy filed, with 2005 through 2031. The election did not reduce book income tax the Internal Revenue Service (IRS), a change in tax accounting               expense. The timing of the reversal of this benefit depends on method notification for their respective calculations of cost of goods       several variables, including the price of power. Approximately half sold. The cash benefit from the method change was $74 million on             of the consolidated cash flow benefit of the election occurred in a consolidated basis in 2004. This accounting method change is               2001 and the remainder occurred in 2002. In accordance with an issue across the utility industry and will likely be challenged by        Entergy's intercompany tax allocation agreement, the cash flow the IRS on audit. As of December 31, 2004, Entergy has a                     benefit for Entergy Louisiana occurred in the fourth consolidated net operating loss (NOL) carryforward for tax                   quarter of 2002.
purposes of $2.9 billion, principally resulting from the change in              In a September 2002 settlement of an LPSC proceeding that tax accounting method related to cost of goods sold. If the tax              concerned the Vidalia contract, the LPSC approved Entergy accounting method change is sustained, Entergy expects to fully              Louisiana's proposed treatment of the regulatory impact of the tax utilize the NOL carryforward through 2006.                                   accounting election. In general, the settlement permits Entergy Louisiana to keep a portion of the tax benefit in exchange for 2003 Comparedto 2002                                                         bearing the risk associated with sustaining the tax treatment. The Entergy's cash flow provided by operating activities decreased in            LPSC settlement divided the term of the Vidalia contract into two 2003 primarily due to the following:                                         segments: 2002-2012 and 2013-2031. During the first eight years
* The U.S. Utility provided $1,675 million in operating cash flow            of the 2002-2012 segment, Entergy Louisiana agreed to credit rates in 2003 compared to providing $2,341 million in 2002. The                 by flowing through its fuel adjustment calculation $11 million each decrease primarily resulted from the tax accounting election              year, beginning monthly in October 2002. Entergy Louisiana must credit rates in this way and by this amount even if Entergy made by Entergy Louisiana, as discussed below. Also Louisiana is unable to sustain the tax deduction. Entergy Louisiana contributing to the decrease were higher payments for fuel also must credit rates by $11 million each year for an additional during the period, which also significantly increased the amount two years unless either the tax accounting method elected is of deferred fuel costs.
retroactively repealed or the Internal Revenue Service denies the
* The non-nuclear wholesale assets business used $70 million in entire deduction related to the tax accounting method. Entergy operating cash flow in 2003 compared to providing $43 million             Louisiana agreed to credit ratepayers additional amounts unless the in 2002 primarily due to a decrease of $64 million in the                 tax accounting election is not sustained if it is challenged. During income tax refund received in 2003 compared to 2002. Also                 2013-2031, Entergy Louisiana and its ratepayers would share the contributing to the increase in cash used was a one-time                  remaining benefits of this tax accounting election.
      $33 million payment in 2003 related to a generation contract in the non-nuclear wholesale assets business.
                                                                                                                                                                                                                                 /6

Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued r Investing Activities                                                            obligations owed to NYPA for the acquisition of the FitzPatrick 2004 Comparedto 2003                                                            and Indian Point 3 nuclear power plants was released to Entergy Net cash used in investing activities decreased in 2004 primarily due           during 2003.
to the following:
* Construction expenditures were $158 million lower in 2004                     Financing Activities than in 2003, including decreases of $81 million in the U.S.                 2004 Comparedto 2003 Utility business, $39 million in the Non-Utility Nuclear                     Net cash used in financing activities increased in 2004 primarily due business, and $42 million in the non-nuclear wholesale                        to the following:
assets business.
* Entergy Corporation issued $538 million of long-term notes
* Entergy received net returns of invested capital from Entergy-                   in 2003.
Koch of $284 million in 2004 after the sale by Entergy-Koch
* Entergy Corporation repurchased $1.018 billion of its common of its trading and pipeline businesses. This activity is reported               stock in 2004, as discussed above in the 'Uses of Capital" section.
in the 'Decrease in other investments" line in the cash
* Entergy Corporation paid $65 million more in common stock flow statement.                                                                 dividends in 2004 than in 2003.
* Approximately $60 million of the cash collateral for a letter of credit that secures the installment obligations owed to New                  Offsetting the factors that caused an increase in cash used in York Power Authority (NYPA) for the acquisition of the                        financing activities in 2004 were the following:
FitzPatrick and Indian Point 3 nuclear power plants was
* Retirements of long-term debt net of issuances by the U.S.
released to Entergy in 2004. Approximately S172 million of this                 Utility segment used $345 million in 2004 and used cash collateral was released to Entergy in 2003, and the letter of               $359 million in 2003. See Note 5 to the consolidated financial credit is no longer secured by cash collateral. This activity is                statements for the details of the long-term debt activity in 2004.
reported in the 'Decrease in other investments" line in the cash
* In 2003, Entergy Corporation decreased the net borrowings on flow statement.                                                                 its credit facility by $500 million, while in 2004, net borrowings
* The non-nuclear wholesale assets business realized $75 million                   on its credit facilities increased by $50 million.
in net proceeds from sales of portions of three of its power
* The non-nuclear wholesale assets business retired the plants in 2004.                                                                   $79 million Top of Iowa wind project debt at its maturity in
* Entergy made temporary investments of $50 million in 2003,                       January 2003.
and these investments matured in the first quarter of 2004.
* Entergy Arkansas used S7 million, Entergy Gulf States used                    2003 Comparedto 2002
     $77 million, and Entergy Mississippi used $73 million for other              Net cash used in financing activities increased in 2003 primarily due regulatory investments in 2003 as a result of fuel cost under-                to the following:
recovery. In 2004, Entergy Arkansas used $4 million and
* Net long-term debt retirements by the U.S. Utility segment Entergy Gulf States used $50 million for other regulatory                       were approximately $470 million in 2003 compared to net investments related to fuel cost under-recovery. See Note 1 to                   issuances of approximately $76 million in 2002. See Note 5 to the consolidated financial statements for discussion of the                     the consolidated financial statements for the details of Entergy's accounting treatment of these fuel cost under-recoveries.                        long-term debt outstanding.
* The net borrowings under Entergy Corporation's credit facilities 2003 Comparedto 2002                                                               decreased $500 million in 2003 compared to an increase of Net cash used in investing activities increased in 2003 primarily due              $244 million in 2002.
to the following:
* The non-nuclear wholesale assets business realized $215 million               The items causing cash used to increase in 2003 were partially in net proceeds from sales of businesses in 2002.                             offset by the following:
* Temporary investments of S150 million matured in 2002, which
* Entergy Corporation issued $538 million of long-term notes in provided cash flow in 2002.                                                      2003 compared to $267 million in 2002.
* Temporary investments of $50 million were made in 2003,
* The non-nuclear wholesale assets business retired $268 million which used cash flow in 2003.                                                    of long-term debt in 2002 related to the repurchase of the rights
* Entergy Gulf States had $77 million and Entergy Mississippi                      to acquire turbines discussed in "Results of Operations" above.
had S73 million of other regulatory investments in 2003 as a                     Partially offsetting this was the retirement of the $79 million result of fuel cost under-recoveries. See Note 1 to the                          Top of Iowa wind project debt at its maturity in January 2003.
consolidated financial statements for discussion of the
* Entergy repurchased $8 million of its common stock in 2003 accounting treatment of these fuel cost under-recoveries. See                    compared to $118 million in 2002.
Note 2 to the consolidated financial statements for discussion of the change in Entergy Mississippi's energy cost recovery rider.                  In a non-cash transaction in 2002, long-term debt was reduced by $488 million in the sale of the Damhead Creek plant when Partially offsetting these uses of cash, approximately $172 million           the purchaser assumed the Damhead Creek debt along with of the cash collateral for a letter of credit that secures the installment      the acquisition of the plant.
33 -
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Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued II 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 Entergy's 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 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/Events Entergy Arkansas                                   11.0%         No base rate cases are pending. Transition cost recovery rider approved to collect S85 million effective October 2004 with recovery expected over subsequent 16 months. It is likely that a rate filing will be made in 2005 in connection with the ANO 1 steam generator and reactor vessel head replacement.
Entergy Gulf States-Texas                        10.95%          Base rates are currently set at rates approved by the PUCT in June 1999. Entergy Gulf States filed a retail electric rate case with the PUCT in August 2004. In October 2004, the PUCT issued a written order in which it dismissed the rate case indicating that Entergy Gulf States is still subject to a rate freeze based on an agreement, approved by PUCT order in 2001, stipulating that a rate freeze would remain in effect until retail open access commenced in Entergy Gulf States' service territory, unless lifted by the PUCT prior thereto. Entergy Gulf States has appealed this decision and intends to pursue other available remedies, including legislation that would clarify that it is no longer operating under a rate freeze. In February 2005, bills were filed in the Texas legislature that would clarify that Entergy Gulf States is no longer operating under a rate freeze and specify that retail open access will not commence in Entergy Gulf States' territory until the PUCT certifies a power region.
Entergy Gulf States-Louisiana                      11.1%         In December 2003, the LPSC staff recommended a 130.6 million rate refund and a prospective rate reduction of approximately 550 million as a result of the ninth post-merger earnings analysis (2002). Hearings concluded in May 2004. In January 2005, Entergy Gulf States and Entergy Louisiana filed testimony with the LPSC in support of a proposed settlement that would resolve, among other dockets, Entergy Gulf States' ninth post-merger review, and dockets established to consider issues concerning the companies' power purchases for the summers of2001, 2002, 2003, and 2004. The proposed settlement currently includes an offer to refund 176 million to Entergy Gulf States' Louisiana customers through a credit on bills rendered in March 2005, with no immediate change in the current base rates. The settlement also proposes a formula rate plan with an ROE midpoint of 10.65%. The LPSC has solicited comments on the proposed settlement from the parties to the various proceedings at issue in the settlement. The proposed settlement is scheduled to be presented to the LPSC for consideration on March 23, 2005.
EntergyLouisiana                             9.7%-11.3%"'        InJanuary 2004, Entergy Louisiana filed with the LPSC an application for a S167 million base rate increase and an ROE of 11.4%.The currently authorized ROE midpoint is 10.5%. Hearings in this matter concluded in December2004. Based on the evidence submitted at the hearing, the LPSC staff is recommending approximately a 17 million base rate increase. The LPSC staff proposed the implementation of a formula rate plan that includes a provision for the recovery of incremental capacity costs, including those related to the proposed Perryville acquisition. A decision by the LPSC is expected in mid- to late-March 2005 on these issues.
In January 2005, Entergy Gulf States and Entergy Louisiana filed testimony with the LPSC in support of a proposed settlement with the LPSC that would resolve, among other doclets, dockets established to consider issues conceming the companies' power purchases for the summers of 2001, 2002, 2003, and 2004. The proposed settlement currently includes an offer to refund
                                                                  $14 minion to Entergy Louisiana's customers. The LPSC has solicited comments on the proposed settlement from the parties to the various proceedings at issue in the proposed settlement The proposed settlement is scheduled to be presented to the LPSC for consideration on March 23, 2005.
Entergy Mississippi                          9.3%-122%m4         An annual formula rate plan is in place. Entergy Mississippi made its annual formula rate plan filing in March 2004 based on a 2003 test year. There was no change in rates based on an adjusted ROE midpoint of 10.77%.
Entergy New Orleans                      10.25%-12.25% '"        The midpoint ROE of the electric and gas plans is 11.25%, with a target equity component of the capital structure of 42%.
Entergy New Orleans made a formula rate plan filing in April 2004. The City Coundl ordered that electric and gas rates remain unchanged from levels set in 2003. Entergy New Orleans will file its formula rate plan for the year ended December 31,2004 by May 1, 2005 and also intends to file for an extension of the formula rate plan by September 1, 2005. If the formula rate plan is not extended by the City Council, the rate adjustments in effect based on the December 31, 2004 test year shall continue.
System Energy                                    10.94%           ROE approved by July 2001 FERC order. No cases pending before FERC.
(1) EntergyLouaiiana'rformularateplan expiredwith the 2001 testwyear. Under the expiredformius          ~fEntergy  Louisianaearnedoutside ofthe bandwidth range,rater would beadjustedon aprospectivm basis. If earnings were above the bandwidth range, rates would bereducedby 60 percent of the amount necessary to bring earningsdown tothe top ofthe bandwidth, and fearnings were below the bandwidth range, rates would be increasedby 60 perent of the orrespondingshortfall (2) Under Mississippilaw and Entergy Mississippi'sJormnularateplan. ifEntergy Missirsippisearned ROE is above the top of the range-of-no-thangeat the top of the bandwidth, then Entergy Mississipss rates are reducedby 50perrent of the diference between the earned ROE and the top ofthe bandwidth. In such circumstance,Entergy Mississipp's II/oweadROE'for the next twelv-monthperiod is the pointhalfway between such earnedROE and the top of the bandwidth - Entergy Mirsirsippi's retailrates are set at thathalfway-point ROE lev. (Before the comparisonismade of the earned ROE tothe bandwidth, the bandwidth canhe adjsotedforperformancemeasures by as much as 1%. Rate armadjustedpursuantto Entergy Missisispprsformularateplanon apraspective basis only.) In the situation where EntergyMississippi's earnedROE is not above the top ofthe range-of-no-changeat the top of the handwidtb,then EntergyMisrissippi's Wfllowed ROE'for the next twelve-month period is the top ofthe range-of-no-changeat the top of the bandwidth,Yearnings are below the bandwidth range,rates are increasedby 50 percent of the difference between the earned ROE and the bottom ofthe bandwidth. Under the provisions ofEntergy Misoisrippi'sformularateplan, each annualformularateplanfiling incorporatesa revi ed calculationofthe benchmark ROE (3) IfEntergy New Orleans earns outside the bandwidth range, rates willbe adjusted on aprospective basis.Underthe garformula rateplan if earnings are above the bandwidth range,rates ar reduced by 100percentof the overage, and f below, increasedby100percent of the shortfall. In addition. f theROEfalls between 11.5% and 12.259k ratesare reducedby 60perrentof th dffersnce (betwee 11.5% and 12.25%), and if the ROEfalls between 10.25% and 11% rates are increasedby 40percentof the dffrence (between 10.25% and11%). Underthe electricformularateplan, rates are adjusted accordingly by 100 perent of the amount ofaany overage or shrorfall EntergyNew Orlansmay earn up to 13.25% underthe electritformula rateplan providedthat the increaseis caused by its share ofenergy costsavings under thegenrationperformance-basedrecoveryplan.
Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued C
In addition to the regulatory scrutiny connected with base rate           history, structure, and precedent regarding the System Agreement; proceedings, the domestic utility companies' fuel and purchased              the Initial Decision's remedy ignores the historical pattern of power costs recovered from customers are subject to regulatory               production cost disparities on the Entergy System and would result scrutiny. The domestic utility companies' significant fuel and               in substantial, sudden transfers of costs between groups of Entergy purchased power cost proceedings are described in Note 2 to the              customers; the numerical standards proposed in the Initial Decision consolidated financial statements.                                           are arbitrary and are so complex that they would be difficult to implement-, the Initial Decision improperly rejected Entergy's FEDERAL REGULATION                                                           resource planning remedy; the Initial Decision erroneously FERC regulates wholesale rates (including Entergy intrasystem                determined that the full costs of the Vidalia project should be sales pursuant to the System Agreement) and interstate                       included in Entergy Louisiana's production costs for purposes of transmission of electricity, as well as rates for System Energy's sales      calculating relative production costs; and the Initial Decision of capacity and energy from Grand Gulf 1 to Entergy Arkansas,                erroneously adopted a new method of calculating reserve sharing Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans              costs rather than the current method.
pursuant to the Unit Power Sales Agreement.                                     If FERC grants the relief requested by the LPSC in the proceeding, the relief may result in a material increase in the total System Agreement Litigation                                                  production costs FERC allocates to companies whose costs The domestic utility companies historically have engaged in the              currently are projected to be less than the Entergy System average, coordinated planning, construction, and operation of generating              and a material decrease in the total production costs FERC allocates and transmission facilities under the terms of an agreement called           to companies whose costs currently are projected to exceed that the System Agreement that has been approved by FERC. Litigation              average. If FERC adopts the ALJ's Initial Decision, the amount involving the System Agreement is being pursued by the LPSC at               of production costs that would be reallocated among the domestic both FERC and before itself. These proceedings include challenges            utility companies would be determined through consideration of to the allocation of costs as defined by the System Agreement, raise         each domestic utility company's relative total production cost questions of imprudence by the domestic utility companies in their           expressed as a percentage of Entergy System average total execution of the System Agreement, and seek support for local                production cost. The ALJ's Initial Decision would reallocate regulatory authority over System Agreement issues. Regarding the             production costs of the domestic utility companies whose percent of proceeding at the LPSC, Entergy believes that state and local                Entergy System average production cost are outside an upper or regulators are preempted by federal law from reviewing and                   lower bandwidth. This would be accomplished by payments from deciding System Agreement issues for themselves. An unrelated                domestic utility companies whose production costs are below case between the LPSC and Entergy Louisiana raised the question              Entergy System average production cost to domestic utility of whether a state regulator is preempted by federal law from                companies whose production costs are above Entergy System reviewing and interpreting FERC rate schedules that are part of the          average production cost.
System Agreement, and from subsequently enforcing that                          An assessment of the potential effects of the ALJ's Initial interpretation. The LPSC interpreted a System Agreement rate                 Decision requires assumptions regarding the future total production schedule in the unrelated case, and then sought to enforce its               cost of each domestic utility company, which assumptions include interpretation. The Louisiana Supreme Court affirmed the LPSC's              the mix of solid fuel and gas-fired generation available to each decision. In 2003, the U.S. Supreme Court ruled in Entergy                   company and the costs of natural gas and purchased power.
Louisiana's favor and reversed the decisions of the LPSC and the             Entergy Louisiana and Entergy Gulf States are more dependent Louisiana Supreme Court.                                                     upon gas-fired generation than Entergy Arkansas, Entergy In February 2004, a FERC Administrative Law Judge (ALJ)                   Mississippi, or Entergy New Orleans. Of these, Entergy Arkansas issued an Initial Decision in the LPSC-initiated proceeding at               is the least dependent upon gas-fired generation. Therefore, FERC. The Initial Decision decided some issues in favor of the               increases in natural gas prices likely will increase the amount by relief sought by the LPSC, and decided some issues against the               which Entergy Arkansas' total production costs are below the relief sought by the LPSC. Several parties, including Entergy, the           average production costs of the domestic utility companies.
LPSC, the APSC, the MPSC, the City Council, and FERC Staff,                  Considerable uncertainty exists regarding future gas prices. Annual filed briefs on exceptions in response to the ALJ's Initial Decision.        average Henry Hub gas prices have varied significantly over recent Entergy's exceptions to the ALJ's Initial Decision include: the             years, ranging from S1.72/mmBtu to S5.85/mmBtu for the practical effect of the Initial Decision is full production cost             1995-2004 period, and averaging S3.43/mmBtu during the ten-year equalization, which was rejected in the Initial Decision and                 period 1995-2004 and S4.58/mmBtu during the five-year period previously has been rejected by FERC; resource planning for the              2000-2004. Recent market conditions have resulted in gas prices Entergy System would be impeded if the Initial Decision were                 that have averaged S5.85/mmBtu for the twelve months ended adopted; the remedy in the Initial Decision is inconsistent with the         December 2004. Based upon analyses considering the effect on 35 -
I

Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued II-future production costs if FERC adopts the ALJ's Initial Decision,            will seek to reverse the production cost-related portions of the ALJ's the following potential annual production cost reallocations among            Initial Decision in the System Agreement proceeding at FERC, the domestic utility companies could result assuming annual                    that the Perryville acquisition is part of Entergy's request for average gas prices range from $6.39/mmBtu in 2005 declining to                proposal generation planning process, that Entergy Arkansas is not
$4.97/mmBtu by 2009 (in millions):                                             in a position to indemnify its retail customers from actions taken by Average Annual          FERC, and that the Perryville acquisition is expected to reduce the Range of Annual Payments Payments or (Receipts)      domestic utility companies' overall production costs. Procedural or (Receipts)       for 2005-2009 Period       schedules have not been established in these APSC investigations.
Entergy Arkansas              S 154 to   5281               S 215                 In April 2004, the City Council issued a resolution directing Entergy Gulf States           S(130) to  5(15)              S (63)             Entergy New Orleans and Entergy Louisiana to notify the City Entergy Louisiana             S(199) to  S(98)              S(141)             Council and obtain prior approval for any action that would Entergy Mississippi           5(16) to   S 8                5   1              materially modify, amend, or terminate the System Agreement for Entergy New Orleans           S(17) to   S (5)              S (12)             one or more of the domestic utility companies. Entergy New Orleans and Entergy Louisiana appealed to state court the City Management believes that any changes in the allocation of                   Council's resolution on the basis that the imposition of this production costs resulting from a FERC decision and related retail             requirement with respect to the System Agreement, a FERC-proceedings should result in similar rate changes for retail                   approved tariff, exceeds the City Council's jurisdiction and customers. The timing of recovery of these costs in rates could be             authority. In July 2004, the City Council answered the appeal and the subject of additional proceedings at the APSC and elsewhere,               filed a third party demand and counterclaim against Entergy, the however, and a delay in fill recovery of any increased allocation of           domestic utility companies, Entergy Services, and System Energy, production costs could result in additional financing requirements.            seeking a declaratory judgment that Entergy and its subsidiaries Although the outcome and timing of FERC, APSC, and other                       cannot terminate the System Agreement until obligations owed proceedings cannot be predicted at this time, Entergy does not                 under a March 2003 rate case settlement are satisfied. In August believe that the ultimate resolution of these proceedings will have a          2004, Entergy New Orleans and Entergy Louisiana, as well as the material effect on its financial condition or results of operation.            named third party defendants, filed pleadings objecting to the City In February 2004, the APSC issued an 'Order of Investigation,"              Council's third party demand and counterclaim on various grounds, in which it discusses the negative effect that implementation of the           including federal preemption. In February 2005, the state court FERC ALJ's Initial Decision would have on Entergy Arkansas'                    issued an oral decision dismissing the City Council's claims for lack customers. The APSC order establishes an investigation into                    of subject matter jurisdiction and prematurity.
whether Entergy Arkansas' continued participation in the System Agreement is in the best interest of its customers, and whether there          Transmission are steps that Entergy Arkansas or the APSC can take 'to protect               In 2000, FERC issued an order encouraging utilities to voluntarily
[Entergy Arkansas' customers] from future attempts by Louisiana,               place their transmission facilities under the control of independent or any other Entergy retail regulator, to shift its high costs to              RTOs (regional transmission organizations) by December 15,2001.
Arkansas." Entergy Arkansas filed testimony in response to the                 Delays in implementing the FERC order have occurred due to a APSC's Order of Investigation. The testimony emphasizes that the               variety of reasons, including the fact that utility companies, other ALJ's Initial Decision is not a final order by FERC; briefly                   stakeholders, and federal and state regulators continue to work to discusses some of the aspects of the Initial Decision that are                 resolve various issues related to the establishment of such RTOs.
included in Entergy's exceptions filed with FERC; emphasizes that                 In April 2004, Entergy filed a proposal with FERC to commit Entergy will seek to reverse the production cost-related portions of           voluntarily to retain an independent entity (Independent the Initial Decision; and states that Entergy Arkansas believes that           Coordinator of Transmission or ICT) to oversee the granting of it is premature, before FERC makes a decision, for Entergy                     transmission or interconnection service on Entergy's transmission Arkansas to determine whether its continued participation in the               system, to implement a transmission pricing structure that ensures System Agreement is appropriate.                                               that Entergy's retail native load customers are required to pay for In April 2004, the APSC commenced the investigation into                    only those upgrades necessary to reliably serve their needs, and to Entergy Louisiana's Vidalia purchased power contract and                       have the ICT serve as the security coordinator for the Entergy requested historical documents, records, and information from                  region. Assuming applicable regulatory support and approvals can Entergy Arkansas, which Entergy Arkansas has provided to the                   be obtained, Entergy proposed to contract with the ICT to oversee APSC. Also in April 2004, the APSC issued an order directing                   the granting of transmission service on the Entergy system as well Entergy Arkansas to show cause why Entergy Arkansas should not                 as the implementation of the proposed weekly procurement process have to indemnify and hold its customers harmless from any adverse              (WPP). The proposal was structured to not transfer control of financial effects related to Entergy Louisiana's pending acquisition            Entergy's transmission system to the ICT, but rather to vest with of the Perryville power plant, or show that the Perryville unit will           the ICT broad oversight authority over transmission planning produce economic benefits for Entergy Arkansas' customers.                      and operations.
Entergy Arkansas filed a response in May 2004 stating that Entergy Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued J    Entergy also proposed to have the ICT administer a transmission expansion pricing protocol that will increase the efficiency of In March 2004, the APSC initiated a proceeding to review Entergy's proposal and compare the benefits of such a proposal to transmission pricing on the Entergy system and that will be                   the alternative of Entergy joining the Southwest Power Pool RTO.
designed to protect Entergy's native load customers from bearing              The APSC sought comments from all interested parties on this the cost of transmission upgrades not required to reliably serve these        issue. Various parties, including the APSC General Staff, filed customers' needs. Entergy intends for the ICT to determine                    comments opposing the ICT proposal. A public hearing has not whether transmission upgrades associated with new requests for                been scheduled by the APSC at this time, although Entergy service should be funded directly by the party requesting such                Arkansas has responded to various APSC data requests. In May service or by a broader group of transmission customers, including            2004, Entergy Mississippi filed a petition for review with the Entergy's native load customers. This determination would be made             MPSC requesting MPSC support for the ICT proposal. A hearing in accordance with protocols approved by FERC and any party                   in that proceeding was held in August 2004. Additionally, Entergy contesting such determination, including Entergy, would be                    Louisiana and Entergy Gulf States have filed an application with required to seek review at FERC. Several technical conferences                the LPSC requesting that the LPSC find that the ICT proposal is regarding the ICT proposal, or various components thereof, were               a prudent and appropriate course of action. A hearing on the held in 2004. Entergy has also responded to discovery requests that           transmission pricing aspects of the ICT proposal is scheduled for resulted from these conferences.                                              May 2005, with a separate hearing on the WPP portion of the In January 2005, Entergy filed a petition for declaratory order           proposal currently scheduled for August 2005.
with FERC requesting that FERC provide guidance on two important issues: (1) whether the functions performed by the ICT               FERC's Supply, Margin Assessmcnt In November 2001, FERC issued an order that established a new generation market power screen (called Supply Margin Assessment) for purposes of evaluating a utility's request for market-based rate authority, applied that new screen to the Entergy System (among "Entergy filed a proposal with FERC                       others), determined that Entergy and the others failed the screen to commit voluntarily to retain an independent entity             within their respective control areas, and ordered these utilities to (Independent Coordinator of Transmission or ICT)."                implement certain mitigation measures as a condition to their continued ability to buy and sell at market-based rates. Among other things, the mitigation measures would require that Entergy transact at cost-based rates when it sells in the hourly wholesale will cause it to become a 'public utility" under the Federal Power market within its control area. Entergy requested rehearing of the Act or the 'transmission provider" under Entergy's open access order, and FERC delayed the implementation of certain mitigation transmission tariff; and (2) whether Entergy's transmission pricing measures until such time as it had the opportunity to consider the proposal, as administered by the ICT, satisfies FERC's transmission rehearing request. In June 2003, FERC proposed and ultimately pricing policy. The petition also indicates that, subject to the adopted new market behavior rules and tariff provisions that would outcome of the petition and obtaining support of Entergy's retail regulators, Entergy would be willing to have the ICT perform the              be applied to any market-based sale. Entergy modified its following additional functions: (a) grant or deny requests for                market-based rate tariffs to reflect the new provisions but requested transmission service; (b) calculate available flowgate capacity; (c)          rehearing of FERC's order.
administer Entergy's OASIS; and (d) perform an enhanced                          In April 2004, FERC issued its Order on Rehearing and planning function (integrating the plans of Entergy and other                 Modifying Interim Generation Market Power Analysis and potential transmission owners to identify regional synergies.)                Mitigation Policy. In its April 2004 order, FERC established a new Comments and interventions on the petition were filed by market               interim generation market power analysis that will consider two participants and retail regulators on February 4, 2005. In their              indicative market power screens: (1) the pivotal supplier screen that individual comments, the APSC, LPSC, and City Council                         is designed to measure an applicant's market power based on the supported Entergy's position that the ICT would not become a                   applicant's share of uncommitted capacity at the time of the control
   'public utility" or "transmission provider' and that the transmission          area market's annual peak demand; and (2) the market share screen pricing proposal satisfies FERC's transmission pricing policy.                that is designed to evaluate an applicant's market share of Certain other parties urged FERC to reject the petition for                    uncommitted capacity on a seasonal basis. An integrated utility's declaratory order or, in the alternative, that FERC assert                     native load obligation will be reflected in both screens; however, jurisdiction over the ICT and determine that Entergy's proposed                the proxy for native load obligation differs between the screens. For pricing policy is inconsistent with FERC's current pricing policy.             the uncommitted pivotal supplier screen, the proxy for native load is FERC action on the petition is expected during the first the average of the daily native load peaks during the month in half of 2005.
which the annual peak load day occurs; for the uncommitted market share screen the proxy for native load is the minimum peak load day for each season. In the event an applicant fails either of these screens, there will be a rebuttable presumption that market Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued J1                                                                                                                                                      K power exists. The applicant will then have the opportunity to either           the Entergy control area, these entities would be limited to making (1) submit a more detailed market power analysis that reflects                wholesale sales pursuant to cost-based rate schedules approved by market prices and measures an applicant's 'economic capacity' and             FERC. The wholesale sales of the domestic utility companies and available economic capacity" under the 'delivered price test," or             their affiliates, including Entergy's non-nuclear wholesale assets (2) propose case-specific mitigation tailored to the applicant's              business, within the Entergy control area could either be cost-specific circumstances or adopt cost-based rates for sales within the         justified or are of such a limited amount that management does not applicant's control area.                                                     believe that the revocation of their market-based rate authority In its April 2004 order, FERC also: (1) determined that                    would have a material effect on the financial results of Entergy, transmission market power and the need to employ an independent                Because Entergy believes that it does not possess market power and entity to operate and administer an applicant's OASIS site is more             that FERC's tests are flawed, Entergy intends to vigorously defend properly considered in other proceedings, to the extent appropriate,           its market-based rate authority.
and would not be considered in evaluating an applicant's generation               FERC has also initiated a rulemaking proceeding to address, market power for purposes of granting market-based rate authority,             among other things, whether FERC should retain or modify its and (2) eliminated the exemption from the generation market                    existing four-prong test for evaluating market-based rate power analysis for sales within an RTO/ISO that had approved                   applications (i.e., whether the applicant has generation or market monitoring. Several parties, including Entergy, filed for               transmission market power, whether the applicant can erect barriers rehearing of the April 2004 order. Among other things, Entergy                 to entry, and whether there are affiliate abuse or reciprocal dealing argued that the market share screen is overly conservative and over-           concerns), and whether FERC should adopt different approaches states vertically integrated utilities' ability to exercise market power.      for affiliate transactions. FERC has held a series of technical In July 2004, FERC issued an order on rehearing                             conferences to discuss these issues. Additionally, in February 2005, reaffirming the use of the pivotal supplier and market share screens           FERC adopted revised reporting obligations for changes in status and clarified certain instructions for performing such analysis.               that apply to public utilities authorized to make wholesale sales of With regard to the delivered price test analysis, FERC declined                power at market-based rates. FERC determined to replace the to make a determination on whether an applicant's native load                  current triennial reporting requirement with more detailed obligations will be reflected when evaluating an applicant's                   guidelines concerning the types of events that will trigger a generation market power, but instead indicated that it would                   reporting obligation and the timing and format for such reports.
evaluate the arguments of both the applicant and intervenors as to            The new rules will become part of all existing market-based rate which measure (one with or without native load obligations) more               tariffs during March 2005.
accurately reflects market conditions. Entergy appealed the April Interconnection Orders 2004 and July 2004 orders to the United States Court of Appeals The domestic utility companies (except Entergy New Orleans) are for the District of Columbia Circuit. In February 2005, the D.C.
currently defendants to several complaints and rehearing requests Circuit granted FERC's motion to dismiss Entergy's appeal on the grounds that Entergy's claims were premature. The D.C. Circuit                before FERC in which independent generation entities (GenCos) found that Entergy's petition was premature because the D.C.                   are seeking a refund of monies that the GenCos had previously paid to the Entergy companies for facilities necessary to connect their Circuit was not yet in a position to evaluate the manner in which generation facilities to Entergy's transmission system. FERC has FERC will apply its new market power tests or whether the tests issued initial orders in response to two of the complaints and in will have adverse consequences for Entergy. Thus, the D.C. Circuit certain other dockets ordering Entergy to refund approximately has not ruled on the merits of Entergy's appeal.
S100 million in expenses and tax obligations previously paid by the Entergy filed with FERC its generation market power analysis GenCos. The refunds will be in the form of transmission credits pursuant to the two indicative screens in August 2004. Entergy's that will be utilized over time as the GenCos take transmission analysis indicated that it passed the pivotal supplier screen for all service from Entergy.
relevant geographical regions, but failed the market share screen In addition, Entergy Louisiana was recently directed, effective as within its control area. At the same time, Entergy submitted the of March 2001, to provide transmission credits, with interest, results of the delivered price test for Entergy, which indicate that associated with a specific generator that asserted to FERC that it Entergy does not have market power in any wholesale market when retained in its contract for interconnection a right to execute the Entergy's native load obligations are reflected.
latest form of Entergy's standard interconnection agreement in lieu In December 2004, FERC issued an order pursuant to Section of its existing contract, which thereby would apply FERC's most 206 of the Federal Power Act: (1) finding that Entergy failed the recent interconnection cost allocation policies to that generator.
market share screen; (2) indicating that FERC is continuing to Following an Administrative Law Judge's (ALJ) Initial Decision review the delivered price test analysis submitted by Entergy, and an order affirming such decision by FERC, approximately (3) establishing a refuind effective date for Entergy's market-based S15 million in expenses and tax obligations previously paid by the wholesale sales within its control area; and (4) indicating that generator have been ordered refunded in the form of transmission FERC believes that it can reach a decision concerning Entergy's credits, to be utilized over time and applied to Entergy transmission market-based rate authority by the second quarter of 2005.                     service bills incurred after March 2001. Entergy has sought If FERC were to revoke Entergy's or the domestic utility rehearing of the FERC's order.
companies' market-based rate authority for wholesale sales within Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued
-I To the extent the Entergy companies are ordered to provide such         would, among other things, allow for participant funding of refunds, these costs will qualify for inclusion in the Entergy             transmission interconnections and upgrades, repeal PUHCA, repeal companies' rates. The recovery of these costs is not automatic,            or modify PURPA, enact a mechanism for establishing enforceable however, especially at the retail level, where the majority of the cost    reliability standards, provide FERC with new authority over utility recovery would occur. Entergy intends to pursue all regulatory and         mergers, and acquisitions, and codify FERC's authority over legal avenues available to it in order to have these orders reversed       market-based rates. It is expected that the United States House and and have the affected interconnection agreements reinstated as             Senate will again craft and consider energy legislation in the agreed to by the generators.                                               109th Congress.
Available Flowvgate Capacity Proceeding                                    MARKET AND             CREDIT RISKS On December 17, 2004, FERC issued an order initiating a hearing            Market risk is the risk of changes in the value of commodity and and investigation concerning the justness and reasonableness               financial instruments, or in future operating results or cash flows, in of the Available Flowgate Capacity (AFC) methodology,                      response to changing market conditions. Entergy is exposed to the the methodology used to evaluate short-term transmission service           following significant market risks:
requests under the domestic utility companies' open access
* The commodity price risk associated with Entergy's Non-Utility transmission tariff, and establishing a refund effective date. In its          Nuclear and Energy Commodity Services segments.
order, FERC indicated that although it "appreciates that Entergy is
* The foreign currency exchange rate risk associated with certain attempting to explore ways to improve transmission access on its              of Entergy's contractual obligations.
system," it believed that an investigation was warranted to gather
* The interest rate and equity price risk associated with Entergy's more evidence in light of the concerns raised by certain                       investments in decommissioning trust funds.
transmission customers and certain issues raised in a FERC audit report finding errors and problems with the predecessor                    Entergy is also exposed to credit risk. Credit risk is the risk methodology used by Entergy for evaluating short-term                      of loss from nonperformance by suppliers, customers, or transmission requests, the Generator Operating Limits                     financial counterparties to a contract or agreement. Where it is methodology. The FERC order indicates that the investigation will          a significant consideration, counterparty credit risk is addressed in include an examination of (i) Entergy's implementation of the AFC          the discussions that follow.
program, (ii) whether Entergy's implementation has complied with prior FERC orders and open access transmission tariff provisions           Commodity Price Risk addressing the AFC program, and (iii) whether Entergy's provision         Power Generation of access to short-term transmission on its transmission system was       The sale of electricity from the power generation plants owned by just, reasonable, and not unduly discriminatory.                            Entergy's Non-Utility Nuclear business and Energy Commodity Entergy has submitted an Emergency Interim Request for                  Services, unless otherwise contracted, is subject to the fluctuation of Rehearing requesting FERC to defer the hearing process and                 market power prices. Entergy's Non-Utility Nuclear business has instead proceed initially with an independent audit of the AFC             entered into purchased power agreements (PPA) and other program and the expansion of the current process involving other           contracts to sell the power produced by its power plants at prices market participants to address a broader range of issues. Entergy          established in the PPAs. Entergy continues to pursue opportunities believes that this type of approach is a more efficient and effective      to extend the existing PPAs and to enter into new PPAs with other mechanism for evaluating the AFC program. Following the                    parties. Following is a summary of the amount of the Non-Utility completion of the independent audit and process involving other            Nuclear business' output that is currently sold forward under market participants, FERC could determine whether other                    physical or financial contracts at fixed prices:
procedural steps are necessary. FERC has not yet ruled on the Emergency Interim Request for Rehearing submitted by Entergy.                                                       2005   2006   2007  2008  2009 Entergy believes that it has complied with the provisions of its Percent of planned generation open access transmission tariff, including the provisions addressing sold forward:
the implementation of the AFC methodology; however, the Unit-contingent                      36%     20%   17%     1%   0%
ultimate scope of this proceeding cannot be predicted at this time.
Unit-contingent with A hearing in the AFC proceeding is currently scheduled to availability guarantees            54% 52% 38% 25% 0%
commence in August 2005.
Firm liquidated damages                4% 4% 2% 0% 0%
FEDERAL LEGISLATION                                                           Total                                94% 76% 57% 26% 0%
Federal legislation intended to facilitate wholesale competition in        Planned generation (TWh)                    34     35    34    34 35 the electric power industry has been seriously considered by the           Average contracted price per MWh          539 S41 542         544  N/A United States Congress for the past several years. In the last Congress, both the House and Senate passed separate versions of                The Vermont Yankee acquisition included a 10-year PPA under comprehensive energy legislation, negotiated a conference package,         which the former owners will buy the power produced by the plant, and fell two votes short of bringing the conferenced bill up for a         which is through the expiration in 2012 of the current operating vote in the Senate. The bill contained electricity provisions that          license for the plant. The PPA includes an adjustment clause under 39 -
                                                                                                                                                       /I

Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued which the prices specified in the PPA will be adjusted downward               As of December 31, 2004, approximately 99% of Entergy's monthly, beginning in November 2005, if power market prices drop          counterparties to Non-Utility Nuclear's energy and capacity below PPA prices. Accordingly, because the price is not fixed, the        contracts have investment grade credit ratings.
table above does not report power from that plant as sold forward              Following is a summary of the amount of Energy Commodity after November 2005.                                                      Services' output and installed capacity that is currently sold forward A sale of power on a unit contingent basis coupled with an             under physical or financial contracts at fixed prices:
availability guarantee provides for the payment to the power purchaser of contract damages, if incurred, in the event the                                                  2005    2006   2007     2008    2009 seller fails to deliver power as a result of the failure of the           Capacity:
specified generation unit to generate power at or above a specified          Planned MW in operation         1,578   1,578 1,578     1,578   1,578 availability threshold. To date, Entergy has not incurred any                % of capacity sold forward       44%     33% 29%         29%      19%
payment obligation to any power purchaser pursuant to an                   Energy:
availability guarantee. AU of Entergy's outstanding availability             Planned generation (TWh)            3       3       3               4 guarantees provide for dollar limits on Entergy's maximum liability          % of planned generation under such guarantees.                                                        sold forward                    69%     54%     45%     45%     35%
Some of the agreements to sell the power produced by Entergy's         Blended Capacity and Energy Non-Utility Nuclear power plants contain provisions that require an          (based on revenues):
Entergy subsidiary to provide collateral to secure its obligations           % of planned energy and under the agreements. The Entergy subsidiary may be required to               capacity sold forward           63%     44%     38%     39%     22%
provide collateral based upon the difference between the current             Average contract market and contracted power prices in the regions where the Non-              revenue per MWh                  524     S24     528     528     $21 Utility Nuclear business sells its power. The primary form of the collateral to satisfy these requirements would be an Entergy                   Entergy continually monitors industry trends in order to Corporation guaranty. Cash and letters of credit are also acceptable       determine whether asset impairments or other losses could result forms of collateral. At December 31, 2004, based on power prices at        from a decline in value, or cancellation, of merchant power projects, that time, Entergy had in place as collateral $545.5 million               and records provisions for impairments and losses accordingly. As of Entergy Corporation guarantees and $47.5 million of letters of          discussed in 'Results of Operations" above, in 2004 Entergy credit. In the event of a decrease in Entergy Corporation's credit         determined that the value of the Warren power plant owned by the rating to specified levels below investment grade, Entergy may be          non-nuclear wholesale assets business was impaired, and recorded required to replace Entergy Corporation guarantees with cash or the appropriate provision for the loss.
letters of credit under some of the agreements.
In addition to selling the power produced by its plants, the Foreign Currency Exchange Rate Risk Non-Utility Nuclear business sells installed capacity to load-serving Entergy Gulf States, System Fuels, and Entergy's Non-Utility distribution companies in order for those companies to meet requirements placed on them by the Independent System Operators Nuclear business enter into foreign currency forward contracts to in their area. Following is a summary of the amount of the                 hedge the Euro-denominated payments due under certain purchase Non-Utility Nuclear business' installed capacity that is currently         contracts. The notional amounts of the foreign currency forward sold forward, and the blended amount of the Non-Utility Nuclear            contracts are 95.5 million Euro and the forward currency rates business' planned generation output and installed capacity that is         range from .8641 to 1.33020. The maturities of these forward currently sold forward:                                                    contracts depend on the purchase contract payment dates and range in time from January 2005 to January 2007. The mark-to-market 2005   2006   2007     2008  2009      valuation of the forward contracts at December 31, 2004 was a net Percent of capacity sold forward:                                          asset of $28.1 million. The counterparty banks obligated on these Bundled capacity and                                                     agreements are rated by Standard & Poor's Rating Services at AA energy contracts                 13%    13%    13%      13%    13%      on their senior debt obligations as of December 31, 2004.
Capacity contracts                58%    67%    36%      22%    10%
Total                              71%    80%    49%      35%    23%      Interest Rate and Equity Price Risk -
Planned net MW in operation        4,155 4,200 4,200 4,200 4,200            Decommissioning Trust Funds Average capacity contract                                                  Entergy's nuclear decommissioning trust funds are exposed to price per kW per month            51.2   51.1   S1.1     51.0   S0.9     fluctuations in equity prices and interest rates. The Nuclear Blended Capacity and Energy                                                 Regulatory Agency (NRC) requires Entergy to maintain trusts to (based on revenues):                                                     fund the costs of decommissioning ANO 1, ANO 2, River Bend,
  % of planned generation and                                              Waterford 3, Grand Gulf, Pilgrim, Indian Point 1 and 2, and capacity sold forward            93%    87%    65%      36%    12%      Vermont Yankee (NYPA currently retains the decommissioning Average contract                                                          trusts and liabilities for Indian Point 3 and FitzPatrick). The funds revenue per MWh                   540    S42    543      544    S43      are invested primarily in equity securities; fixed-rate, fixed-income securities; and cash and cash equivalents. Management believes that 40 -
I

Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued exposure of the various funds to market fluctuations will not affect       appropriate means to contest vigorously litigation threatened or Entergy's financial results of operations as it relates to the ANO 1       filed against it, but litigation poses a significant business risk and 2, River Bend, Grand Gulf, and Waterford 3 trust funds                 to Entergy.
because of the application of regulatory accounting principles. The Pilgrim, Indian Point 1 and 2, and Vermont Yankee trust funds              CRITICAL ACCOUNTING ESTIMATES collectively hold approximately 5952 million of fixed-rate,                The preparation of Entergy's financial statements in conformity fixed-income securities as of December 31, 2004. These securities          with generally accepted accounting principles requires management have an average coupon rate of approximately 5.4%, an average              to apply appropriate accounting policies and to make estimates and duration of approximately 5.2 years, and an average maturity of            judgments that can have a significant effect on reported financial approximately 7.9 years. The Pilgrim, Indian Point 1 and 2, and            position, results of operations, and cash flows. Management has Vermont Yankee trust funds also collectively hold equity securities        identified the following accounting policies and estimates as critical worth approximately 5450 million as of December 31, 2004. These            because they are based on assumptions and measurements that securities are generally held in funds that are designed to                involve a high degree of uncertainty, and the potential for future approximate or somewhat exceed the return of the Standard &                changes in the assumptions and measurements that could produce Poor's 500 Index, and a relatively small percentage of the securities      estimates that would have a material effect on the presentation of are held in a fund intended to replicate the return of the Wilshire        Entergy's financial position or results of operations.
4500 Index. The decommissioning trust funds are discussed more thoroughly in Notes 1, 8, and 15 to the consolidatedI                NUCLEAR DECOMMISSIONING COSTS financial statements.                                                     Entergy owns a significant number of nuclear generation facilities in both its U.S. Utility and Non-Utility Nuclear business units.
NUCLEAR MATTERS                                                           Regulations require Entergy to decommission its nuclear power The domestic utility companies, System Energy, and Non-Utility             plants after each facility is taken out of service, and money is Nuclear subsidiaries own and operate ten nuclear power generating         collected and deposited in trust funds during the facilities' units and the shutdown Indian Point 1 nuclear reactor. Entergy is,
* operating lives in order to provide for this obligation. Entergy therefore, subject to the risks related to owning and operating           conducts periodic decommissioning cost studies (typically updated nuclear plants. These include risks from the use, storage, handling, ;     every three to five years) to estimate the costs that will be incurred and disposal of high-level and low-level radioactive materials,            to decommission the facilities. The following key assumptions have limitations on the amounts and types of insurance commercially             a significant effect on these estimates:
available for losses in connection with nuclear operations,                   Cost EscalationFactors - Entergy's decommissioning revenue and technological and financial uncertainties related to                      requirement studies include an assumption that decommissioning nuclear plants at the end of their licensed lives,            decommissioning costs will escalate over present cost levels by including the sufficiency of funds in decommissioning trusts. In the          annual factors ranging from approximately CPI-U to 5.5%.
event of an unanticipated early shut-down of any of Entergy's*                A 50 basis point change in this assumption could change the nuclear plants, Entergy may be required to provide additional                 ultimate cost of decommissioning a facility by as much funds or credit support to satisfy regulatory requirements                    as 11.0%.
for decommissioning.                                                          Timing - In projecting decommissioning costs, two assumptions Concerns are being expressed in public forums about the safety of*         must be made to estimate the timing of plant decommissioning.
nuclear generating units and nuclear fuel, in particular in the               First, the date of the plant's retirement must be estimated. The northeastern United States where Non-Utility Nuclear units are               expiration of the plant's operating license is typically used for located. These concerns have led to, and are expected to continue to          this purpose, or an assumption could be made that the plant will lead to, various proposals to federal regulators as well as governing        be relicensed and operate for some time beyond the original bodies in some localities where Entergy owns nuclear plants for               license term. Second, an assumption must be made whether legislative and regulatory changes that could lead to the shut-down           decommissioning will begin immediately upon plant retirement, of nuclear units, denial of license extension applications,                   or whether the plant will be held in "safestore" status for later municipalization of nuclear units, restrictions on nuclear units as a         decommissioning, as permitted by applicable regulations. While result of unavailability of sites for nuclear fuel disposal, or other         the effect of these assumptions cannot be determined with adverse effects on owning and operating nuclear power plants.                 precision, assuming either license extension or use of a Entergy believes that its generating units are in compliance with             I safestore" status can possibly change the present value of these NRC requirements and Entergy vigorously responds to these                     obligations. As discussed in Note 8 to the consolidated financial concerns and proposals.                                                       statements, Entergy recorded revisions in 2004 to its estimated decommissioning cost liability for four of its nuclear power LITIGATION                                                                   plants to reflect changes in assumptions regarding license Entergy and its subsidiaries are involved in the ordinary course of           renewal. Increases in the probability of decommissioning the business in a substantial amount of employment, commercial,                   plants at a date later than the original license expiration lowered asbestos, hazardous material, and other environmental and                    the estimate of the decommissioning cost liability. The changes rate-related proceedings and litigation. Entergy uses legal and              in probability for the unregulated portion of Entergy Gulf Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued I/                                                                                                                                                     I States and Entergy's Non-Utility Nuclear business increased
* Fairvalue approach - SFAS 143 requires that these obligations income by approximately $28.9 million net-of-tax for the excess             be measured using a fair value approach. Among other things, of the reduction in the liability over the amount of                        this entails the assumption that the costs will be incurred by a undepreciated asset retirement cost at the time of adoption of              third party and will therefore include appropriate profit margins SFAS 143. The changes in probability for ANO 1 and ANO 2                     and risk premiums. Entergy's decommissioning studies had had no effect on net income because, as discussed further below,            been based on Entergy performing the work, and did not any amounts recorded related to SFAS 143 are offset by the                  include any such margins or premiums.
recording of regulatory assets or regulatory liabilities when
* Discount rate - SFAS 143 requires that these obligations be projected decommissioning costs are collected in rates. Future               discounted using a credit-adjusted, risk-free rate.
revisions to appropriately reflect changes needed to the estimate of decommissioning costs will affect net income, only to the                The net effect on Entergy's financial statements of implementing extent that the estimate of any reduction in the liability exceeds        SFAS 143 for the U.S. Utility and Non-Utility Nuclear the amount of the undepreciated asset retirement cost at the              businesses follows:
date of the revision, for unregulated portions of Entergy's
* For the U.S. Utility business, the implementation of SFAS 143 business. Any increases in the liability recorded due to such                for the rate-regulated business of the domestic utility companies changes are capitalized and depreciated over the asset's                     and System Energy was recorded as regulatory assets, with no remaining economic life in accordance with SFAS 143.                         resulting effect on Entergy's net income. Entergy recorded these
* Spent Fuel Disposal- Federal regulations require the U.S.                   regulatory assets because existing rate mechanisms in each Department of Energy (DOE) to provide a permanent                          jurisdiction are based on the original or historical cost standard repository for the storage of spent nuclear fuel, and legislation           that allows Entergy to recover all ultimate costs of has been passed by Congress to develop this repository at Yucca            decommissioning existing assets from current and future Mountain, Nevada. Until this site is available, however, nuclear           customers. As a result of this treatment, SFAS 143 is expected plant operators must provide for interim spent fuel storage on              to be earnings neutral to the rate-regulated business of the the nuclear plant site, which can require the construction and              domestic utility companies and System Energy. Upon maintenance of dry cask storage sites or other facilities. The              implementation of SFAS 143 in 2003, assets and liabilities costs of developing and maintaining these facilities can have a             increased by $1.1 billion for the U.S. Utility segment as a result significant effect (as much as 16% of estimated decommission-               of recording the asset retirement obligations at their fair values ing costs). Entergy's decommissioning studies include cost esti-           of $1.1 billion as determined under SFAS 143, increasing mates for spent fuel storage. However, these estimates could               utility plant by $288 million, reducing accumulated depreciation change in the future based on the timing of the opening of the             by $361 million and recording the related regulatory assets of Yucca Mountain facility, the schedule for shipments to that                  $422 million. The implementation of SFAS 143 for the portion facility when it is opened, or other factors.                               of River Bend not subject to cost-based ratemaking decreased
* Technology and Regulation - To date, there is limited practical              earnings by $21 million net-of-tax ($0.09 per share) as a result experience in the United States with actual decommissioning of             of a one-time cumulative effect of accounting change. In large nuclear facilities. As experience is gained and technology            accordance with ratemaking treatment and as required by changes, cost estimates could also change. If regulations                   SFAS 71, the depreciation provisions for Entergy's utility regarding nuclear decommissioning were to change, this could                subsidiaries include a component for removal costs that are not have a potentially significant effect on cost estimates. The effect         asset retirement obligations under SFAS 143. Approximately of these potential changes is not presently determinable.                   6% of the U.S. Utility's current depreciation rates, on a Entergy's decommissioning cost studies assume current                      weighted-average basis, represents a component for the net of technologies and regulations.                                               salvage value and removal costs.
* For the Non-Utility Nuclear business, the implementation of SFAS 143                                                                       SFAS 143 in 2003 resulted in a decrease in liabilities of Entergy implemented SFAS 143, 'Accounting for Asset                            $595 million due to reductions in decommissioning liabilities, Retirement Obligations," effective January 1, 2003. Nuclear                    a decrease in assets of $340 million, including a decrease in decommissioning costs comprise substantially all of Entergy's asset            electric plant in service of $315 million, and an increase in retirement obligations, and the measurement and recording of                   earnings of $155 million net-of-tax as a result of the one-time Entergy's decommissioning obligations changed significantly with               cumulative effect of accounting change.
the implementation of SFAS 143. The most significant differences in the measurement of these obligations are outlined below:                 Also, beginning in 2003, Entergy's earnings for the Non-Utility Recording offuIf obligation - SFAS 143 requires that the fair            Nuclear business have an increase of S18 million after-tax because value of an asset retirement obligation be recorded when it is           of the change in accretion of the liability and depreciation of the incurred. This caused the recorded decommissioning obligation            adjusted plant costs from the 2002 levels. This effect will gradually in Entergy's U.S. Utility business to increase significantly, as         decrease over future years as the accretion of the liability increases.
Entergy had previously only recorded this obligation as the             Management expects that applying SFAS 143 post-implementation related costs were collected from customers, and as earnings             will have a minimal effect on ongoing earnings for the were recorded on the related trust funds.                                U.S. Utility business.
I

Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued K
In the first quarter of 2004, Entergy Arkansas recorded a revision      evaluation involves a significant degree of estimation and to its estimated decommissioning cost liability in accordance with a       uncertainty, and these estimates are particularly important in new decommissioning cost study for ANO 1 and 2 as a result of              Entergy's U.S. Utility and Energy Commodity Services segments.
revised decommissioning costs and changes in assumptions                   In the U.S. Utility segment, portions of River Bend and Grand Gulf regarding the timing of when the decommissioning of the plants             are not included in rate base, which could reduce the revenue that will begin. The revised estimate resulted in a S107.7 million              would otherwise be recovered for the applicable portions of those reduction in its decommissioning liability, along with a                   units' generation. In the Energy Commodity Services segment,
$19.5 million reduction in utility plant and an $88.2 million              Entergy's investments in merchant generation assets are subject to reduction in the related regulatory asset.                                 impairment if adverse market conditions arise.
In the third quarter of 2004, Entergy Gulf States recorded a               In order to determine if Entergy should recognize an impairment revision to its estimated decommissioning cost liability in                of a long-lived asset that is to be held and used, accounting accordance with a new decommissioning cost study for River Bend            standards require that the sum of the expected undiscounted future that reflected an expected life extension for the plant. The revised       cash flows from the asset be compared to the asset's carrying value.
estimate resulted in a $116.8 million reduction in decommissioning         If the expected undiscounted future cash flows exceed the carrying liability, along with a $31.3 million reduction in utility plant,          value, no impairment is recorded; if such cash flows are less than the a $40.1 million reduction in the related regulatory asset, and a           carrying value, Entergy is required to record an impairment charge regulatory liability of $17.7 million. For the portion of River Bend       to write the asset down to its fair value. If an asset is held for sale, not subject to cost-based ratemaking, the revised estimate resulted        an impairment is required to be recognized if the fair value (less in the elimination of the asset retirement cost that had been              costs to sell) of the asset is less than its carrying value.
recorded at the time of adoption of SFAS 143 with the remainder recorded as miscellaneous income of $27.7 million.
In the third quarter of 2004, Entergy's Non-Utility Nuclear business recorded a reduction of $20.3 million in its decommissioning cost liability to reflect changes in assumptions                         "Electricity and gas prices have been very volatile in regarding the timing of when the decommissioning of a plant will recent years, and this volatility is expected to continue."
begin. Entergy considered the assumptions as part of recent studies evaluating the economic effect of the plant in its region. The revised estimate resulted in miscellaneous income of
$20.3 million, reflecting the excess of the reduction in the liability over the amount of undepreciated asset retirement cost recorded at            These estimates are based on a number of key assumptions, the time of adoption of SFAS 143.                                           including:
* Futurepower andfuelprices - Electricity and gas prices have UNBILLED REVENUE                                                              been very volatile in recent years, and this volatility is expected As discussed in Note 1 to the consolidated financial statements,               to continue. This volatility necessarily increases the imprecision Entergy records an estimate of the revenues earned for energy                 inherent in the long-term forecasts of commodity prices that are delivered since the latest customer billing. Each month the                    a key determinant of estimated future cash flows. There is estimated unbilled revenue amounts are recorded as revenue and                 currently an oversupply of electricity throughout the U.S.,
a receivable, and the prior month's estimate is reversed. The                 including much of Entergy's service territory, and it is necessary difference between the estimate of the unbilled receivable at the              to project economic growth and other macroeconomic factors in beginning of the period and the end of the period is the amount of             order to project when this oversupply will cease and prices will unbilled revenue recognized during the period. The estimate                   rise. Similarly, gas prices have been volatile as a result of recent recorded is primarily based upon an estimate of customer usage                fluctuations in both supply and demand, and projecting future during the unbilled period and the billed price to customers in that          trends in these prices is difficult.
month, including fuel price. Therefore, revenue recognized may be
* Market value ofgenerationassets - Valuing assets held for sale affected by the estimated price and usage at the beginning and end            requires estimating the current market value of generation of each period and fuel price fluctuations, in addition to changes in         assets. While market transactions provide evidence for this certain components of the calculation including changes to                    valuation, the market for such assets is volatile and the value of estimates such as line loss, which affects the estimate of unbilled           individual assets is impacted by factors unique to those assets.
customer usage, and assumptions regarding price such as the fuel
* Future operatingcosts - Entergy assumes relatively minor annual cost recovery mechanism.                                                      increases in operating costs. Technological or regulatory changes that have a significant impact on operations could cause a I11MIPAIRMENT OF LONG-LIVED ASSETS                                            significant change in these assumptions.
Entergy has significant investments in long-lived assets in all of its segments, and Entergy evaluates these assets against the market economics and under the accounting rules for impairment whenever there are indications that impairments may exist. This 43 -
I'-

Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS continued
-I Due to the oversupply of power that existed throughout the U.S.         assumption used in calculating the December 31, 2004 and the UK in 2002, and the resulting decreases in spark spreads,          accumulated postretirement benefit obligation to a 10% increase in consistent with Entergy's point of view, Entergy's impairment tests        health care costs in 2005 gradually decreasing each successive year, indicated that a number of impairments were required to be                 until it reaches a 4.5% annual increase in health care costs in 2011 recognized in 2002 in the Energy Commodity Services segment.               and beyond.
These impairments, which were also accompanied by other charges                In determining its expected long-term rate of return on plan related to the restructuring of Entergy's independent power                assets, Entergy reviews past long-term performance, asset business, are further detailed in Note 11 to the consolidated              allocations, and long-term inflation assumptions. Entergy targets an financial statements.                                                      asset allocation for its pension plan assets of roughly 65% equity In 2004, Entergy recorded a charge of approximately $55 million         securities, 31% fixed-income securities, and 4% other investments.
($36 million net-of-tax) as a result of an impairment of the value of      The target allocation for Entergy's other postretirement benefit the Warren Power plant. Entergy concluded that the value of the            assets is 51% equity securities and 49% fixed income securities.
plant, which is owned in the non-nuclear wholesale assets business,        Based on recent market trends, Entergy reduced its expected was impaired. Entergy reached this conclusion based on valuation           long-term rate of return on plan assets used to calculate benefit studies prepared in connection with the Entergy Asset                      obligations from 8.75% for 2002 and 2003 to 8.5% in 2004. The Management stock sale discussed above in 'Results of Operations."          assumed rate of increase in future compensation levels used to calculate benefit obligations was 3.25% in 2002,2003, and 2004.
PENSION AND OTHER            POSTRETIREMENT         BENEFITS Entergy sponsors defined benefit pension plans which cover                 Cost Sensitivity substantially all employees. Additionally, Entergy currently provides      The following chart reflects the sensitivity of pension cost to postretirement health care and life insurance benefits for                 changes in certain actuarial assumptions (in thousands):
substantially all employees who reach retirement age while still Actuarial                Change in  Impact on 2004      Impact on Projected working for Entergy. Entergy's reported costs of providing these           Assumption             Assumption      Pension Cost       Benefit Obligation benefits, as described in Note 10 to the consolidated financial                                                 Increase/(Decrease) statements, are impacted by numerous factors including the                 Discountrate              (0.25%)        $10,268                   $94,903 provisions of the plans, changing employee demographics, and               Rate of return various actuarial calculations, assumptions, and accounting                  on plan assets          (0.25%)         S 4,388 mechanisms. Because of the complexity of these calculations, the           Rate of increase long-term nature of these obligations, and the importance of                 in compensation          0.2596        S 4,928                   $29,134 the assumptions utilized, Entergy's estimate of these costs is a critical accounting estimate for the U.S. Utility and Non-Utility              The following chart reflects the sensitivity of postretirement Nuclear segments.                                                          benefit cost to changes in certain actuarial assumptions (in thousands):
Assumptions                                                                                                                                  Impact on Impact on 2004             Accumulated Key actuarial assumptions utilized in determining these Actuarial              Change in     Postretirement          Postretirement costs include:                                                             Assumption            Assumption        Benefit Cost      Benefit Obligation
* Discount rates used in determining the future benefit                                                       Increase/(Decrease) obligations;                                                            Health care
* Projected health care cost trend rates;                                   cost trend             0.25%            $4,150                    S23,892
* Expected long-term rate of return on plan assets; and                   Discount rate           (0.25%)           $2,715                    $28,719
* Rate of increase in future compensation levels.
Each fluctuation above assumes that the other components of the Entergy reviews these assumptions on an annual basis and adjusts        calculation are held constant.
them as necessary. The falling interest rate environment and worse-Accounting Mechanisms than-expected performance of the financial equity markets over the In accordance with SFAS No. 87, "Employers' Accounting for past several years have impacted Entergy's funding and reported Pensions," Entergy utilizes a number of accounting mechanisms costs for these benefits. In addition, these trends have caused that reduce the volatility of reported pension costs. Differences Entergy to make a number of adjustments to its assumptions.
between actuarial assumptions and actual plan results are deferred In selecting an assumed discount rate to calculate benefit and are amortized into cost only when the accumulated differences obligations, Entergy reviews market yields on high-quality exceed 10% of the greater of the projected benefit obligation or the corporate debt and matches these rates with Entergys projected             market-related value of plan assets. If necessary, the excess is stream of benefit payments. Based on recent market trends,                 amortized over the average remaining service period of Entergy reduced its discount rate used to calculate benefit active employees.
obligations from 6.75% in 2002 to 6.25% in 2003 and to 6% in Additionally, Entergy accounts for the effect of asset 2004. Entergy reviews actual recent cost trends and projected future performance on pension expense over a twenty-quarter phase-in trends in establishing health care cost trend rates. Based on this period through a 'market-related" value of assets calculation. Since review, Entergy increased its health care cost trend rate
                                                                                                                                                                                                                                    -)

Entergy Corporation and Subsidiaries 2004 MANAGEMENT'S FINANCIAL DISCUSSION and ANALYSIS concluded the market-related value of assets recognizes investment gains or           Environmental losses over a twenty-quarter period, the future value of assets will be     Entergy must comply with environmental laws and regulations impacted as previously deferred gains or losses are recognized. As a        applicable to the handling and disposal of hazardous waste. Under result, the losses that the pension plan assets experienced in 2002         these various laws and regulations, Entergy could incur substantial may have an adverse impact on pension cost in future years                  costs to restore properties consistent with the various standards.
depending on whether the actuarial losses at each measurement date          Entergy conducts studies to determine the extent of any required exceed the 10% corridor in accordance with SFAS 87.                         remediation and has recorded reserves based upon its evaluation of the likelihood of loss and expected dollar amount for each issue.
Costs and Funding                                                           Additional sites could be identified which require environmental In 2004, Entergy's total pension cost was $98 million. Entergy              remediation for which Entergy could be liable. The amounts of anticipates 2005 pension cost to increase to $117 million due to            environmental reserves recorded can be significantly affected by the decreases in the discount rate (from 6.25% to 6.00%) and the                following external events or conditions:
expected rate of return (from 8.75% to 8.5%) used to calculate
* Changes to existing state or federal regulation by governmental benefit obligations. Pension funding was $73 million for 2004 and authorities having jurisdiction over air quality, water quality, in 2005 is projected to be $186 million. The rise in pension control of toxic substances and hazardous and solid wastes, and funding requirements is due to declining interest rates and the other environmental matters.
phased-in effect of asset underperformance from 2000 to 2002,
* The identification of additional sites or the filing of other offset by the Pension Funding Equity Act relief passed in complaints in which Entergy may be asserted to be a potentially April 2004.
Entergy's accumulated benefit obligation at December 31, 2004,             responsible party.
2003, and 2002 exceeded plan assets. As a result, Entergy was
* The resolution or progression of existing matters through the required to recognize an additional minimum pension liability                  court system or resolution by the United States Environmental as prescribed by SEAS 87. At December 31, 2004, Entergy                        Protection Agency (EPA).
increased its additional minimum pension liability to
 $244 million ($218 million net of related pension assets)                  Litigation from $180 million ($149 million net of related pension assets) at           Entergy has been named as defendant in a number of lawsuits December 31, 2003. Other comprehensive income decreased to                  involving employment, ratepayer, and injuries and damages issues,
$6.6 million at December 31, 2004 from $9.3 million at December             among other matters. Entergy periodically reviews the cases in 31, 2003, after reductions for the unrecognized prior service cost,         which it has been named as defendant and assesses the likelihood of amounts recoverable in rates, and taxes. Net income for 2004,2003,          loss in each case as probable, reasonably estimable, or remote and and 2002 was not affected.                                                 records reserves for cases which have a probable likelihood of loss Total postretirement health care and life insurance benefit costs       and can be estimated. Notes 2 and 8 to the consolidated financial for Entergy in 2004 were $86 million, including $23 million in              statements include more detail on ratepayer and other lawsuits and savings due to the estimated effect of future Medicare Part D              management's assessment of the adequacy of reserves recorded for subsidies. Entergy expects 2005 postretirement health care and life        these matters. Given the environment in which Entergy operates, insurance benefit costs to approximate $96 million, including a             and the unpredictable nature of many of the cases in which Entergy projected $27 million in savings due to the estimated effect of future      is named as a defendant, however, the ultimate outcome of the Medicare Part D subsidies. The increase in postretirement health litigation Entergy is exposed to has the potential to materially care and life insurance benefit costs is due to the decrease in the affect the results of operations of Entergy, or its operating discount rate (from 6.25% to 6.00%) and an increase in the health company subsidiaries.
care cost trend rate used to calculate benefit obligations.
OTHER CONTINGENCIES Sales Warranty and Tax Reserves Entergy, as a company with multi-state domestic utility operations,        Entergy's operations, including acquisitions and divestitures, require and which also had investments in international projects, is subject       Entergy to evaluate risks such as the potential tax effects of a trans-to a number of federal, state, and international laws and regulations       action, or warranties made in connection with such a transaction.
and other factors and conditions in the areas in which it operates,         Entergy believes that it has adequately assessed and provided for which potentially subject it to environmental, litigation, and other        these types of risks, where applicable. Any reserves recorded for risks. Entergy periodically evaluates its exposure for such risks          these types of issues, however, could be significantly affected by and records a reserve for those matters which are considered               events such as claims made by third parties under warranties, probable and estimable in accordance with generally accepted                additional transactions contemplated by Entergy, or completion of accounting principles.                                                     reviews of the tax treatment of certain transactions or issues by taxing authorities. Tax reserves not expected to reverse within the next year are reflected as non-current taxes accrued in the consolidated financial statements. Entergy does not expect a material adverse effect on earnings from these matters.
                                                                        -45

Entergy Corporation and Subsidiaries 2004
-I REPORT OF MANAGEMENT                                                          REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Management of Entergy Corporation and its subsidiaries has prepared            To the Board of Directors and Shareholders of Entergy Corporation:
and is responsible for the financial statements and related financial information included in this document. To meet this responsibility,           We have audited the accompanying consolidated balance sheets of management establishes and maintains a system of internal control             Entergy Corporation and Subsidiaries (the Corporation) as of designed to provide reasonable assurance regarding the preparation and        December 31, 2004 and 2003, and the related consolidated statements fair presentation of financial statements in accordance with generally        of income; of retained earnings, comprehensive income, and paid-in accepted accounting principles. This system includes communication            capital; and of cash flows for each of the three years in the period ended through written policies and procedures, an employee Code of                  December 31,2004. These financial statements are the responsibility of Entegrity, and an organizational structure that provides for appropriate      the Corporation's management. Our responsibility is to express an division of responsibility and the training of personnel. This system is      opinion on these financial statements based on our audits. We did not also tested by a comprehensive internal audit program.                        audit the financial statements of Entergy-Koch, LP, the Corporation's Entergy management assesses the effectiveness of its internal              investment in which is accounted for by the use of the equity method.
control over financial reporting on an annual basis. In making this           The Corporations equity in earnings of unconsolidated equity affiliates assessment, management uses the criteria set forth by the Committee of        for the year ended December 31, 2003 includes S180,110,000 for Sponsoring Organizations of the Treadway Commission (COSO) in                 Entergy-Koch, LP, which earnings were audited by other auditors Internal Control - Integrated Framework. Management acknowledges,             whose report (which as to 2003 included an explanatory paragraph con-however, that all internal control systems, no matter how well designed,      cerning a change in accounting for inventory held for trading purposes have inherent limitations and can provide only reasonable assurance           and energy trading contracts not qualifying as derivatives) has been with respect to financial statement preparation and presentation.             furnished to us, and our opinion for the year ended December 31, 2003, As a supplement to management's assessment, Entergy's                      insofar as it relates to the amount audited by other auditors included for independent auditors conduct an objective assessment of the degree            such company, is based solely on the report of such other auditors.
to which management meets its responsibility for fairness of financial            We conducted our audits in accordance with the standards of the reporting and issue an attestation report on the adequacy of                  Public Company Accounting Oversight Board (United States). Those management's assessment. They evaluate Entergy's internal control over        standards require that we plan and perform the audit to obtain financial reporting and perform such tests and other procedures               reasonable assurance about whether the financial statements are free of as they deem necessary to reach and express an opinion on the fairness        material misstatement. An audit includes examining, on a test basis, of the financial statements.                                                  evidence supporting the amounts and disclosures in the financial In addition, the Audit Committee of the Board of Directors,                statements. An audit also includes assessing the accounting principles composed solely of independent Directors, meets with the independent          used and significant estimates made by management, as well as auditors, internal auditors, management, and internal accountants             evaluating the overall financial statement presentation. We believe that periodically to discuss internal controls, and auditing and financial         our audits and the report of other auditors provide a reasonable basis reporting matters. The Audit Committee appoints the independent               for our opinion.
auditors annually, and reviews with the independent auditors the scope            In our opinion, based on our audits and the report of other auditors, and results of the audit effort. The Committee also meets periodically        such consolidated financial statements present fairly, in all material with the independent auditors and the chief internal auditor without          respects, the financial position of Entergy Corporation and Subsidiaries management, providing free access to the Committee.                            as of December 31, 2004 and 2003, and the results of their operations Based on management's assessment of internal controls using the            and their cash flows for each of the three years in the period ended COSO criteria, management believes that Entergy maintained effective          December 31, 2004 in conformity with accounting principles generally internal control over financial reporting as of December 31, 2004.            accepted in the United States of America.
Management further believes that this assessment, combined with the               As discussed in Notes 1,5, and 8 to the consolidated financial statements, policies and procedures noted above provide reasonable assurance that         Entergy Corporation adopted the provisions of Statement of Financial Entergy's financial statements are fairly and accurately presented in         Accounting Standards (SPAS) No. 143, Accounting for Asset Retirement accordance with generally accepted accounting principles.                     Obligations, and Statement of Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, in 2003, and SFAS No. 142, Goodwill and Other Intangible Assets, in 2002.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control - Integrated J. WAYNE LEONARD                           LEO P. DENAULT                     Framework issued by the Committee of Sponsoring Organizations of the Chief Executive Officer                    Executive Vice President           Treadway Commission and our report dated March 8, 2005 expressed an and Chief Financial Officer        unqualified opinion on management's assessment of the effectiveness of the Corporatiods internal control over financial reporting and an unqualified opinion on the effectiveness of the Corporation's internal control over financial reporting.
DELOITTE &TOUCHE LLP New Orleans, Louisiana March 8,2005
                                                                                                                                                                                                                                            -1

Entergy Corporation and Subsidiaries 2004 I
REPORT OF IND)EPEND)ENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directorsand Shareholdersof Entergy Corporation:
We have audited management's assessment, included in the                        accepted accounting principles, and that receipts and expenditures of accompanying Internal Control over Financial Reporting, that Entergy            the company are being made only in accordance with authorizations Corporation and Subsidiaries (the Corporation) maintained effective             of management and directors of the company; and (3) provide internal control over financial reporting as of December 31, 2004, based        reasonable assurance regarding prevention or timely detection of on criteria established in Internal Control - Integrated Framework              unauthorized acquisition, use, or disposition of the company's assets issued by the Committee of Sponsoring Organizations of the Treadway             that could have a material effect on the financial statements.
Commission. The Corporation's management is responsible for                        Because of the inherent limitations of internal control over financial maintaining effective internal control over financial reporting and for its     reporting, including the possibility of collusion or improper assessment of the effectiveness of internal control over financial              management override of controls, material misstatements due to error reporting. Our responsibility is to express an opinion on management's          or fraud may not be prevented or detected on a timely basis. Also, assessment and an opinion on the effectiveness of the Corporation's             projections of any evaluation of the effectiveness of the internal control internal control over financial reporting based on our audit.                   over financial reporting to future periods are subject to the risk that the We conducted our audit in accordance with the standards of the               controls may become inadequate because of changes in conditions, or Public Company Accounting Oversight Board (United States). Those                that the degree of compliance with the policies or procedures standards require that we plan and perform the audit to obtain                  may deteriorate.
reasonable assurance about whether effective internal control over                 In our opinion, management's assessment that Entergy Corporation financial reporting was maintained in all material respects. Our audit          and Subsidiaries maintained effective internal control over financial included obtaining an understanding of internal control over financial          reporting as of December 31, 2004, is fairly stated, in all material reporting, evaluating management's assessment, testing and evaluating           respects, based on the criteria established in Internal Control -
the design and operating effectiveness of internal control, and                 Integrated Framework issued by the Committee of Sponsoring performing such other procedures as we considered necessary in the              Organizations of the Treadway Commission. Also in our opinion, circumstances. We believe that our audit provides a reasonable basis for        Entergy Corporation and Subsidiaries maintained, in all material our opinions.                                                                   respects, effective internal control over financial reporting as of A company's internal control over financial reporting is a process           December 31, 2004, based on the criteria established in Internal designed by, or under the supervision of, the company's principal               Control - Integrated Framework issued by the Committee of executive and principal financial officers, or persons performing similar       Sponsoring Organizations of the Treadway Commission.
functions, and effected by the company's board of directors,                       We have also audited, in accordance with the standards of the management, and other personnel to provide reasonable assurance                 Public Company Accounting Oversight Board (United States), the regarding the reliability of financial reporting and the preparation of         consolidated financial statements as of and for the year ended financial statements for external purposes in accordance with                   December 31, 2004 of the Corporation and our report dated March 8, accounting principles generally accepted in the United States of               2005 expressed an unqualified opinion on those financial statements.
America. A company's internal control over financial reporting includes those policies and procedures that (1) 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         DELOITTE &TOUCHE LLP reasonable assurance that transactions are recorded as necessary to             New Orleans, Louisiana permit preparation of financial statements in accordance with generally        March 8, 2005 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 effective 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, 2004. 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, 2004.
Entergy's registered public accounting firm has issued an attestation report on management's assessment of its internal control over financial reporting.
(

Entergy Corporation and Subsidiaries 2004 CONSOLIDATED STATEMENTS OF INCOME 1)
Inthousands, except share data, for the years ended December 31,                                    2004            2003           2002 OPERATING REVENUES:
Domestic electric                                                                         S 7,932,577     S 7,397,175     S 6,646,414 Natural gas                                                                                     208,499        186,176          125,353 Competitive businesses                                                                        1,982,648      1,611,569        1,533,268 Total                                                                                     10,123,724      9,194,920        8,305,035 OPERATING EXPENSES:
Operating and Maintenance:
Fuel, fuel-related expenses, and gas purchased for resale                                   2,488,208      1,987,217        2,154,596 Purchased power                                                                             2,092,922      1,728,526          833,829 Nuclear refueling outage expenses                                                              166,072        159,995          105,592 Provision for turbine commitments, asset impairments, and restructuring charges                                                                      55,000          (7,743)       428,456 Other operation and maintenance                                                              2,303,561      2,453,869        2,486,617 Decommissioning                                                                                 149,529        146,100           76,417 Taxes other than income taxes                                                                   409,886        405,659          380,462 Depreciation and amortization                                                                   895,593        850,503          839,181 Other regulatory credits - net                                                                   (90,611)       (13,761)       (141,836)
Total                                                                                      8,470,160      7,710,365        7,163,314 OPERATING INCOME                                                                              1,653,564      1,484,555        1,141,721 OTHER INCOME:
Allowance for equity funds used during construction                                               39,582         42,710          31,658 Interest and dividend income                                                                    109,809          87,386         118,325 Equity in earnings (loss) of unconsolidated equity affiliates                                    (78,727)      271,647          183,878 Miscellaneous - net                                                                               53,752        (76,505)         13,892 Total                                                                                        124,416        325,238          347,753 INTEREST AND OTHER CHARGES:
Interest on long-term debt                                                                      463,384        485,964          526,442 Other interest - net                                                                              41,380         53,553          70,560 Allowance for borrowed funds used during construction                                            (25,741)       (33,191)        (24,538)
Total                                                                                        479,023        506,326          572,464 INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES                                                       1,298,957      1,303,467          917,010 Income taxes                                                                                    365,908        490,074          293,938 INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES                                                                           933,049        813,393          623,072 CUMULATIVE EFFECT OF ACCOUNTING CHANGES          (NET OF INCOME TAXES OF              589,925)                                          -      137,074                 -
CONSOLIDATED NET INCOME                                                                         933,049        950,467          623,072 Preferred dividend requirements and other                                                         23,525         23,524          23,712 EARNINGS APPLICABLE TO COMMON STOCK                                                        S    909,524   S    926,943    S     599,360 Earnings per average common share before cumulative effect of accounting changes:
Basic                                                                                   S        4.01  S         3.48  S        2.69 Diluted                                                                                S         3.93  S         3.42  S        2.64 Earnings per average common share:
Basic                                                                                   $        4.01  S         4.09  S        2.69 Diluted                                                                                 S        3.93  S         4.01  S        2.64 Dividends declared per common share                                                        S         1.89 S          1.60 S         1.34 Average number of common shares outstanding Basic                                                                                    226,863,758    226,804,370      223,047,431 Diluted                                                                                  231,193,686    231,146,040      227,303,103 See Notes to ConsolidatedFinancialStatements.                                  -   -

Entergy Corporation and Subsidiaries 2004 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME, AND PAID-IN CAPITAL In thousands, for the years ended December 31,                                2004                      2003                        2002 RETAINED EARNINGS Retained Earnings - Beginning of period                           S 4,502,508                 S3,938,693                 53,638,448 Add: Earnings applicable to common stock                           909,524      S 909,524     926,943     S 926,943      599,360      S599,360 Deduct:
Dividends declared on common stock                              427,740                    362,941                    299,031 Capital stock and other expenses                                      (10)                      187                          84 Total                                                        427,730                    363,128                    299,115 Retained Earnings - End of period                                 S 4,984,302                 54,502,508                 53,938,693 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                      (NET OF TAXES):
Balance at beginning of period:
Accumulated derivative instrument fair value changes                                           S   (25,811)                S    17,313                S (17,973)
Other accumulated comprehensive (loss) items                       18,016                     (39,673)                   (70,821)
Total                                                              (7,795)                   (22,360)                   (88,794)
Net derivative instrument fair value changes arising during the period                                   (115,600)      (115,600)     (43,124)      (43,124)      35,286        35,286 Foreign currency translation                                             1,882         1,882        4,169         4,169       65,948       (15,487)
Minimum pension liability                                                2,762         2,762        1,153         1,153      (10,489)     (10,489)
Net unrealized investment gains (losses)                               25,298         25,298       52,367        52,367      (24,311)      (24,311)
Balance at end of period:
Accumulated derivative instrument fair value changes             (141,411)                    (25,811)                    17,313 Other accumulated comprehensive income (loss) items                47,958                      18,016                    (39,673)
Total                                                      S   (93,453)                5    (7,795)               S (22,360)
Comprehensive Income                                                               $823,866                  S941,508                    S584,359 PAID-IN CAPITAL Paid-in Capital - Beginning of period                             S4,767,615                  S4,666,753                 S4,662,704 Add:
Common stock issuances related to stock plans                    67,760                    100,862                       4,049 Paid-in Capital - End of period                                   S4,835,375                  54,767,615                 S4,666,753 See Notes to Consolidated FinancialStatements.
Entergy Corporation and Subsidiaries 2004 CONSOLIDATED BALANCE SHEETS I
Inthousands, as of December 31,                                                                         2004           2003 ASSETS CURRENT ASSETS:
Cash and cash equivalents:
Cash                                                                                        S      79,136  S    115,112 Temporary cash investments - at cost, which approximates market                                  728,600        576,813 Special deposits                                                                                        -            308 Total cash and cash equivalents                                                                807,736        692,233 Other temporary investments                                                                                -         50,000 Notes receivable                                                                                       3,092          1,730 Accounts receivable:
Customer                                                                                         435,191        398,091 Allowance for doubtful accounts                                                                   (23,758)       (25,976)
Other                                                                                            342,289        246,824 Accrued unbilled revenues                                                                        460,039        384,860 Total receivables                                                                            1,213,761      1,003,799 Deferred fuel costs                                                                                   85,911       245,973 Accumulated deferred income taxes                                                                     76,899 Fuel inventory - at average cost                                                                    127,251        110,482 Materials and supplies - at average cost                                                            569,407        548,921 Deferred nuclear refueling outage costs                                                             107,782        138,836 Prepayments and other                                                                               116,279        127,270 Total                                                                                        3,108,118      2,919,244 OTHER PROPERTY AND INVESTMENTS:
Investment in affiliates - at equity                                                                231,779      1,053,328 Decommissioning trust funds                                                                       2,453,406      2,278,533 Non-utility property - at cost (less accumulated depreciation)                                      219,717        262,384 Other                                                                                                 90,992       152,681 Total                                                                                        2,995,894      3,746,926 PROPERTY, PLANT AND EQUIPMENT:
Electric                                                                                        29,053,340      28,035,899 Property under capital lease                                                                        738,554        751,815 Natural gas                                                                                         262,787        236,622 Construction work in progress                                                                     1,197,551      1,380,982 Nuclear fuel under capital lease                                                                    262,469        278,683 Nuclear fuel                                                                                        320,813        234,421 Total property, plant and equipment                                                         31,835,514     30,918,422 Less - accumulated depredation and amortization                                                  13,139,883     12,619,625 Property, plant and equipment - net                                                         18,695,631     18,298,797 DEFERRED DEBITS AND OTHER ASSETS:
Regulatory assets:
SFAS 109 regulatory asset - net                                                                  746,413        830,539 Other regulatory assets                                                                        1,429,261      1,398,323 Long-term receivables                                                                                 39,417         20,886 Goodwill                                                                                            377,172        377,172 Other                                                                                               918,871        935,501 Total                                                                                        3,511,134      3,562,421 TOTAL ASSETS                                                                                   $28,310,777    $28,527,388 See Notes to ConsolidatedFinancialStatements.
                                                                            -X\

Entergy Corporation and Subsidiaries 2004 CONSOLIDATED BALANCE SHEETS K
In thousands, as of December 31,                                                                           2004           2003 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT          LIABILITIES:
Currently maturing long-term debt                                                                S    492,564    S    524,372 Notes payable                                                                                               193            351 Accounts payable                                                                                       896,528        796,572 Customer deposits                                                                                     222,320         199,620 Taxes accrued                                                                                         224,011         224,926 Accumulated deferred income taxes                                                                                      22,963 Nuclear refueling outage costs                                                                                           8,238 Interest accrued                                                                                       144,478        139,603 Obligations under capital leases                                                                       133,847        159,978 Other                                                                                                  218,442        145,453 Total                                                                                         2,332,383       2,222,076 NON-CURRENT              LIABILITIES:
Accumulated deferred income taxes and taxes accrued                                                 5,067,381       4,779,513 Accumulated deferred investment tax credits                                                            399,228        420,248 Obligations under capital leases                                                                       146,060        153,898 Other regulatory liabilities                                                                           329,767        291,239 Decommissioning and retirement cost liabilities                                                     2,066,277       2,215,490 Transition to competition                                                                                79,101        79,098 Regulatory reserves                                                                                    103,061         69,528 Accumulated provisions                                                                                 549,914        506,960 Long-term debt                                                                                      7,016,831       7,322,940 Preferred stock with sinking fund                                                                       17,400        20,852 Other                                                                                               1,541,331      1,407,551 Total                                                                                        17,316,351      17,267,317 Preferred stock without sinking fund                                                                  365,356        334,337 SHAREHOLDERS'             EQUITY:
Common stock, S.01 par value, authorized 500,000,000 shares; issued 248,174,087 shares in 2004 and in 2003                                                2,482          2,482 Paid-in capital                                                                                     4,835,375      4,767,615 Retained earnings                                                                                   4,984,302      4,502,508 Accumulated other comprehensive loss                                                                   (93,453)        (7,795)
Less - treasury stock, at cost (31,345,028 shares in 2004 and 19,276,445 shares in 2003)                                                                      1,432,019        561,152 Total                                                                                          8,296,687      8,703,658 Commitments and Contingencies TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                       $28,310,777     S28,527,388 See Notes to Consolidated Financial Statements.
6

Entergy Corporation and Subsidiaries 2004 CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands, for the years ended December 31,                                                2004         2003         2002 OPERATING ACTIVITIES:
Consolidated net income                                                               S 933,049     S 950,467    S 623,072 Adjustments to reconcile consolidated net income to net cash flow provided by operating activities:
Reserve for regulatory adjustments                                                     33,533        13,090       18,848 Other regulatory credits - net                                                        (90,611)      (13,761)   (141,836)
Depredation, amortization, and decommissioning                                     1,045,122       996,603      915,597 Deferred income taxes and investment tax credits                                     275,458     1,189,531     (256,664)
Cumulative effect of accounting changes                                                      -    (137,074)
Equity in earnings (loss) of unconsolidated equity affiliates -
net of dividends                                                                   608,141      (176,036)    (181,878)
Provision for turbine commitments, asset impairments, and restructuring charges                                          55,000        (7,743)    428,456 Changes in working capitali Receivables                                                                            (210,419)     (140,612)      (43,957)
Fuel inventory                                                                           (16,769)      (14,015)       1,030 Accounts payable                                                                          95,306       (60,164)    286,230 Taxes accrued                                                                             75,055     (882,446)     462,956 Interest accrued                                                                           5,269      (35,837)       7,209 Deferred fuel                                                                          213,627        (33,874)    156,181 Other working capital accounts                                                           41,008        16,809    (286,232)
Provision for estimated losses and reserves                                              (18,041)      196,619        10,533 Changes in other regulatory assets                                                         48,626        22,671       71,132 Other                                                                                   (164,035)      121,592      111,026 Net cash flow provided by operating activities                                     2,929,319     2,005,820    2,181,703 INVESTING ACTIVITIES:
Construction/capital expenditures                                                     (1,410,610)   (1,568,943)  (1,530,301)
Allowance for equity funds used during construction                                        39,582        42,710       31,658 Nuclear fuel purchases                                                                  (238,170)     (224,308)    (250,309)
Proceeds from sale/leaseback of nuclear fuel                                             109,988       150,135      183,664 Proceeds from sale of assets and businesses                                                75,430        25,987     215,088 Investment in non-utility properties                                                        (6,420)     (71,438)   (216,956)
Decrease in other investments                                                            383,498       172,187        38,964 Changes in other temporary investments                                                     50,000       (50,000)    150,000 Decommissioning trust contributions and realized change in trust assets                   (89,807)      (91,518)     (84,914)
Other regulatory investments                                                              (53,566)    (156,446)      (39,390)
Other                                                                                                   (11,496)    114,033 Net cash flow used in investing activities                                        (1,140,075)   (1,783,130)  (1,388,463)
See Notes to ConsolidatedFinancialStatements.
                                                                                                                                                                                                        /,

Entergy Corporation and Subsidiaries 2004 CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands, for the years ended December 31,                                             2004           2003          2002 FINANCING ACTIVITIES:
Proceeds from the issuance of:
Long-term debt                                                                     1,059,824     2,221,164      1,197,330 Common stock and treasury stock                                                      170,237        217,521       130,061 Retirement of long-term debt                                                        (1,478,894)    (2,409,917)   (1,341,274)
Repurchase of common stock                                                          (1,017,996)         (8,135)    (118,499)
Redemption of preferred stock                                                            (3,450)        (3,450)       (1,858)
Changes in credit line borrowings - net                                                  49,846      (499,975)      244,333 Dividends paid:
Common stock                                                                        (427,901)      (362,814)     (298,991)
Preferred stock                                                                       (23,525)       (23,524)      (23,712)
Net cash flow used in financing activities                                      (1,671,859)      (869,130)     (212,610)
Effect of exchange rates on cash and cash equivalents                                    (1,882)         3,345         3,125 Net increase (decrease) in cash and cash equivalents                                   115,503       (643,095)      583,755 Cash and cash equivalents at beginning of period                                       692,233      1,335,328       751,573 Cash and cash equivalents at end of period                                     S   807,736   S    692,233   S 1,335,328 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for Interest - net of amount capitalized                                             S   477,768   S    552,017   S   633,931 Income taxes                                                                     S     28,241  S 188,709      S     57,856 Noncash investing and financing activities:
Debt assumed by the Damhead Creek purchaser                                                  -              - S 488,432 Decommissioning trust funds acquired in nuclear power plant acquisitions                                                       -               - S   310,000 Long-term debt refunded with proceeds from long-term debt issued in prior period                                                     -               - S    (47,000)
See Notes to ConsolidatedFinancialStatements.
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Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS K
NOTE 1. 

==SUMMARY==
OF SIGNIFICANT                                                  The domestic utility companies' rate schedules include either fuel ACCOUNTING POLICIES                                                          adjustment clauses or fixed fuel factors, which allow either current The accompanying consolidated financial statements include the               recovery in billings to customers or deferral of fuel costs until the accounts of Entergy Corporation and its direct and indirect                  costs are billed to customers. Because the fuel adjustment clause subsidiaries. As required by generally accepted accounting                   mechanism allows monthly adjustments to recover fuel costs, principles, all significant intercompany transactions have been              Entergy Louisiana, Entergy New Orleans, and the Louisiana eliminated in the consolidated financial statements. The domestic            portion of Entergy Gulf States include a component of fuel cost utility companies and System Energy maintain accounts in                     recovery in their unbilled revenue calculations. Where the fuel accordance with Federal Energy Regulatory Commission (FERC)                  component of revenues is billed based on a pre-determined fuel cost and other regulatory guidelines. Certain previously reported                 (fixed fuel factor), the fuel factor remains in effect until changed as amounts have been reclassified to conform to current classifications,        part of a general rate case, fuel reconciliation, or fixed fuel factor with no effect on net income or shareholders' equity.                        filing. Entergy Mississippi's fuel factor includes an energy cost rider that is adjusted quarterly. As discussed in Note 2 to the USE OF ESTIMATES IN THE PREPARATION OF                                       consolidated financial statements, the MPSC approved Entergy FINANCIAL STATEMENTS                                                         Mississippi's deferral of the refund of over-recoveries for the third The preparation of Entergy Corporation's consolidated financial              quarter of 2004 that would have been refunded in the first quarter statements, in conformity with generally accepted accounting                 of 2005. The deferred amount plus carrying charges will be principles, requires management to make estimates and                        refunded in the second and third quarters of 2005. In the case of assumptions that affect the reported amounts of assets and                   Entergy Arkansas and the Texas portion of Entergy Gulf States, liabilities and disclosure of contingent assets and liabilities and the      their fuel under-recoveries are treated as regulatory investments in reported amounts of revenues and expenses. Adjustments to the                the cash flow statements because those companies are allowed by reported amounts of assets and liabilities may be necessary in the           their regulatory jurisdictions to recover the fuel cost regulatory asset future to the extent that future estimates or actual results are             over longer than a twelve-month period, and the companies earn a different from the estimates used.                                           carrying charge on the under-recovered balances.
System Energy's operating revenues are intended to recover from REVENUES AND FUEL COSTS                                                      Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and The domestic utility companies generate, transmit, and distribute            Entergy New Orleans operating expenses and capital costs electric power primarily to retail customers in Arkansas, Louisiana,         attributable to Grand Gulf. The capital costs are computed by including the City of New Orleans, Mississippi, and Texas. Entergy           allowing a return on System Energy's common equity funds Gulf States distributes gas to retail customers in and around Baton          allocable to its net investment in Grand Gulf, plus System Energy's Rouge, Louisiana and Entergy New Orleans distributes gas to retail           effective interest cost for its debt allocable to its investment customers in the City of New Orleans. Entergy's Non-Utility                  in Grand Gulf.
Nuclear and Energy Commodity Services segments derive almost all of their revenue from sales of electric power generated by plants        PROPERTY, PLANT, AND EQUIPMENT owned by them.                                                               Property, plant, and equipment is stated at original cost. For the Entergy recognizes revenue from electric power and gas sales             domestic utility companies and System Energy, the original cost of when it delivers power or gas to its customers. To the extent that           plant retired or removed, less salvage, is charged to accumulated deliveries have occurred but a bill has not been issued, the domestic        depreciation. Normal maintenance, repairs, and minor replacement utility companies accrue an estimate of the revenues for energy              costs are charged to operating expenses. Substantially all of the delivered since the latest billings. Entergy calculates the estimate         domestic utility companies' and System Energy's plant is subject to based upon several factors including billings through the last billing,      mortgage liens.
cycle in a month, actual generation in the month, historical line loss           Electric plant includes the portions of Grand Gulf and factors, and prices in effect in the domestic utility companies'             Waterford 3 that have been sold and leased back. For financial various jurisdictions. Each month the estimated unbilled revenue             reporting purposes, these sale and leaseback arrangements are amounts are recorded as revenue and a receivable, and the prior
* reflected as financing transactions.
month's estimate is reversed. Therefore, changes in price and volume differences resulting from factors such as weather affect the calculation of unbilled revenues from one period to the next, and may result in variability in reported revenues from one period to the next as prior estimates are so recorded and reversed.
6

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued Net property, plant, and equipment by business segment and functional category, as of December 31, 2004 and 2003, is shown below (in millions):
Non-        Energy   Parent                                                          Non-      Energy    Parent U.S.      Utility Commodity        and                                               U.S.      Utility Commodity       and 2004                          Entergy      Utility  Nuclear      Services    Other      2003                        Entergy    Utility   Nuclear     Services    Other Production                                                                              Production Nuclear                   S 7,308 S 5,987         11,321            5-      S -        Nudear                   S 7,056 S 6,112        S 944          S 7     -
Other                        1,533      1,228                       305                Other                       1,816     1,359                     45 Transmission                   2,182 2,182                                              Transmission                 2,067 2,067 Distribution                   4,672      4,672                                         Distribution                 4,231     4,231 Other                          1,123      1,115                                  8      Other                        1,079     1,069                        _       10 Construction work                                                                       Construction work in progress                  1,198        924         244              2      28        in progress                1,381       954        398             _       29 Nuclear fuel                                                                            Nuclear fuel (leased and owned)              583        297        286              -       -        (leased and owned)           513       298        215 Asset retirement                                                                        Asset retirement obligation                       97          97                                         obligation                    156      155             -          1 Property, plant,                                                                        Property, plant, and equipment - net        118,696 116,502         11,851          5307      136        and equipment - net      518,299 116,245        11,557        1458       539 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 2.8% in 2004 and 2003, and 2.9% in 2002. Included in these rates are the depreciation rates on average depreciable utility property of 2.7% in 2004 and 2.8% in 2003 and 2002 and the depredation rates on average depreciable non-utility property of 3.8% in 2004, 3.3% in 2003, and 4.0% in 2002.
Non-utility property - at cost (less accumulated depredation) is reported net of accumulated depreciation of 1152.8 million and 1145.2 million as of December 31, 2004 and 2003, 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, 2004, the subsidiaries' investment and accumulated depredation in each of these generating stations were as follows (S in millions):
Total Megawatt                                                             Accumulated Generating Stations                                          Fuel-Type             Capabilityc'          Ownership              Investment               Depreciation US. Utility:
Grand Gulf Unit 1                                          Nuclear                  1,270               90.00%(2)                 13,702                   51,780 Independence Units 1 and 2                                     Coal                 1,630               47.90%                    S 462                    S 249 White Bluff Units 1 and 2                                      Coal                  1,635               57.00%                    S 428                   S 264 Roy S. Nelson Unit 6                                           Coal                    550              60.90%                    S 403                    S 241 Big Cajun 2 Unit 3                                            Coal                     575              42.00%                    S 233                   S 128 Energy Commodity Services:
Harrison County                                                Gas                     550              61.00%                    S 209                   S       7 Warren                                                          Gas                     300              75.00%                    S 24                    S       9 (1) 'Total Megawatt Capability is the dependable load carryingcapability as demonstrated under actual operatingconditions based on the primaryfuel (assuming no curtailments) that each station was designedto utilize.
(2) Includes an 11.5% leaseholdinterest held by System Energy. System Energy's Grand Gulf lease obligations are discussed in Note 9 to the consolidatedfinancial statements.
I-

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued I"I F NUCLEAR REFUEIING             (OUTAGE COSTS                                 EARNINGS          PER SHARE Entergy records nuclear refueling outage costs in accordance with          The following table presents Entergy's basic and diluted earnings regulatory treatment and the matching principle. These refueling            per share (EPS) calculation included on the consolidated income outage expenses are incurred to prepare the units to operate for the        statement (in millions, except per share data):
next operating cycle without having to be taken off line. Except for the River Bend plant, the costs are deferred during the outage and          For the years ended December 31,           2004             2003             2002 amortized over the period to the next outage. In accordance with                                                         S/share          S/share         S/share the regulatory treatment of the River Bend plant, River Bend's costs        Income before cumulative are accrued in advance and included in the cost of service used to             effect of accounting change      5909.5           S789.9          S 599.4 establish retail rates. Entergy Gulf States relieves the accrued            Average number of common liability when it incurs costs during the next River Bend outage.              shares outstanding - basic       226.9 S 4.01       226.8 S 3.48    223.0    52.69 Average dilutive effect of ALLOWANCE         FOR FUNDS USED DURING                                        StockOptions"                       4.3 (0.075)       4.1 (0.062)      3.9 (0.046)
CONSTRUCTION          (AFUDC)                                                  Equity Awards                         -        -      0.2 (0.004)     0.4 (0.005)
AFUDC represents the approximate net composite interest cost of             Average number of common borrowed funds and a reasonable return on the equity finds used for            shares outstanding - diluted      231.2 S3.93       231.1 53.42     227.3   52.64 construction in the U.S. Utility segment. Although AFUDC                    Eamings applicable to increases both the plant balance and earnings, it is realized in cash          common stock                     5909.5           5926.9          S599.4 through depreciation provisions included in rates.                          Average number of common shares outstanding - basic       226.9 54.01       226.8   54.09 223.0      52.69 INCOME TAXES                                                                Average dilutive effect of Entergy Corporation and the majority of its subsidiaries file a                Stock Options "I                    4.3 (0.075)       4.1 (0.073)     3.9 (0.046)
United States consolidated federal income tax return. Income taxes             EquityAwards                          -        -      0.2 (0.004)     0.4 (0.005) are allocated to the subsidiaries in proportion to their contribution       Average number of common to consolidated taxable income. Securities and Exchange                        shares outstanding - diluted     231.2     53.93 231.1     54.01 227.3      52.64 Commission (SEC) regulations require that no Entergy subsidiary              (1) Options to purchase approximately3,319 common stock shares in 2004, pay more taxes than it would have paid if a separate income tax                   15,231 common stock shares in 2003, and 109,897 common stock shares in return had been filed. In accordance with Statement of Financial                  2002 at variousprices were outstanding at the end ofthose years that were not included in the computation ofdiluted earningsper share because the Accounting Standards (SFAS) 109, 'Accounting for Income Taxes,"                   exerciseprices were greater than the common shareaverage market price at deferred income taxes are recorded for all temporary                              the end ofeach of the years presented.
differences between the book and tax basis of assets and liabilities, and for certain credits available for carryforward.                          STOCK-BASED COMPENSATION                         PLANS Deferred tax assets are reduced by a valuation allowance when, in         Entergy grants stock options to key employees of the Entergy the opinion of management, it is more likely than not that some              subsidiaries, which is described more fully in Note 7 to the portion of the deferred tax assets will not be realized. Deferred           consolidated financial statements. Prior to 2003, Entergy applied tax assets and liabilities are adjusted for the effects of changes          the recognition and measurement principles of APB Opinion 25, in tax laws and rates in the period in which the tax or rate                 'Accounting for Stock Issued to Employees," and related was enacted.                                                                 Interpretations in accounting for those plans. No stock-based Investment tax credits are deferred and amortized based upon the          employee compensation expense is reflected in 2002 net income as average usefII life of the related property, in accordance with              all options granted under the plans have an exercise price equal to ratemaking treatment.                                                        the market value of the underlying common stock on the date of grant. Effective January 1, 2003, Entergy prospectively adopted the fair value based method of accounting for stock options prescribed by SFAS 123, 'Accounting for Stock-Based Compensation."
Awards under Entergy's plans vest over three years. Therefore, the cost related to stock-based employee compensation included in
                                                                        -                                                                                                                                                                      f

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued K
the determination of net income for 2004 and 2003 is less than that             that event in its financial statements. In general, SFAS 101 requires which would have been recognized if the fair value based method                 that the enterprise report the discontinuation of the application of had been applied to all awards since the original effective date of             SFAS 71 by eliminating from its balance sheet all regulatory assets SFAS 123. The following table illustrates the effect on net income              and liabilities related to the applicable segment. Additionally, if and earnings per share if Entergy would have historically applied               it is determined that a regulated enterprise is no longer recovering the fair value based method of accounting to stock-based employee               all of its costs and therefore no longer qualifies for SFAS 71 compensation (in thousands, except per share data):                             accounting, it is possible that an impairment may exist that could require further write-offs of plant assets.
For the years ended December 31               2004       2003        2002          Emerging Issues Task Force (EITF) 97-4: "Deregulation of the Earnings applicable                                                             Pricing of Electricity - Issues Related to the Application of FASB to common stock                         5909,524   5926,943    5599,360       Statements No. 71 and 101" specifies that SFAS 71 should be Add back. Stock-based compensation                                              discontinued at a date no later than when the effects of a transition expense included in earnings                                                  to competition plan for all or a portion of the entity subject to such applicable to common stock, net                                               plan are reasonably determinable. Additionally, EITF 97-4 of related tax effects                     5,141      2,818                   promulgates that regulatory assets to be recovered through cash Deduct: Total stock-based employee                                              flows derived from another portion of the entity that continues to compensation expense determined                                               apply SFAS 71 should not be written off; rather, they should be under fair value method for all                                               considered regulatory assets of the segment that will continue to awards, net of related tax effects        16,668     24,518      28,110       apply SFAS 71.
Pro forma earnings applicable                                                      See Note 2 to the consolidated financial statements for discussion to common stock                        $897,997    $905,243   5571,250        of transition to competition activity in the retail regulatory Earnings per average common share:                                              jurisdictions served by the domestic utility companies. Only Texas Basic                                      54.01       54.09      52.69       has a currently enacted retail open access law, but Entergy believes Basic - pro forma                           53.96      53.99      $2.56       that significant issues remain to be addressed by regulators, and the Diluted                                     53.93      54.01       52.64      enacted law does not provide sufficient detail to reasonably Diluted - pro forma                         53.88      53.92      52.51       determine the impact on Entergy Gulf States' regulated operations.
CASH AND CASH EQUIVALENTS APPLICATION OF SFAS 71 The domestic utility companies and System Energy currently                       Entergy considers all unrestricted highly liquid debt instruments account for the effects of regulation pursuant to SFAS 71,                      with an original or remaining maturity of three months or less at date of purchase to be cash equivalents. Investments with original "Accounting for the Effects of Certain Types of Regulation." This maturities of more than three months are classified as other statement applies to the financial statements of a rate-regulated temporary investments on the balance sheet.
enterprise that meets three criteria. The enterprise must have rates that (i) are approved by a body empowered to set rates that bind INVESTM ENTS customers (its regulator); (ii) are cost-based; and (iii) can be charged Entergy applies the provisions of SFAS 115, 'Accounting for to and collected from customers. These criteria may also be applied Investments for Certain Debt and Equity Securities," in accounting to separable portions of a utility's business, such as the generation or for investments in decommissioning trust funds. As a result, transmission functions, or to specific classes of customers. If an               Entergy records the decommissioning trust funds at their fair value enterprise meets these criteria, it capitalizes costs that would                 on the consolidated balance sheet. Because of the ability of the otherwise be charged to expense if the rate actions of its regulator            domestic utility companies and System Energy to recover make it probable that those costs will be recovered in future revenue.          decommissioning costs in rates and in accordance with the Such capitalized costs are reflected as regulatory assets in the                regulatory treatment for decommissioning trust funds, the domestic accompanying financial statements. A significant majority of                    utility companies and System Energy have recorded an offsetting Entergy's regulatory assets, net of related regulatory and deferred             amount of unrealized gains/(losses) on investment securities in tax liabilities, earn a return on investment during their recovery              other regulatory liabilities/assets. For the nonregulated portion of periods. SFAS 71 requires that rate-regulated enterprises assess the            River Bend, Entergy Gulf States has recorded an offsetting probability of recovering their regulatory assets at each balance               amount of unrealized gains/(losses) in other deferred credits.
sheet date. When an enterprise concludes that recovery of a                     Decommissioning trust funds for Pilgrim, Indian Point 2, and regulatory asset is no longer probable, the regulatory asset must be            Vermont Yankee do not receive regulatory treatment. Accordingly, removed from the entity's balance sheet.                                        unrealized gains and losses recorded on the assets in these trust SFAS 101, "Accounting for the Discontinuation of Application                 funds are recognized in the accumulated other comprehensive of Financial Accounting Standards Board (FASB) Statement No.                    income component of shareholders' equity because these assets are 71," specifies how an enterprise that ceases to meet the criteria for           classified as available for sale. See Note 15 to the consolidated application of SFAS 71 for all or part of its operations should report          financial statements for details on the decommissioning trust funds.
Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued
-/                                                                                                                                                           K, EQUITY METHOD INVESTEES                                                         IMPAIRMENT OF LONG-LIVED ASSETS Entergy owns investments that are accounted for under the equity                Entergy periodically reviews long-lived assets held in all of its method of accounting because Entergy's ownership level results in               business segments whenever events or changes in circumstances significant influence, but not control, over the investee and its               indicate that recoverability of these assets is uncertain. Generally, operations. Entergy records its share of earnings or losses of the              the determination of recoverability is based on the undiscounted net investee based on the change during the period in the estimated                 cash flows expected to result from such operations and assets.
liquidation value of the investment, assuming that the investee's               Projected net cash flows depend on the future operating costs assets were to be liquidated at book value. The equity earnings for             associated with the assets, the efficiency and availability of the assets Entergy-Koch, LP recorded by Entergy are dictated by the terms of               and generating units, and the future market and price for the partnership agreement in accordance with the hypothetical                   energy over the remaining life of the assets. See Note 11 to the liquidation at book value (HLBV) method. In accordance with the                 consolidated financial statements for a discussion of asset HLBV method, earnings are allocated to members based on what                    impairments recognized by Entergy in 2002 and 2004.
each partner would receive from their capital account if, RIVER BEND AFUDC hypothetically, liquidation were to occur at the balance sheet date The River Bend AFUDC gross-up is a regulatory asset that and amounts distributed were based on recorded book values.
represents the incremental difference imputed by the Louisiana Entergy discontinues the recognition of losses on equity Public Service Commission (LPSC) between the AFUDC actually investments when its share of losses equals or exceeds its carrying recorded by Entergy Gulf States on a net-of-tax basis during the amount of investee plus any advances made or commitments to                     construction of River Bend and what the AFUDC would have been provide additional financial support. See Note 12 to the                        on a pre-tax basis. The imputed amount was only calculated on that consolidated financial statements for additional information                    portion of River Bend that the LPSC allowed in rate base and is regarding Entergy's equity method investments.                                  being amortized over the estimated remaining economic life of River Bend.
DERIVATIVE FINANCIAL INSTRUMENTS AND COMMODITY DERIVATIVES TRANSITION TO COMPETITION LIABILITIES SFAS 133, "Accounting for Derivative Instruments and Hedging                    In conjunction with electric utility industry restructuring activity in Activities,' requires that all derivatives be recognized in the balance         Texas, regulatory mechanisms were established to mitigate sheet, either as assets or liabilities, at fair value, unless they meet the     potential stranded costs. Texas restructuring legislation allowed normal purchase, normal sales criteria. The changes in the fair value           depreciation on transmission and distribution assets to be directed of recognized derivatives are recorded each period in current                   toward generation assets. The liability recorded as a result of this earnings or other comprehensive income, depending on whether a                  mechanism is classified as 'transition to competition" deferred derivative is designated as part of a hedge transaction and the type            credits on the balance sheet.
of hedge transaction.
Contracts for commodities that will be delivered in quantities               REACQUIRED DEBT expected to be used or sold in the ordinary course of business,                 The premiums and costs associated with reacquired debt of the including certain purchases and sales of power and fuel, are not                domestic utility companies and System Energy (except that portion classified as derivatives. These contracts are exempted under the               allocable to the deregulated operations of Entergy Gulf States) normal purchase, normal sales criteria of SFAS 133. Revenues and                are being amortized over the life of the related new issuances, in expenses from these contracts are reported on a gross basis in the              accordance with ratemaking treatment.
appropriate revenue and expense categories as the commodities are received or delivered.                                                          FOREIGN CURRENCY TRANSLATION For other contracts for commodities in which Entergy is hedging              All assets and liabilities of Entergy's foreign subsidiaries are the variability of cash flows related to a variable-rate asset, liability,      translated into U.S. dollars at the exchange rate in effect at the end or forecasted transactions that qualify as cash flow hedges, the                of the period. Revenues and expenses are translated at average changes in the fair value of such derivative instruments are reported           exchange rates prevailing during the period. The resulting in other comprehensive income. To qualify for hedge accounting,                 translation adjustments are reflected in a separate component of the relationship between the hedging instrument and the hedged                  shareholders' equity. Current exchange rates are used for U.S.
item must be documented to include the risk management objective                dollar disclosures of future obligations denominated in and strategy and, at inception and on an ongoing basis, the effec-              foreign currencies.
tiveness of the hedge in offsetting the changes in the cash flows of the item being hedged. Gains or losses accumulated in other com-                NEW ACCOUNTING PRONOUNCEMENTS prehensive income are reclassified as earnings in the periods in                During 2004, Entergy adopted the provisions of FASB Staff which earnings are affected by the variability of the cash flows of the         Position (FSP) 106-2, 'Accounting and Disclosure Requirements hedged item. The ineffective portions of all hedges are recognized              Related to Medicare Prescription Drug, Improvement and in current-period earnings.                                                     Modernization Act of 2003," which is discussed further in Note 10 to the consolidated financial statements. Entergy also adopted Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued FSP 109-1, 'Application of FASB Statement No. 109, 'Accounting                 NOTE 2. RATE AND REGULATORY MATTERS for Income Taxes', to the Tax Deduction on Qualified Production                ELECTRIC INDUSTRY RESTRUCTURING AND THE Activities Provided by the American Jobs Creation Act of 2004"                 CONTINUED APPLICATION OF SFAS 71 and FSP 109-2, "Accounting and Disclosure Guidance for the                     Although Arkansas and Texas enacted retail open access laws, the Foreign Earnings Repatriation Provision within the American Jobs               retail open access law in Arkansas has now been repealed. Retail Creation Act of 2004" which are further discussed in Note 3 to the             open access in Entergy Gulf States' service territory in Texas has consolidated financial statements.                                             been delayed. Entergy believes that significant issues remain to be SFAS 123R, "Share-Based Payment" was issued in December of                 addressed by regulators, and the enacted law in Texas does not 2004 and is effective for Entergy at the beginning of the third                provide sufficient detail to allow Entergy Gulf States to reasonably quarter in 2005. SFAS 123R requires all employers to account for               determine the impact on Entergy Gulf States' regulated operations.
share-based payments at fair value and also provides guidance on               Entergy therefore continues to apply regulatory accounting determining the assumptions to estimate fair value. SFAS 123R also             principles to the retail operations of all of the domestic utility provides guidance on how to account for differences in the amounts             companies. Following is a summary of the status of retail open of deferred taxes initially recorded when the options are                      access in the domestic utility companies' retail service territories.
recorded as expense and the amount of expense deducted on a company's tax return when the options are actually exercised.                                                                                     % of Entergy's 2004 Revenues Derived Entergy began voluntarily expensing its stock options effective Status of Retail                        from Retail Electric Utility January 1, 2003 in accordance with SFAS 148, "Stock-Based Jurisdiction     Open Access                       Operations in the Jurisdiction Compensation - Transition and Disclosure." Entergy is in the Arkansas         Retail open access was repealed in process of evaluating the reporting and disclosure issues resulting February 2003.                                             11.6%
from the adoption of SFAS 123R but does not expect the effect of the adoption of this standard to be material to Entergy's financial            Texas            In July 2004, the Public Utility Commission position or results of operations.                                                              of Texas (PUCT) effectively rejected Entergy Gulf SFAS 151, "Inventory Costs - an amendment of ARB No. 43,                                    States' proposal to implement retail open access in its Chapter 4" and SFAS 153, "Exchanges of Nonmonetary Assets,"                                     service territory. In February 2005, bills were submitted were also issued during the fourth quarter of 2004 and are effective                            in the Texas Legislature that would specify that retail open for Entergy in 2006 and 2005, respectively. Entergy does not expect                             access will not commence in Entergy Gulf States' territory the impact of the adoption of these standards to be material.                                   until the PUCT certifies a power region.                   11.8%
During 2003, Entergy adopted the provisions of the following               Louisiana        The LPSC has deferred pursuing retail open access, accounting standards: SFAS 143, 'Accounting for Asset                                           pending developments at the federal level and Retirement Obligations," which is discussed further in Note 8 to                               in other states. In response to a study submitted the consolidated financial statements; FASB Interpretation No.                                 to the LPSC that was fiuded by a group of large (FIN) 46, "Consolidation of Variable Interest Entities," which is                              industrial customers, the LPSC recently has solicited discussed further in Note 5 to the consolidated financial statements;                           comments regarding a limited retail access program.
and SFAS 150, "Accounting for Certain Financial Instruments with                               It is uncertain what action, if any, the LPSC might take in response to the information it received.           34.1%
Characteristics of both Liabilities and Equity.' SFAS 150, which became effective July 1, 2003, requires mandatorily redeemable                 Mississippi      The Mississippi Public Service Commission (MPSC) has recommended not pursuing financial instruments to be classified and treated as liabilities in the open access at this time.                                  10.9%
presentation of financial position and results of operations. The only effect of implementing SEAS 150 for Entergy is the inclusion of               New Orleans      The Council of the City of New Orleans, Louisiana (Council or City Council) has long-term debt and preferred stock with sinking fund under the taken no action on Entergy New Orleans' liabilities caption in Entergy's balance sheet. Entergy's results of proposal filed in 1997.                                     4.5%
operations and cash flows were not affected by SFAS 150.
During 2003, Entergy also adopted the provisions of the Texas following accounting standards: EITF 02-3, "Issues Involved in As ordered by the PUCT, in January 2003 Entergy Gulf States filed Accounting for Derivative Contracts Held for Trading Purposes                  its proposal for an interim solution (retail open access without a and Contracts Involved in Energy Trading and Risk Management                   FERC-approved RTO), which among other elements, included:
Activities;" SFAS 149, "Amendment of Statement 133 on                             the recommendation that retail open access in Entergy Gulf Derivative Instruments and Hedging Activities" and related inter-                 States' Texas service territory, including corporate unbundling, pretations by the Derivatives Implementation Group, and FIN 45,                   occur by January 1, 2004, or else be delayed until at least "Guarantor's Accounting and Disclosure Requirements for                           January 1, 2007. If retail open access is delayed past January 1, Guarantees Including Indirect Guarantees of Indebtedness of                       2004, Entergy Gulf States seeks authorization to separate into Others." The adoption of these standards did not have a material                  two bundled utilities, one subject to the retail jurisdiction of the effect on Entergy's financial statements.                                         PUCT and one subject to the retail jurisdiction of the LPSC.
Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued J                                                                                                                                                    \K
* the recommendation that Entergy's transmission organization,              REGULATORY ASSETS possibly with the oversight of another entity, will continue to          Other Regulatory Assets serve as the transmission authority for purposes of retail open         The domestic utility companies and System Energy are subject to access in Entergy Gulf States' service territory.                        the provisions of SFAS 71, "Accounting for the Effects of Certain
* the recommendation that the decision points be identified                Types of Regulation." Regulatory assets represent probable future that would require prior to January 1, 2004, the PUCT's                 revenues associated with certain costs that are expected to be determination, based upon objective criteria, whether to proceed         recovered from customers through the ratemaking process. In with further efforts toward retail open access in Entergy Gulf           addition to the regulatory assets that are specifically disclosed on States' Texas service territory.                                         the face of the balance sheets, the table below provides detail of
                                                                              'Other regulatory assets" that are included on the balance sheets as After considering the proposal, in an April 2003 order, the              of December 31, 2004 and 2003 (in millions):
PUCT set forth a sequence of proceedings and activities designed to initiate an interim solution. These proceedings and activities                                                               2004         2003 included initiating a proceeding to certify an independent                 Asset Retirement Obligation -
organization to administer market protocols and ensure                       recovery dependent upon timing of decommissioning (Note 8)             S 380.1      S 464.9 nondiscriminatory access to transmission and distribution systems.
Deferred fuel - non-current -
In July 2004 the PUCT denied Entergy's application to certify             recovered through rate riders when rates Entergy's transmission organization as an independent organization           are redetermined annually                          21.9         28.2 under Texas law. In its order, the PUCT also ordered: the cessation        Depreciation re-direct -
of efforts to develop an interim solution for retail open access in          recovery begins at start of Entergy Gulf States' Texas service territory, termination of the pilot       retail open access (Note 1)                        79.1          79.1 project in that territory, and a delay in retail open access in that        DOE Decommissioning territory until either a FERC-approved RTO is in place or some               and Decontamination Fees -
other independent transmission entity is certified under Texas law.            recovered through fuel rates Several parties have appealed the termination of the pilot program             until December 2006 (Note 8)                     25.3         32.9 Low-level radwaste -
aspect of the order, claiming the issue was not properly a part recovery timing dependent of the proceeding.
upon pending lawsuit                               19.4          19.4 In February 2005, bills were submitted in the Texas Legislature          Pension costs (Note 10)                            207.3        134.0 that would clarify that Entergy Gulf States is no longer subject to a       Postretirement benefits -
rate freeze and specify that retail open access will not commence in         recovered through 2013 (Note 10)                   19.1         21.5 Entergy Gulf States' Texas service territory until the PUCT certi-          Provisions for storm damages -
fies a power region.                                                         recovered through cost of service                 124.5        123.3 Removal costs -
Louisiana                                                                    recovered through depredation rates (Note 8)       53.2         45.6 In November 2001, the LPSC decided not to move forward with                 Resource planning - recovery timing retail open access for any customers at this time. The LPSC instead          will be determined by the LPSC in a base directed its staff to hold collaborative group meetings concerning           rate proceeding (Note 2)                           25.4           5.8 open access from time to time, and to have the LPSC staff monitor           River Bend AFUDC -
developments in neighboring states and to report to the LPSC                 recovered through August 2025 (Note 1)             37.5         39.4 regarding the progress of retail access developments in those states.       Sale-leaseback deferral -
In September 2004, in response to a study funded by certain                  recovered through June 2014 (Note 9)              127.3        131.7 industrial customers that evaluated a limited industrial-only retail        Spindletop gas storage facility -
choice program, the LPSC asked the LPSC staff to solicit                     recovered through December 2032                    42.3          38.0 Unamortized loss on reacquired debt -
comments and obtain information from utilities, customers, and recovered over term of debt                       169.9        164.4 other interested parties concerning the potential costs and benefits Other - various                                     97.0          70.1 of a limited choice program, the impact of such a program on other customers, as well as issues such as stranded costs and transmission       Total                                            51,429.3     $1,398.3 service. Comments from interested parties were filed with the LPSC on January 14, 2005. The LPSC has not established a                    Deferred Fuel Costs procedural framework for consideration of the comments. At this            The domestic utility companies are allowed to recover certain fuel time, it is not certain what further action, if any, the LPSC might         and purchased power costs through fuel mechanisms included in take in response to the information it received.                            electric rates that are recorded as fuel cost recovery revenues. 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, 2004 and 2003 that Entergy expects to recover or (refund) through the Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued
,2I fuel mechanisms of the domestic utility companies, subject to                the PUCT dismissed the rate case and fuel reconciliation subsequent regulatory review (in millions):                                  proceeding in October 2004 indicating that Entergy Gulf States is 2004      2003       still subject to a rate freeze based on the current PUCT-approved Entergy Arkansas                                      S 7.4      S 10.6      settlement agreement stipulating that a rate freeze would remain in Entergy Gulf States                                   5 90.1    5118.4       effect until retail open access commenced in Entergy Gulf States' Entergy Louisiana                                     S 8.7     S 30.6       service territory, unless the rate freeze is lifted by the PUCT prior Entergy Mississippi                                   S(22.8)   S 89.1       thereto. Without a Texas base rate proceeding, it is possible that Entergy New Orleans                                   S 2.6     S (2.7)      Entergy Gulf States will not be allowed to recover imputed capacity charges in Texas retail rates in the future. Entergy Gulf Entergy Arkansas                                                              States believes the PUCT has misinterpreted the settlement and has Entergy Arkansas' rate schedules include an energy cost recovery             appealed the PUCT order to the Travis County District Court and rider to recover fuel and purchased energy costs in monthly bills.           also intends to pursue other available remedies as discussed above in The rider utilizes prior calendar year energy costs and projected            'Electric Industry Restructuring and the Continued Application of energy sales for the twelve-month period commencing on April 1                SFAS 71." The dismissal of the rate case does not preclude Entergy of each year to develop an annual energy cost rate. The energy cost          Gulf States from seeking the reconciliation of fuel and purchased rate includes a true-up adjustment reflecting the over-recovery or           power costs of $288 million incurred from September 2003 through under-recovery, including carrying charges, of the energy cost for           March 2004 when, at the appropriate time, similar costs are the prior calendar year.                                                     reconciled in the future.
In March 2004, Entergy Arkansas filed with the Arkansas Public                In January 2001, Entergy Gulf States filed with the PUCT a fuel Service Commission (APSC) its energy cost recovery rider for the             reconciliation case covering the period from March 1999 through period April 2004 through March 2005. The filed energy cost rate,            August 2000. Entergy Gulf States was reconciling approximately which accounts for 12 percent of a typical residential customer's bill        $583 million of fuel and purchased power costs. As part of this using 1,000 kWh per month, increased 16 percent due primarily                filing, Entergy Gulf States requested authority to collect to the elimination of a credit contained in the prior year's rate to          $28 million, plus interest, of under-recovered fuel and purchased refund previously over-recovered fuel costs. Also included in the            power costs. In August 2002, the PUCT reduced Entergy Gulf current year's energy cost calculation is a decrease in rates of              States' request to approximately $6.3 million, including interest 53.9 million as a result of the operation of a revised energy                 through July 31, 2002. Approximately $4.7 million of the total allocation method between the retail and wholesale sectors resulting          reduction to the requested surcharge relates to nuclear fuel costs from the APSC's approval of a life-of-resources power purchase                that the PUCT deferred ruling on at this time. In October 2002, agreement with Entergy New Orleans.                                           Entergy Gulf States appealed the PUCT's final order in Texas District Court. In its appeal, Entergy Gulf States is challenging the Entergy GuyStates (Texas)                                                     PUCT's disallowance of approximately $4.2 million related to In the Texas jurisdiction, Entergy Gulf States' rate schedules include        imputed capacity costs and its disallowance related to costs for ener-a fixed fuel factor to recover fuel and purchased power costs,               gy delivered from the 30% non-regulated share of River Bend. The including carrying charges, not recovered in base rates. Under the            case was argued before the Travis County Texas District Court in current methodology, semi-annual revisions of the fixed fuel factor          August 2003 and the Travis County District Court judge affirmed may be made in March and September based on the market price of               the PUCT's order. In October 2003, Entergy Gulf States appealed natural gas. Entergy Gulf States will likely continue to use this             this decision to the Court of Appeals. Oral argument before the methodology until the start of retail open access, which has been             appellate court occurred in September 2004 and the matter delayed. The amounts collected under Entergy Gulf States' fixed               is still pending.
fuel factor and any interim surcharge implemented until the date                 In September 2003, Entergy Gulf States filed an application with retail open access commences are subject to fuel reconciliation               the PUCT to implement an $87.3 million interim fuel surcharge, proceedings before the PUCT. In the Texas jurisdiction, Entergy               including interest, to collect under-recovered fuel and purchased Gulf States' deferred electric fuel costs are $78.6 million as of             power expenses incurred from September 2002 through August December 31, 2004, which include the following (in millions):                2003. Hearings were held in October 2003 and the PUCT issued an order in December 2003 allowing for the recovery of Under-recovered fuel costs for the period 9/03 - 7/04                         $87 million. The surcharge was collected over a twelve-month to be recovered through an interim fuel surcharge over a                    period that began in January 2004.
six-month period beginning in January 2005                       527.8         In March 2004, Entergy Gulf States filed with the PUCT a fuel Items to be addressed as part of unbundling                        529.0 reconciliation case covering the period September 2000 through Imputed capacity charges                                           S 9.3 August 2003. Entergy Gulf States is reconciling $1.43 billion of Other                                                              512.5 fuel and purchased power costs on a Texas retail basis. This amount includes 58.6 million of under-recovered costs that Entergy Gulf The PUCT has ordered that the imputed capacity charges be                     States is asking to reconcile and roll into its fuel over/under-excluded from fuel rates and therefore recovered through base rates.          recovery balance to be addressed in the next appropriate fuel Entergy Gulf States filed a retail electric rate case and fuel                proceeding. This case involves imputed capacity and River Bend proceeding with the PUCT in August 2004. As discussed below,                  payment issues similar to those decided adversely in the January
                                                                             -61 7-

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued I/
2001 proceeding, discussed above, which is now on appeal. On              Entergy Mississippi January 31, 2005, the Administrative Law Judges (ALJ) issued a            Entergy Mississippi's rate schedules include an energy cost recovery Proposal for Decision that recommends disallowing $10.7 million           rider which is adjusted quarterly to reflect accumulated over- or (excluding interest) related to these two issues. A final PUCT            under-recoveries from the second prior quarter. In May 2003, decision is expected in the first quarter of 2005.                        Entergy Mississippi filed and the MPSC approved a change in In September 2004, Entergy Gulf States filed an application with       Entergy Mississippi's energy cost recovery rider. Under the MPSC's the PUCT to implement a $27.8 million interim fuel surcharge,             order, Entergy Mississippi deferred until 2004 the collection of fuel including interest, to collect under-recovered fuel and purchased under-recoveries for the first and second quarters of 2003 that power expenses incurred from September 2003 through July 2004.            would have been collected in the third and fourth quarters of 2003, Entergy Gulf States proposed to collect the surcharge over a respectively. The deferred amount of $77.6 million plus carrying six-month period beginning January 2005. In December 2004, the charges was collected through the energy cost recovery rider over a PUCT approved the surcharge consistent with Entergy Gulf States' twelve-month period that began in January 2004.
request. Amounts collected though the interim fuel surcharge, In January 2005, the MPSC approved a change in Entergy which will be implemented over the six-month period commencing January 2005, are subject to final reconciliation in a future fuel        Mississippi's energy cost recovery rider. Entergy Mississippi's fuel reconciliation proceeding.                                                over-recoveries for the third quarter of 2004 of $21.3 million will be deferred from the first quarter 2005 energy cost recovery rider Entergy Gulf States (Louisiana) andEntergy Louisiana                      adjustment calculation. The deferred amount of $21.3 million plus In Louisiana, Entergy Gulf States and Entergy Louisiana recover           carrying charges will be refunded through the energy cost recovery electric fuel and purchased power costs for the upcoming month            rider in the second and third quarters of 2005.
based upon the level of such costs from the prior month. In Louisiana, Entergy Gulf States' purchased gas adjustments include         Entergy New Orleans estimates for the billing month adjusted by a surcharge or credit for     Entergy New Orleans' electric rate schedules include a fuel deferred fuel expense arising from monthly reconciliations of actual      adjustment tariff designed to reflect no more than targeted fuel and fuel costs incurred with fuel cost revenues billed to customers.          purchased power costs adjusted by a surcharge or credit for deferred In August 2000, the LPSC authorized its staff to initiate a            fuel expense arising from monthly reconciliations, including proceeding to audit the fuel adjustment clause filings of Entergy         carrying charges. Entergy New Orleans' gas rate schedules include Louisiana pursuant to a November 1997 LPSC general order. The             estimates for the billing month adjusted by a surcharge or credit for time period that is the subject of the audit is January 1, 2000           deferred fuel expense arising from monthly reconciliations, through December 31, 2001. In September 2003, the LPSC staff              including carrying charges. In June and November 2004, the City issued its audit report and recommended a disallowance with regard        Council passed resolutions implementing a package of measures to one item. The issue relates to the alleged failure to uprate           developed by Entergy New Orleans and the Council Advisors to Waterford 3 in a timely manner, a claim that also has been raised in      protect customers from potential gas price spikes during the 2004 -
the summer 2001, 2002, and 2003 purchased power proceedings.              2005 winter heating season. These measures include: maintaining The LPSC staff has quantified the possible disallowance as between        Entergy New Orleans' financial hedging plan for its purchase of
   $7.6 and $14 million. Entergy Louisiana notified the LPSC that it         wholesale gas, and deferral of collection of up to $6.2 million of gas will contest the recommendation. The procedural schedule in the           costs associated with a cap on the purchased gas adjustment in case has been suspended. A status conference for the purpose of           November and December 2004 and in the event that the average establishing a new procedural schedule will be set when the current       residential customer's gas bill were to exceed a threshold level. The hearings in the Power Purchase Agreement proceedings at FERC              deferrals resulting from these caps will receive accelerated recovery are concluded. FERC hearings in that matter concluded in                  over a seven-month period beginning in April 2005.
November 2004. If the LPSC approves the proposed settlement                  In November 2004, the City Council directed Entergy New discussed below under 'Retail Rate Proceedings," the issue of a           Orleans to confer with the Council Advisors regarding possible proposed imprudence disallowance relating to the uprate will be           modification of the current gas cost collection mechanism in order resolved and will no longer be at issue in this proceeding.               to address concerns regarding its fluctuations particularly during the In January 2003, the LPSC authorized its staff to initiate a           winter heating season.
proceeding to audit the fuel adjustment clause filings of Entergy Gulf States and its affiliates pursuant to a November 1997 LPSC           RETAIL RATE PROCEEDINGS general order. The audit will include a review of the reasonableness      Filings with the APSC (Entergy Arkansas) of charges flowed by Entergy Gulf States through its fuel                 No significant retail rate proceedings are pending in Arkansas at adjustment clause in Louisiana for the period January 1, 1995             this time.
through December 31, 2002. Discovery is underway, but a detailed procedural schedule extending beyond the discovery stage has not yet been established and the LPSC staff has not yet issued its audit report.
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Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued Filings with the PUCT and Texas Cities                                        abeyed plant costs. The net carrying value of the abeyed plant costs (Entergy Gulf States)                                                         was $107.7 million at the time of the Court of Appeals decision.
Retail Rates                                                                  Accrual of the $107.7 million loss was recorded in the second Entergy Gulf States is operating in Texas under the terms of a                quarter of 2003 as miscellaneous other income (deductions) and December 2001 settlement agreement approved by the PUCT. The                  reduced net income by $65.6 million after-tax. In September 2004, settlement provided for base rates that have remained in effect               the Texas Supreme Court denied Entergy Gulf States' petition for during the delay in the implementation of retail open access in               review, and Entergy Gulf States filed a motion for rehearing. In Entergy Gulf States' Texas service territory. In view of the PUCT             February 2005, the Texas Supreme Court denied the motion for order in July 2004 to further delay retail open access in the Texas           rehearing, and the proceeding is now final.
service territory, Entergy Gulf States filed a retail electric rate case and fuel reconciliation proceeding with the PUCT in August 2004               Filings with the LPSC seeking the following:                                                        Proposed Settlement
* approval of a base rate increase of $42.6 million annually for the          In September 2004, the LPSC consolidated various dockets that Texas retail jurisdiction;                                                 were the subject of settlement discussions between the LPSC staff
* approval to implement a $14.1 million per year rider to recover,            and Entergy Gulf States and Entergy Louisiana. The LPSC over a 15-year period, $110.9 million of incurred costs related to         directed its staff to continue the settlement discussions and submit its efforts to transition to a competitive retail market in                any proposed settlement to the LPSC for its consideration. In accordance with the Texas restructuring law;                              January 2005, Entergy Gulf States and Entergy Louisiana filed
* approval to implement a proposed $11.3 million franchise fee                testimony with the LPSC in support of a proposed settlement that rider to recover payments to municipalities charging such                  currently includes an offer to refund $76 million to Entergy Gulf fees; and                                                                  States' Louisiana customers, with no immediate change in current
* a requested return on equity of 11.5%.                                      base rates and to refund $14 million to Entergy Louisiana's customers. If the LPSC approves the proposed settlement, Entergy In addition, Entergy Gulf States' fuel reconciliation filing made          Gulf States will be regulated under a three-year formula rate plan in conjunction with the base rate case sought to reconcile                    that, among other provisions, establishes an ROE mid-point of approximately $288 million in fuel and purchased power costs                   10.65% and permits Entergy Gulf States to recover incremental incurred during the period September 2003 through March 2004.                 capacity costs without filing a traditional base rate proceeding. The In October 2004, the PUCT issued a written order in which it                  settlement resolves all issues in, and will result in the dismissal of, dismissed the rate case and fuel reconciliation proceeding indicating         Entergy Gulf States' fourth, fifth, sixth, seventh, and eighth annual that Entergy Gulf States is still subject to a rate freeze based on a         earnings reviews, Entergy Gulf States' ninth post-merger earnings PUCT-approved agreement in 2001 stipulating that a rate freeze                review and revenue requirement analysis, a fuel review for Entergy would remain in effect until retail open access commenced                     Gulf States, dockets established to consider issues concerning in Entergy Gulf States' service territory, unless the rate freeze is          power purchases for both Entergy Gulf States and Entergy lifted by the PUCT prior thereto. Entergy Gulf States believes                Louisiana for the summers of 2001, 2002, 2003, and 2004, and a the PUCT has misinterpreted the settlement and has appealed the               docket concerning retail issues arising under the Entergy PUCT order to the Travis County District Court and intends to                  System Agreement. The settlement does not include the System pursue other available remedies.                                              Agreement case pending at FERC. The LPSC has solicited In February 2005, bills were submitted in the Texas Legislature            comments on the proposed settlement from the parties to the that would clarify that Entergy Gulf States is no longer subject to a         various proceedings at issue in the proposed settlement. The rate freeze and specify that retail open access will not commence in          proposed settlement is scheduled to be presented to the LPSC for Entergy Gulf States' Texas service territory until the PUCT                   consideration on March 23,2005.
certifies a power region.
AnnualEarnings Reviews (Entergy Gulf States)
Recovery of River Bend Costs                                                  In May 2002, Entergy Gulf States filed its ninth and last required In March 1998, the PUCT disallowed recovery of $1.4 billion of                post-merger analysis with the LPSC. The filing included an company-wide abeyed River Bend plant costs, which have been                   earnings review filing for the 2001 test year that resulted in a rate held in abeyance since 1988. Entergy Gulf States appealed the                 decrease of $11.5 million, which was implemented effective June PUCT's decision on this matter to the Travis County District Court            2002. In its latest testimony, in December 2003, the LPSC staff in Texas. In April 2002, the Travis County District Court issued an           recommended a rate refund of $30.6 million and a prospective rate order affirming the PUCT's order on remand disallowing recovery               reduction of approximately $50 million. Hearings concluded in of the abeyed plant costs. Entergy Gulf States appealed this                  May 2004. Should the LPSC approve the proposed settlement ruling to the Third District Court of Appeals. In July 2003,                  discussed above, the ninth post-merger analysis would be resolved.
the Third District Court of Appeals unanimously affirmed the                     In December 2002, the LPSC approved a settlement between judgment of the Travis County District Court. After considering                Entergy Gulf States and the LPSC staff pursuant to which Entergy the progress of the proceeding in light of the decision of the Court           Gulf States agreed to make a base rate refund of $16.3 million, of Appeals, Entergy Gulf States accrued for the loss that would be            including interest, and to implement a $22.1 million prospective associated with a final, non-appealable decision disallowing the              base rate reduction effective January 2003. The settlement I

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued discharged any potential liability for claims that relate to Entergy        provides for no change in rates based on a performance adjusted Gulf States' fourth, fifth, sixth, seventh, and eighth post-merger          return on common equity mid-point of 10.77%, establishing an earnings reviews, with the exception of certain issues related to the       allowed regulatory earnings range of 9.3% to 12.2%.
calculation of the River Bend Deregulated Asset Plan percentage.
Entergy Gulf States made the refund in February 2003. Should the            Filings with the Council (Entergy New Orleans)
LPSC approve the proposed settlement discussed above, the out-              Rate Proceedings standing issue in these proceedings would be resolved.                      In May 2003, the City Council approved a resolution allowing for a total increase of $30.2 million in electric and gas base rates effective Retail Rates (Entergy Louisiana)                                           June 1, 2003. In April 2004, Entergy New Orleans made filings In January 2004, Entergy Louisiana made a rate filing with the              with the City Council as required by the earnings review process LPSC requesting a base rate increase of approximately                       prescribed by the Gas and Electric Formula Rate Plans approved by
$167 million. In that filing, Entergy Louisiana noted that                  the City Council in 2003. In August 2004, the City Council approximately $73 million of the base rate increase was                     approved an unopposed settlement among Entergy New Orleans, attributable to the acquisition of a generating station and certain         the Council Advisors, and the intervenors in connection with the power purchase agreements that, based on current natural gas                Gas and Electric Formula Rate Plans. In accordance with the reso-prices, would produce fuel and purchased power savings for                  lution approving the settlement agreement, Entergy New Orleans' customers that substantially mitigate the impact of the requested           gas and electric base rates remain unchanged from the levels set in base rate increase. The filing also requested an allowed ROE of             May 2003. The resolution ordered Entergy New Orleans to defer 11.4%. Entergy Louisiana's previously authorized ROE mid-point               $3.9 million relating to voluntary severance plan costs allocated to currently in effect is 10.5%. Hearings concluded in December 2004.          its electric operations and $1.0 million allocated to its gas opera-Based on the evidence submitted at the hearing, the LPSC staff is           tions, which amounts were accrued on its books in 2003, and to recommending approximately a $7 million base rate increase. The             record on its books regulatory assets in those amounts to be amor-LPSC staff proposed the implementation of a formula rate plan that          tized over five years effective January 2004. Entergy New Orleans includes a provision for the recovery of incremental capacity costs,        also was ordered to defer $6.0 million of fossil plant maintenance including those related to the proposed Perryville acquisition,             expense incurred in 2003 and to record on its books a regulatory without filing a traditional base rate proceeding. A decision by the         asset in that amount to be amortized over a five-year period LPSC is expected in mid- to late-March 2005 on these issues.                 effective January 2003.
Filings with the NIPSC (Entergy Mississippi)                                FuelAdjustment Clause Litigation Formula Rate Plan Filings                                                   In April 1999, a group of ratepayers filed a complaint against Entergy Mississippi is operating under a December 2002 order                 Entergy New Orleans, Entergy Corporation, Entergy Services, and issued by the MPSC. The order endorsed a new power                           Entergy Power in state court in Orleans Parish purportedly on management rider schedule designed to more efficiently collect              behalf of all Entergy New Orleans ratepayers. The plaintiffs seek capacity portions of purchased power costs. Also, the order provides         treble damages for alleged injuries arising from the defendants' for improvements in the return on equity formula and more robust             alleged violations of Louisiana's antitrust laws in connection with performance measures for Entergy Mississippi's formula rate plan.           certain costs passed on to ratepayers in Entergy New Orleans' fuel Under the provisions of Entergy Mississippi's formula rate plan, a           adjustment filings with the City Council. In particular, plaintiffs bandwidth is placed around the benchmark ROE, and if Entergy                 allege that Entergy New Orleans improperly included certain costs Mississippi earns outside of the bandwidth (as well as outside of a          in the calculation of fuel charges and that Entergy New Orleans range-of-no-change at each edge of the bandwidth), then Entergy              imprudently purchased high-cost fuel from other Entergy affiliates.
Mississippi's rates will be adjusted, though on a prospective basis          Plaintiffs allege that Entergy New Orleans and the other defendant only. Under Mississippi law and Entergy Mississippi's formula rate           Entergy companies conspired to make these purchases to the plan, however, if Entergy Mississippi's earned ROE is above the top          detriment of Entergy New Orleans' ratepayers and to the benefit of of the range-of-no-change at the top of the formula rate plan band-          Entergy's shareholders, in violation of Louisiana's antitrust laws.
width, then Entergy Mississippi's 'Allowed ROE" for the next                 Plaintiffs also seek to recover interest and attorneys' fees. Entergy twelve-month period is the point halfway between such earned                 filed exceptions to the plaintiffs' allegations, asserting, among other ROE and the top of the bandwidth; and Entergy Mississippi's retail          things, that jurisdiction over these issues rests with the City Council rates are set at that halfway-point ROE level. In the situation where        and FERC. In March 2004, the plaintiffs supplemented and Entergy Mississippi's earned ROE is not above the top of the                 amended their petition. If necessary, at the appropriate time, range-of-no-change at the top of the bandwidth, then Entergy                 Entergy will also raise its defenses to the antitrust claims. The suit Mississippi's "Allowed ROE' for the next twelve-month period is              in state court has been stayed by stipulation of the parties pending the top of the range-of-no-change at the top of the bandwidth.               a decision by the City Council in the proceeding discussed in the Entergy Mississippi made its annual formula rate plan filing              next paragraph.
with the MPSC in March 2004 based on a 2003 test year. In April                 Plaintiffs also filed this complaint with the City Council in order 2004, the MPSC approved a joint stipulation entered into between             to initiate a review by the City Council of the plaintiffs' allegations the Mississippi Public Utilities Staff and Entergy Mississippi that          and to force restitution to ratepayers of all costs they allege were Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued improperly and imprudently included in the fuel adjustment filings.                          reasons for the differences for the years 2004, 2003, and 2002 are:
Testimony was filed on behalf of the plaintiffs in this proceeding                            (in thousands):
asserting, among other things, that Entergy New Orleans and other                                                                       2004           2003           2002 defendants have engaged in fuel procurement and power                                         Computed at statutory rate (35%)    $454,635       $535,663      S320,954 purchasing practices and included costs in Entergy New Orleans'                               Increases (reductions) in tax fuel adjustment that could have resulted in New Orleans customers                              resulting from:
being overcharged by more than S100 million over a period of years.                              State income taxes net of federal income tax effect         36,185         54,024         44,835 Hearings were held in February and March 2002. In February 2004, Regulatory differences-the City Council approved a resolution that resulted in a refund to utility plant items               41,240         52,638         29,774 customers of $11.3 million, including interest, during the Amortization of investment months of June through September 2004. The resolution                                                                               (20,596)       (24,364)       (22,294) tax credits concludes, among other things, that the record does not support an                               EAM Capital Loss                   (86,426) allegation that Entergy New Orleans' actions or inactions, either                                Flow-through/permanent alone or in concert with Entergy or any of its affiliates, constituted                             differences                      (42,902)       (30,221)       (38,197) a misrepresentation or a suppression of the truth made in order to                               U.S. tax on foreign income            2,014          7,888       (28,416) obtain an unjust advantage of Entergy New Orleans, or to cause                                   Other - net                        (18,242)       (15,629)       (12,718) loss, inconvenience, or harm to its ratepayers. Management believes                                Total income taxes             $365,908       $579,999      $293,938 that it has adequately provided for the liability associated with this Effective income tax rate               28.2%          37.9%          32.1%
proceeding. The plaintiffs have appealed the City Council resolution to the state court in Orleans Parish. Oral argument on                            The EAM capital loss is a tax benefit resulting from the sale of the plaintiffs' appeal was conducted in February 2005.                                       preferred stock and less than 1% of the common stock of Entergy Asset Management, an Entergy subsidiary. In December 2004, an NOTE 3. INCOME TAXES                                                                          Entergy subsidiary sold the stock to a third party for $29.75 million.
Income tax expenses for 2004, 2003, and 2002 consist of                                      The sale resulted in a capital loss for tax purposes the following (in thousands):
of $370 million, producing a federal and state net tax benefit of 2004           2003            2002       $97 million that Entergy recorded in the fourth quarter of 2004.
Current:                                                                                      Entergy has established a contingency provision in its financial Federal(-)*                                S 54,380 S(731,129) S 510,109                     statements that management believes will sufficiently cover the risk Foreign                                         (2,231)         8,284          (3,295)      associated with this issue.
StateI') ()                                    38,301          23,396         43,788           Significant components of net deferred and noncurrent accrued Total W"W                                     90,450        (699,449)      550,602 tax liabilities as of December 31, 2004 and 2003 are as follows Deferred - net                                 296,445        1,307,092      (233,532)
(in thousands):
Investment tax credit 2004                2003 adjustments - net                             (20,987)        (27,644)       (23,132)
Deferred and Noncurrent Recorded income tax expense               S 365,908 S 579,999 S 293,938 Accrued Tax Liabilities:
(a) The actual cash taxes paid were $28,241 in 2004, $188,709 in 2003, and                       Net regulatory liabilities               $ (978,815)       S(1,072,898)
         $57,856 in 2002. Entergy Louisiana's mark-to-market tax accounting election significantly reduced taxes paidin 2002. In 2001, Entergy Plant-related basis differences            (4,699,803)      (3,574,593)
Louisiana changed its method of accountingfortax purposes relatedto its                     Power purchase agreements                    (972,348)        (945,495) wholesale electric power contracts. The most signifcant of these is the                     Nuclear decommissioning                      (545,109)        (519,028) contract to purchase powerfrom the Vidalia project (the contract is discussed               Other                                        (346,993)         (379,875) in Note 8 to the consolidatedfinancialstatements). The new tax accounting                     Total                                    (7,543,068)      (6,491,889) method hasprovided a cumulative cashflow benefit of approximately $790 million through 2004, which is expected to reverse in the years 2005 through             Deferred Tax Assets:
2031. The election did not reduce book income tax expense. The timing ofthe               Accumulated deferred investment reversalof this benefit depends on several variables, including the price of                tax credit                                    133,979           141,723 power. Approximately hal/ofthe consolidatedcash flow benefit ofthe                        Capital losses                                  134,688             92,423 election occurred in 2001 and the remainderoccurred in 2002.                              Net operating loss carryforwards              1,201,006           129,122 (b) In 2003, the domestic utility companies and System Energyfiled,with the IRS, a Sale and leaseback                              227,155           223,134 change in tax accounting method notf cationfortheir respective calculations of cost ofgoods sold. The adjustment implementeda simplyifed method ofallocation             Unbilled/deferred revenues                       28,741             18,983 of overheadto the production of electricity, which is provided under the IRS              Pension-related items                           247,662           204,083 capitalization regulations. The cumulative adjustmentplacing these companies on           Reserve for regulatory adjustments              131,112           138,933 the new methodology resulted in a $2.95 billion deduction on Entergy's 2003               Customer deposits                               107,652           108,591 income tax return. There was no cash benefitfrom the method change in 2003.               Nuclear decommissioning                         158,796           272,551 On a consolidatedbasis, a 174 million cash tax benefit was realizedin 2004.
This tax accountingmethod change is an issue across the utility industry andwill         Other                                           225,659           399,080 likely be challengedby the IRS on audit.                                                  Valuation allowance                             (43,864)           (39,210)
Total                                     2,552,586        1,689,413 Total income taxes differ from the amounts computed by                                     Net deferred and noncurrent applying the statutory income tax rate to income before taxes. The                             accrued tax liability                       S(4,990,482)     $(4,802,476) 4 1-1                                                                                                                                                                            l

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued
-I                                                                                                                                                                     K At December 31, 2004, Entergy had $342.4 million in net                  borrowing capacity of $965 million, of which $50 million was realized federal capital loss carryforwards that will expire as follows:     outstanding at December 31, 2004. Entergy also has the ability to S103.8 million in 2007, $10.6 million in 2008, and 5228.0 million            issue letters of credit against the total borrowing capacity of both in 2009.                                                                     credit facilities, and $50 million had been issued against this 3-year At December 31, 2004, Entergy had federal net operating                   facility at December 31, 2004. The commitment fee for these loss carryforwards of $2.9 billion. If the federal net operating loss        facilities is currently 0.13% of the line amount. Commitment fees carryforwards are not utilized, they will expire in the years 2023           and interest rates on loans under the credit facility can fluctuate through 2024.                                                                depending on the senior debt ratings of the domestic At December 31, 2004, Entergy had state net operating loss                utility companies.
carryforwards of $3.5 billion, primarily resulting from Entergy                 Entergy Corporation's facilities require it to maintain a Louisiana's mark-to-market tax election and the change in method             consolidated debt ratio of 65% or less of its total capitalization, and of accounting for tax purposes related to cost of goods sold, as             maintain an interest coverage ratio of 2 to 1. If Entergy fails to meet discussed above. If the state net operating loss carryforwards are not       these limits, or if Entergy or the domestic utility companies default utilized, they will expire in the years 2008 through 2019.                   on other indebtedness or are in bankruptcy or insolvency The 2004 and 2003 valuation allowances are provided against               proceedings, an acceleration of the facility's maturity date UK capital loss and UK net operating loss carryforwards, and                 may occur.
certain state net operating loss carryforwards. The UK losses can be            Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and utilized against future UK taxable income. For UK tax purposes,              Entergy New Orleans each have 364-day credit facilities available these carryforwards do not expire.                                           as follows (in millions):
On October 22, 2004, the American Jobs Creation Act of 2004                                                                                  Amount Drawn as Company                       Expiration Date Amount of Facility     of Dec. 31, 2004 (the Act) was enacted. The Act promotes domestic production Entergy Arkansas               April 2005             585 and investing activities by providing a number of tax incentives, Entergy Louisiana              April 2005             $515')
including a temporary incentive to repatriate accumulated Entergy Mississippi            May 2005               525 foreign earnings, subject to certain limitations, by providing an Entergy New Orleans            April 2005             S14)                           -
85% dividends received deduction for certain repatriated earnings and also providing a tax deduction of up to 9% of qualifying                 (a) The combined amount borrowedby Entergy LouisianaandEntergyNew Orleans under thesefacilitiesat any one time cannot exceed $15 million.
production activities. In 2004, Entergy repatriated 564 million of accumulated foreign earnings, which resulted in approximately                   The 364-day credit facilities have variable interest rates and the
   $16.1 million of tax benefit. At December 31, 2004, Entergy has              average commitment fee is 0.13%. The Entergy Arkansas facility approximately $7.4 million of undistributed earnings from                    requires it to maintain total shareholder's equity of at least 25% of subsidiary companies outside the United States that are being                its total assets.
considered for repatriation. If these earnings are repatriated in               The short-term borrowings of Entergy's subsidiaries are limited accordance with the Act, the repatriation would result in                    to amounts authorized by the SEC. The current limits authorized approximately $1.5 million of income tax expense. In accordance              are effective through November 30,2007. In addition to borrowing with FSP 109-1, which was issued by the FASB to address the                  from commercial banks, Entergy's subsidiaries are authorized under accounting for the impacts of the Act, the allowable production tax          the SEC order to borrow from Entergy's money pool. The money credit will be treated as a special deduction in the period in which it      pool is an inter-company borrowing arrangement designed to is deducted rather than treated as a tax rate change during 2004             reduce Entergy's subsidiaries' dependence on external short-term which is the period in which the Act was signed into law. The                borrowings. Borrowings from the money pool and external adoption of FSP 109-1 and FSP 109-2, also issued by the FASB to              borrowings combined may not exceed the SEC authorized limits.
address the accounting for the repatriation provisions of the Act, did       As of December 31, 2004, Entergy's subsidiaries' aggregate not have a material effect on Entergy's financial statements.                authorized limit was $1.6 billion and the aggregate outstanding borrowing from the money pool was $151.6 million. There were no NOTE 4. LINES OF CREDIT AND                                                  borrowings outstanding from external sources. Under the SEC SHORT-TERM BORROWINGS                                                        order and without further SEC authorization, the domestic utility Entergy Corporation has in place two separate credit facilities, a           companies and System Energy cannot issue new short-term 5-year credit facility and a 3-year credit facility. The 5-year credit       indebtedness unless (a) Entergy and the borrower each maintain facility, which expires in December 2009, has a borrowing capacity           common equity of at least 30% of its capital and, (b) with the of $500 million, none of which was outstanding at December 31,               exception of money pool borrowings, the debt security to be issued 2004. The 3-year credit facility, which expires in May 2007, has a           (if rated) and all outstanding securities of the issuer and Entergy 66 -
                                                                                                                                                                       /K

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued K
Corporation that are rated must be rated investment grade. There is      Corporation cannot incur additional indebtedness or issue other further discussion of commitments for long-term financing                securities unless (a) it and each of its public utility subsidiaries arrangements in Note 5 to the consolidated financial statements.         maintain a common equity ratio of at least 30% and (b) the The short-term securities issuances of Entergy Corporation also        security to be issued (if rated) and all outstanding securities of are limited to amounts authorized by the SEC. Under its current          Entergy Corporation that are rated, are rated investment grade.
SEC order and without further SEC authorization, Entergy NOTE 5. LONG-TERMT DEBT Long-term debt as of December 31, 2004 and 2003 consisted of (in thousands):
Mortgage Bonds:                                                             Maturity Date                     2004                        2003 8.25% Series                   Entergy Gulf States                        April 2004                 S        _                S 292,000 6.2% Series                    Entergy Mississippi                         May 2004                                                  75,000 6.125% Series                  Entergy Arkansas                             July 2005                   100,000                    100,000 8.125% Series                  Entergy New Orleans                          July 2005                    30,000                      30,000 6.77% Series                   Entergy Gulf States                      August 2005                      98,000                      98,000 Libor + 0.90% Series           Entergy Gulf States                         June 2007                                               275,000 4.875% Series                  System Energy                           October 2007                      70,000                      70,000 5.2% Series                    Entergy Gulf States                   December 2007                                                 200,000 6.5% Series                    Entergy Louisiana                         March 2008                                                115,000 4.35% Series                   Entergy Mississippi                        April 2008                    100,000                    100,000 6.45% Series                   Entergy Mississippi                        April 2008                                                 80,000 3.6% Series                    Entergy Gulf States                         June 2008                    325,000                    325,000 3.875% Series                  Entergy New Orleans                       August 2008                     30,000                      30,000 Libor + 0.40% Series           Entergy Gulf States                   December 2009                      225,000 4.65% Series                   Entergy Mississippi                         May 2011                      80,000 4.875% Series                  Entergy Gulf States                   November 2011                      200,000 6.0% Series                    Entergy Gulf States                   December 2012                      140,000                    140,000 5.15% Series                   Entergy Mississippi                     February 2013                    100,000                    100,000 5.25% Series                   Entergy New Orleans                       August 2013                     70,000                      70,000 5.09% Series                   Entergy Louisiana                     November 2014                      115,000 5.6% Series                    Entergy Gulf States                   December 2014                       50,000 5.25% Series                   Entergy Gulf States                       August 2015                    200,000                    200,000 6.75% Series                   Entergy New Orleans                      October 2017                     25,000                      25,000 5.4% Series                    Entergy Arkansas                            May 2018                     150,000                    150,000 4.95% Series                   Entergy Mississippi                         June 2018                     95,000                      95,000 5.0% Series                    Entergy Arkansas                             July 2018                   115,000                    115,000 5.5% Series                    Entergy Louisiana                          April 2019                    100,000 8.0% Series                    Entergy New Orleans                       March 2023                                                  45,000 7.7% Series                    Entergy Mississippi                          July 2023                                                60,000 7.55% Series                   Entergy New Orleans                   September 2023                                                  30,000 7.0% Series                    Entergy Arkansas                         October 2023                    175,000                    175,000 5.6% Series                    Entergy New Orleans                   September 2024                      35,000 5.65% Series                   Entergy New Orleans                   September 2029                      40,000 6.7% Series                    Entergy Arkansas                           April 2032                    100,000                    100,000 7.6% Series                    Entergy Louisiana                          April 2032                    150,000                    150,000 6.0% Series                    Entergy Arkansas                      November 2032                      100,000                     100,000 6.0% Series                    Entergy Mississippi                   November 2032                       75,000                      75,000 725% Series                    Entergy Mississippi                   December 2032                      100,000                    100,000 5.9% Series                    Entergy Arkansas                            June 2033                    100,000                    100,000 6.20% Series                   Entergy Gulf States                          July 2033                   240,000                    240,000 6.25% Series                   Entergy Mississippi                        April 2034                    100,000 6.4% Series                    Entergy Louisiana                        October 2034                     70,000 6.38% Series                   Enterey Arkansas                      November 2034                       60,000 I    Total mortgage bonds                                                                                 S3,763,000                 53,860,000 Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued Ij                                                                                                                II Governmental BondsI:                                                  Maturity Date          2004        2003 5.45% Series               Calcasieu Parish - Louisiana                     2010     S   22,095 S    22,095 6.75% Series               Calcasieu Parish - Louisiana                     2012         48,285      48,285 6.7% Series                Pointe Coupee Parish - Louisiana                 2013         17,450      17,450 5.7% Series                Iberville Parish - Louisiana                     2014         21,600      21,600 7.7% Series                West Feliciana Parish - Louisiana                2014         94,000      94,000 5.8% Series                West Feliciana Parish - Louisiana                2015         28,400      28,400 7.0% Series                West Feliciana Parish - Louisiana                2015         39,000      39,000 7.5% Series                West Feliciana Parish - Louisiana                2015         41,600      41,600 9.0% Series                West Feiciana Parish - Louisiana                 2015         45,000      45,000 5.8% Series                West Feliciana Parish - Louisiana                2016         20,000      20,000 6.3% Series                Pope County - Arkansas "I                        2016         19,500      19,500 5.6% Series                Jefferson County - Arkansas                      2017         45,500      45,500 6.3% Series               Jefferson County - Arkansas                       2018          9,200       9,200 6.3% Series                Pope County - Arkansas                           2020        120,000     120,000 6.25% Series               Independence County - Arkansas                   2021         45,000      45,000 7.5% Series                St. Charles Parish - Louisiana"''                2021         50,000      50,000 5.875% Series              Mississippi Business Finance Corp.               2022        216,000    216,000 5.9% Series                Mississippi Business Finance Corp.               2022        102,975     102,975 7.0% Series                Warren County - Mississippi                      2022                      8,095 7.0% Series                Washington County - Mississippi                  2022                      7,935 7.0% Series                St. Charles Parish - Louisiana "                 2022         24,000      24,000 7.05% Series               St. Charles Parish - Louisiana N                 2022         20,000      20,000 Auction Rate               Independence County - Mississippi                2022         30,000      30,000 4.6% Series                Mississippi Business Finance Corp.               2022         16,030 5.95% Series               St. Charles Parish - Louisiana t                 2023         25,000      25,000 6.2% Series                St. Charles Parish - Louisiana (hi               2023         33,000      33,000 6.875% Series              St. Charles Parish - Louisiana I                 2024         20,400      20,400 6.375% Series              St. Charles Parish - Louisiana                   2025         16,770      16,770 7.3% Series                Claiborne County - Mississippi                   2025                      7,625 6.2% Series                Claiborne County - Mississippi                   2026         90,000      90,000 5.05% Series               Pope County - Arkansas "I                        2028         47,000      47,000 5.65% Series               West Feliciana Parish - Louisiana                2028                     62,000 6.6% Series                West Feliciana Parish - Louisiana                2028         40,000      40,000 5.35% Series               St. Charles Parish - Louisiana (i                2029 Auction Rate               St. Charles Parish - Louisiana ()                2030         60,000      60,000 4.9% Series                St. Charles Parish - Louisiana (d)               2030         55,000      55,000 Total governmental bonds                                                             S1,462,805 S1,532,430
                                                                                                                                                                                    /(

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS                                           continued Other Long-Term Debt:                                                                                                                      2004                           2003 Note Payable to NYPA, non-interest bearing, 4.8% implicit rate                                                                 S 445,605                       S 514,708 3 year Bank Credit Facility (Entergy Corporation and Subsidiaries, Note 4)                                                           50,000 Bank term loan, Entergy Corporation, avg rate 2.98%, due 2005                                                                        60,000                          60,000 Bank term loan, Entergy Corporation, avg rate 3.08%, due 2008                                                                        35,000                         35,000 6.17% Notes due March 2008, Entergy Corporation                                                                                      72,000                          72,000 6.23% Notes due March 2008, Entergy Corporation                                                                                      15,000                          15,000 6.13% Notes due September 2008, Entergy Corporation                                                                                150,000                         150,000 7.75% Notes due December 2009, Entergy Corporation                                                                                 267,000                         267,000 6.58% Notes due May 2010, Entergy Corporation                                                                                        75,000                          75,000 6.9% Notes due November 2010, Entergy Corporation                                                                                  140,000                         140,000 7.06% Notes due March 2011, Entergy Corporation                                                                                      86,000                          86,000 Long-term DOE Obligation ")                                                                                                        156,332                         154,409 Waterford 3 Lease Obligation 7.45% (Entergy Corporation and Subsidiaries, Note 9)                                                  247,725                         262,534 Grand Gulf Lease Obligation 5.01% (Entergy Corporation and Subsidiaries, Note 9)                                                   397,119                         403,468 Unamortized Premium and Discount - Net                                                                                              (10,277)                        (11,853) 8.5% Junior Subordinated Deferrable Interest Debentures due 2045 - Entergy Arkansas                                                        -                         61,856 8.75% Junior Subordinated Deferrable Interest Debentures due 2046 - Entergy Gulf States                                              87,629                          87,629 9.0% Junior Subordinated Deferrable Interest Debentures due 2045 - Entergy Louisiana                                                       -                         72,165 Other                                                                                                                                 9,457                           9,966 Total Long-Term Debt                                                                                                               67,509,395                      $7,847,312 Less Amount Due Within One Year                                                                                                  492,564                         524,372 Long-Term Debt Excluding Amount Due Within One Year                                                                                $7,016,831                      67,322,940 Fair Value of Long-Term Debt (                                                                                                $6,614,211                      S7,123,706 (a) Consists ofpollution control revenue bonds and environmental revenue bonds.
(b) The bonds are subject to mandatory tenderforpurchasefrom the holders at 100% ofthe principalamount outstanding on September 1,2005 andcan then be remarketed.
(c) The bonds had a mandatory tender date of September 1, 2004. Entergy Gulf States purchasedthe bondsfrom the holders, pursuant to the mandatory tender provision, and has not remarketed the bonds at this time.
(d) On June 1, 2002, Entergy Louisiana remarketed $55 million St. Charles Parish Pollution Control Revenue Refunding Bonds due 2030, resetting the interest rate to 4. 9%
through May2005.
(e) The bonds are subject to mandatory tenderforpurchasefrom the holders at 100% of the principal amount outstanding onJune 1, 2005 and can then be remarketed (t) Pursuant to the Nuclear Waste Poliy Act of1982, Entergys nuclear owner/l7icensee subsidiaries have contracts with the DOEfor spent nucearfueldisposal service. The contracts include a one-timefeefor generation prior to April 7, 1983. Entergy Arkansas is the only Entergy company that generated electricpower with nuclear fuel prior to that date and includes the one-timefee, plus accrued interest, in long-term debt.
(g) Thefair value excludes lease obligations and long-term DOE obligations and includes debt due within oneyear. It is determined using bidprices reportedby dealer markets and by nationally recognized investment bankingfirms.
(h) The bonds are secured by a series of collateralfirst mortgage bonds.
(i) The bonds in the principal amount of $110.95 million hada mandatory tender date of October 1,2003. Entergy Louisianapurchasedthe bondsfrom the holders.
pursuant to the mandatory tender provision, and has not remarketed the bonds at this time.

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued 2
The annual long-term debt maturities (excluding lease                       Junior Subordinated Deferrable Interest obligations) for debt outstanding as of December 31, 2004, for                  Debentures and Implementation of FIN 46 the next five years are as follows (in thousands):                              Entergy implemented FASB Interpretation No. 46, 'Consolidation of Variable Interest Entities' effective December 31, 2003. FIN 46 2005            2006            2007            2008             2009      requires existing unconsolidated variable interest entities (VIEs) to 5467,298        575,896         S199,539        5747,246        5512,584       be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among their investors. VIEs, generally, are In November 2000, Entergy's Non-Utility Nuclear business                     entities that do not have sufficient equity to permit the entity to purchased the FitzPatrick and Indian Point 3 power plants in a                  finance its operations without additional financial support from its seller-financed transaction. Entergy issued notes to New York                   equity interest holders and/or the group of equity interest holders Power Authority (NYPA) with seven annual installments of                        are collectively not able to exercise control over the entity. The approximately 5108 million commencing one year from the date of                 primary beneficiary is the party that absorbs a majority of the the closing, and eight annual installments of 520 million                       entity's expected losses, receives a majority of its expected residual commencing eight years from the date of the closing. These notes                returns, or both as a result of holding the variable interest. A do not have a stated interest rate, but have an implicit interest rate          company may have an interest in a VIE through ownership or other of 4.8%. In accordance with the purchase agreement with NYPA,                   contractual rights or obligations.
the purchase of Indian Point 2 in 2001 resulted in Entergy's Non-                  Entergy Louisiana Capital I, Entergy Arkansas Capital I, and Utility Nuclear business becoming liable to NYPA for an                         Entergy Gulf States Capital I (Trusts) were established as financing additional 510 million per year for 10 years, beginning in September            subsidiaries of Entergy Louisiana, Entergy Arkansas, and Entergy 2003. This liability was recorded upon the purchase of Indian Point             Gulf States, respectively, (the parent company or companies, 2 in September 2001, and is included in the note payable to NYPA                collectively) for the purposes of issuing common and preferred balance above. In July 2003, a payment of $102 million was made                 securities. The Trusts issued Cumulative Quarterly Income prior to maturity on the note payable to NYPA. Under a provision                Preferred Securities (Preferred Securities) to the public and issued in a letter of credit supporting these notes, if certain of the                 common securities to their parent companies. Proceeds from such domestic utility companies or System Energy were to default on                  issues were used to purchase junior subordinated deferrable interest other indebtedness, Entergy could be required to post collateral to             debentures (Debentures) from the parent company. The Debentures support the letter of credit.                                                   held by each Trust are its only assets. Each Trust uses interest Covenants in the Entergy Corporation notes require it to                     payments received on the Debentures owned by it to make cash maintain a consolidated debt ratio of 65% or less of its total                  distributions on the Preferred Securities and common securities.
capitalization. If Entergy's debt ratio exceeds this limit, or if               The parent companies fully and unconditionally guaranteed Entergy or certain of the domestic utility companies default on                 payment of distributions on the Preferred Securities issued by other indebtedness or are in bankruptcy or insolvency proceedings,              the respective Trusts. Prior to the application of FIN 46, each an acceleration of the notes' maturity dates may occur.                         parent company consolidated its interest in its Trust. Because each The long-term securities issuances of Entergy Corporation,                   parent company's share of expected losses of its Trust is limited to Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and                its investment in its Trust, the parent companies are not considered System Energy also are limited to amounts authorized by the SEC.                the primary beneficiaries and therefore de-consolidated their Under its current SEC order, and without further authorization,                 interest in the Trusts upon application of FIN 46 with no Entergy Corporation can incur additional indebtedness or issue                  significant impacts to the financial statements. The parent other securities unless (a) it and each of its public utility subsidiaries      companies' investment in the Trusts and the Debentures issued by maintain a common equity ratio of at least 30% and (b) the                      each parent company are included in Other Property and security to be issued (if rated) and all outstanding securities of              Investments and Long-Term Debt, respectively.
Entergy Corporation that are rated, are rated investment grade by at least one nationally recognized statistical rating agency. Under             Capital Funds Agreement their current SEC orders, and without further authorization,                    Pursuant to an agreement with certain creditors, Entergy Entergy Gulf States, Entergy Louisiana, and Entergy Mississippi                 Corporation has agreed to supply System Energy with sufficient cannot incur additional indebtedness or issue other securities unless           capital to:
(a) the issuer and Entergy Corporation maintains a common
* maintain System Energy's equity capital at a minimum of 35%
equity ratio of at least 30% and (b) the security to be issued (if rated)          of its total capitalization (excluding short-term debt);
and all outstanding securities of the issuer (other than preferred
* permit the continued commercial operation of Grand Gulf 1; stock of Entergy Gulf States), as well as all outstanding securities of         *pay in full all System Energy indebtedness for borrowed money Entergy Corporation that are rated, are rated investment grade.                    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.
                                                                                                                                                                                                                                      />

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued NOTE 6. PREFERRED STOCK The number of shares authorized and outstanding and dollar value of preferred stock and minority interest for Entergy Corporation subsidiaries as of December 31, 2004 and 2003 are presented below. Only the Entergy Gulf States series 'with sinking fund" contain mandatory redemption requirements. All other series of the U.S. Utility are redeemable at Entergy's option. (S in thousands)
Shares Authorized                Shares Outstanding 2004               2003            2004            2003            2004         2003 U.S. Utility:
Preferred Stock without sinking fund:
Entergy Arkansas, 4.32% - 7.88% Series                           1,613,500         1,613,500       1,613,500       1,613,500        5116,350     $116,350 Entergy Gulf States, 4.20% - 7.56% Series                          473,268           473,268         473,268         473,268           47,327       47,327 Entergy Louisiana, 4.16% - 8.00% Series                          2,115,000         2,115,000       2,115,000       2,115,000          100,500      100,500 Entergy Mississippi, 4.36% - 8.36% Series                          503,807           503,807         503,807         503,807           50,381       50,381 Entergy New Orleans, 4.36% - 5.56% Series                          197,798           197,798         197,798         197,798           19,780       19,780 Total U.S. Utility Preferred Stock without sinking fund                 4,903,373         4,903,373       4,903,373       4,903,373         $334,337    S334,337 Energy Commodity Services:
Preferred Stock without sinking fund:
Entergy Asset Management, 11.50% Rate                            1,000,000                  -        297,376                -          29,738 Other                                                                     -                 -               -               -           1,281             -
Total Preferred Stock without sinking fund                              5,903,373         4,903,373       5,200,749       4,903,373        5365,356     5334,337 U.S. Utility:
Preferred Stock with sinking fund:
Entergy Gulf States, Adjustable Rate 7.0%&deg;                         174,000           208,520         174,000         208,520         S 17,400     S 20,852 Total Preferred Stock with sinking fund                                   174,000           208,520         174,000         208,520        S 17,400     S 20,852 Fair Value of Preferred Stockwith sinking fund*"                                                                                           S 15,286     S 15,354 Totals may notfoot due to rounding.
(a) Represents weighted-average annualized ratefor 2004 and 2003.
of (b) Fairvalues were determinedusing bidprices reportedby dealermarkets and by nationally recognized investment bankingfirms. There is additionaldisclosure fair value offinancial instruments in Note 14 to the consolidatedfinancialstatements.
All outstanding preferred stock is cumulative.
Entergy Gulf States' preferred stock with sinking fund retirements were 34,500 shares in 2004 and 2003, and 18,579 shares in 2002.
Entergy Gulf States has annual sinking fund requirements of 53.45 million through 2009 for its preferred stock outstanding.
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 Entergy Asset 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, 2007 or each subsequent December 31 thereafter, either Entergy Asset Management or the preferred 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 directors for the purpose of liquidating the assets of Entergy Asset Management in order to repay the preferred shares and any accrued dividends.
NOTE 7. COMMON EQUITY COMMON STOCK Treasury Stock Treasury stock activity for Entergy for 2004 and 2003 is as follows (S in thousands):
2004                                              2003 Treasury Shares                Cost              Treasury Shares                 cost Beginning Balance, January 1                                                      19,276,445         S 561,152                     25,752,410          S 747,331 Repurchases                                                                    16,631,800          1,017,996                        155,000             8,135 Issuances:
Employee Stock-Based Compensation Plans                                      (4,555,897)          (146,877)                    (6,622,095)         (194,057)
Directors' Plan                                                                   (7,320)              (252)                        (8,870)             (257)
Ending Balance, December 31                                                       31,345,028         S1,432,019                    19,276,445          S 561,152 Entergy Corporation reissues treasury shares to meet the requirements of the Stock Plan for Outside Directors (Directors' Plan), the Equity Ownership Plan of Entergy Corporation and Subsidiaries (Equity Ownership Plan), the Equity Awards Plan of Entergy Corporation and Subsidiaries, and certain other stock benefit plans. The Directors' Plan awards to non-employee directors a portion of their compensation in the form of a fixed number of shares of Entergy Corporation common stock.
A

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued Equity Compensation Plan Information                                           grant or restricted period, as appropriate. In 2004, 2003, and 2002, Entergy grants stock options, equity awards, and incentive awards              $47 million, $45 million, and $28 million, respectively, was charged to key employees of the Entergy subsidiaries under the Equity                  to compensation expense.
Ownership Plan which is a shareholder-approved stock-based                        Entergy was assisted by external valuation firms to determine the compensation plan. Stock options are granted at exercise prices not            fair value of the stock option grants made in 2004 and 2003. The less than market value on the date of grant. The majority of options           fair value applied to these grants was an average of two firms' option granted in 2004, 2003, and 2002 will become exercisable in equal               valuations, which included adjustments for factors such as lack amounts on each of the first three anniversaries of the date of grant.         of marketability, stock retention requirements, and regulatory Unless they are forfeited previously under the terms of the                    restrictions on exercisability. In 2002, the fair value of each option grant, options expire ten years after the date of the grant if they            grant was estimated on the date of grant using the Black-Scholes are not exercised.                                                             option-pricing model, without any such adjustments. The stock Entergy grants most of the equity awards and incentive awards               option weighted-average assumptions used in determining the fair earned under its stock benefit plans in the form of performance                values were as follows:
units, which are equal to the cash value of shares of Entergy 2004           2003           2002 Corporation common stock at the time of payment. In addition Stock price volatility                        23.1%          26.3%          27.2%
to the potential for equivalent share appreciation or depreciation, Expected term in years                            6.3            6.2            5.0 performance units will earn the cash equivalent of the dividends Risk-free interest rate                         3.2%           3.3%           4.2%
paid during the performance period applicable to each plan. The                Dividend yield                                  3.3%           3.3%           3.2%
costs of equity and incentive awards, given either as company stock            Dividend payment                                51.80         51.40          51.32 or performance units, are charged to income over the period of the Stock option transactions are summarized as follows:
2004                                       2003                                   2002 Number             Average                Number              Average             Number                Average of Options      Exercise Price            of Options       Exercise Price         of Options         Exercise Price Beginning-of-year balance                   15,429,383               538.64           19,943,114               S35.85         17,316,816                 $31.06 Options granted                              1,898,098               558.63            2,936,236                544.98         8,168,025                  541.72 Options exercised                           (4,541,053)              538.07           (6,927,000)               533.12        (4,877,688)                528.62 Options forfeited/expired                      (476,351)             539.94              (522,967)              540.98           (664,039)                536.36 End-of-year balance                         12,310,077               $41.88           15,429,383               538.64         19,943,114                 535.85 Options exercisable at year-end              7,162,884               $37.25            6,153,043               534.82          4,837,511                 531.39 Weighted-average fair value of options at time of grant                      57.76                                     56.86                                   59.22 The following table summarizes information about stock options outstanding as of December 31, 2004:
Options Outstanding                                             Options Exercisable Weighted-Range of                                         Number          Average Remaining              Weighted-Average            Number             Weighted-Average Exercise Prices                               of Options       Contractual Life-Years              Exercise Price        of Options                Exercise Price 523 - 533.99                                 1,674,430                           5.0                      526.28        1,674,430                         526.28 534 - S44.99                                 8,547,519                            7.1                     S41.09        5,195,493                         539.95 545 - $55.99                                    230,445                          5.6                      S49.61          222,378                         $49.68 556 - S67.99                                 1,857,683                            9.1                     S58.64            70,583                        $59.67 S23 - 567.99                                12,310,077                            7.1                     541.88        7,162,884                         537.25 Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued K
RETAINED        EARNINGS      AND DIVIDEND RESTRICTIONS                      NUCLEAR       INSUJRANCE Provisions within the Articles of Incorporation or pertinent                Third Party Liability Insurance indentures and various other agreements relating to the long-term           The Price-Anderson Act provides insurance for the public in the debt and preferred stock of certain of Entergy Corporation's                event of a nuclear power plant accident. The costs of this insurance subsidiaries restrict the payment of cash dividends or other                 are borne by the nuclear power industry. Originally passed by distributions on their common and preferred stock. As of December           Congress in 1957 and most recently amended in 1988, the 31, 2004, Entergy Arkansas and Entergy Mississippi had restricted           Price-Anderson Act requires nuclear power plants to show evidence retained earnings unavailable for distribution to Entergy                    of financial protection in the event of a nuclear accident. This Corporation of 5394.9 million and $68.5 million, respectively.               protection must consist of two levels:
Additionally, the Public Utility Holding Company Act (PUHCA)                 1. The primary level is private insurance underwritten by prohibits Entergy Corporation's subsidiaries from making loans or               American Nuclear Insurers and provides liability insurance advances to Entergy Corporation. In 2004, Entergy Corporation                    coverage of $300 million. If this amount is not sufficient to received dividend payments totaling 5825 million from subsidiaries.             cover claims arising from the accident, the second level, Investments in affiliates that are not controlled by Entergy                 Secondary Financial Protection, applies. An industry-wide Corporation, but over which it has significant influence, are                    aggregate limitation of 5300 million exists for domestically-accounted for using the equity method. Entergy's retained earnings              sponsored terrorist acts. There is no limitation for for 2003 included $472 million of undistributed earnings of                     foreign-sponsored terrorist acts.
equity method investees. Due to the receipt of dividends from                2. Within the Secondary Financial Protection level, each nuclear Entergy-Koch, LP after the sale of its energy trading and pipeline              plant must pay a retrospective premium, equal to its businesses in 2004, there were no undistributed earnings in                      proportionate share of the loss in excess of the primary level, Entergy's retained earnings at December 31, 2004. Equity                        up to a maximum of $100.6 million per reactor per incident.
method investments are discussed in Note 12 to the consolidated                 This consists of a $95.8 million maximum retrospective financial statements.                                                           premium plus a five percent surcharge that may be applied, if needed, at a rate that is presently set at $10 million per year per NOTE 8. COMMITMENTS AND CONTINGENCIES                                           nuclear power reactor. There are no domestically- or foreign-Entergy is involved in a number of legal, tax, and regulatory                   sponsored terrorism limitations.
proceedings before various courts, regulatory commissions, and                  Currendy, 104 nuclear reactors are participating in the Secondary governmental agencies in the ordinary course of its business. While          Financial Protection program - 103 operating reactors and one management is unable to predict the outcome of such proceedings,            closed reactor that still stores used nuclear fuel on site. The product management does not believe that the ultimate resolution of these           of the maximum retrospective premium assessment to the nuclear matters will have a material adverse effect on Entergy's results of          power industry and the number of nuclear power reactors provides operations, cash flows, or financial condition.                              over $10 billion in insurance coverage to compensate the public in the event of a nuclear power reactor accident.
VIDALIA      PURCHASED       POWER AGREEMENT                                    Entergy owns and operates ten of the nuclear power reactors, and Entergy Louisiana has an agreement extending through the year                owns the shutdown Indian Point 1 reactor (10% of Grand Gulf 2031 to purchase energy generated by a hydroelectric facility known          is owned by a non-affiliated company which would share on a as the Vidalia project. Entergy Louisiana made payments under the            pro-rata basis in any retrospective premium assessment under the contract of approximately $147.7 million in 2004, 5112.6 million in          Price-Anderson Act).
2003, and $104.2 million in 2002. If the maximum percentage                     An additional but temporary contingent liability exists for all (94%) of the energy is made available to Entergy Louisiana, current          nuclear power reactor owners because of a previous Nuclear Worker production projections would require estimated payments of                   Tort (long-term bodily injury caused by exposure to nuclear approximately S125.3 million in 2005, and a total of $3.5 billion for        radiation while employed at a nuclear power plant) insurance the years 2006 through 2031. Entergy Louisiana currently recovers            program that was in place from 1988 to 1998. The maximum the costs of the purchased energy through its fuel adjustment clause.        premium assessment exposure to each reactor is $3 million and will In an LPSC-approved settlement related to tax benefits from the              only be applied if such claims exceed the program's accumulated tax treatment of the Vidalia contract, Entergy Louisiana agreed to           reserve funds. This contingent premium assessment feature will credit rates by S11 million each year for up to ten years, beginning         expire with the Nuclear Worker Tort program's expiration, which is in October 2002. The provisions of the settlement also provide that          scheduled for 2008.
the LPSC shall not recognize or use Entergy Louisiana's use of the cash benefits from the tax treatment in setting any of Entergy               Propernt Insurance Louisiana's rates. Therefore, to the extent Entergy Louisiana's use of       Entergy's nuclear owner/licensee subsidiaries are members of the proceeds would ordinarily have reduced its rate base, no change          certain mutual insurance companies that provide property in rate base shall be reflected for ratemaking purposes.                     damage coverage, including decontamination and premature decommissioning expense, to the members' nuclear generating Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued
-I                                                                                                                                                    K, plants. These programs are underwritten by Nuclear Electric               maximum amounts of such possible assessments per occurrence Insurance Limited (NEIL). As of December 31,2004, Entergy was             were $50.8 million for the U.S. Utility plants and $68.9 million for insured against such losses per the following structures:                  the Non-Utility Nuclear plants.
Entergy maintains property insurance for its nuclear units in US. Utility Plants (ANO 1 and 2 GrandGuf l, River Bend,                   excess of the Nuclear Regulatory Commission's (NRC) minimum and Waterford3)                                                           requirement of $1.06 billion per site for nuclear power plant
* Primary Layer (per plant) - $500 million per occurrence                 licensees. NRC regulations provide that the proceeds of this
* Excess Layer (per plant) - S100 million per occurrence                  insurance must be used, first, to render the reactor safe and stable,
* Blanket Layer (shared among all plants) - $1.0 billion                   and second, to complete decontamination operations. Only after per occurrence                                                         proceeds are dedicated for such use and regulatory approval is
* Total limit - S1.6 billion per occurrence secured would any remaining proceeds be made available for the
* Deductibles:
benefit of plant owners or their creditors.
      * $5.0 million per occurrence - Turbine/generator damage In the event that one or more acts of domestically-sponsored
      * $5.0 million per occurrence - Other than turbine/
terrorism causes property damage under one or more or all nuclear generator damage Note: ANO 1 and 2 share in the Primary Layer with one                      insurance policies issued by NEIL (including, but not limited to, policy in common.                                                          those described above) within 12 months from the date the first property damage occurs, the maximum recovery under all such Non-Utility Nuclear Plants (Indian Point 2 and 3, FitzPatrick,             nuclear insurance policies shall be an aggregate of $3.24 billion plus Pilgrim,and Vermont Yankee)                                                the additional amounts recovered for such losses from reinsurance,
* Primary Layer (per plant) - $500 million per occurrence                 indemnity, and any other sources applicable to such losses. There
* Blanket Layer (shared among all plants) - $615 million                   is no aggregate limit involving one or more acts of foreign-per occurrence                                                          sponsored terrorism.
* Total limit - S1.115 billion per occurrence
* Deductibles:                                                            NUCLEAR DECOMMISSIONING                  AND    OTHER
      * $1.0 million per occurrence - Turbine/generator damage                RETIREMENT COSTS
      * $2.5 million per occurrence - Other than turbine/                     SFAS 143, 'Accounting for Asset Retirement Obligations," which generator damage                                                    was implemented effective January 1, 2003, requires the recording Note: Indian Point 2 and 3 share in the Primary Layer with one             of liabilities for all legal obligations associated with the retirement policy in common.
of long-lived assets that result from the normal operation of those assets. For Entergy, these asset retirement obligations consist of its In addition, the Non-Utility Nuclear plants are also covered under NEIL'S Accidental Outage Coverage program. This                      liability for decommissioning its nuclear power plants.
coverage provides certain fixed indemnities in the event of an                These liabilities are recorded at their fair values (which is the unplanned outage that results from a covered NEIL property                 present values of the estimated future cash outflows) in the period damage loss, subject to a deductible. The following summarizes this        in which they are incurred, with an accompanying addition to coverage as of December 31, 2004:                                          the recorded cost of the long-lived asset. The asset retirement obligation is accreted each year through a charge to expense, to Indian Point2 and3                                                         reflect the time value of money for this present value obligation. The
* S4.5 million weekly indemnity                                           amounts added to the carrying amounts of the long-lived assets will
   * $490 million maximum indemnity be depreciated over the useful lives of the assets. The net effect of
* Deductible: 12 week waiting period implementing SFAS 143 for the rate-regulated business of the domestic utility companies and System Energy was recorded as a FitzPatrickand Pilgrim (eachplant has an individualpolicy with the notedparameters)                                                          regulatory asset, with no resulting impact on Entergy's net income.
    * $4.0 million weekly indemnity                                           Entergy recorded these regulatory assets because existing rate
    * $490 million maximum indemnity                                          mechanisms in each jurisdiction are based on the principle
* Deductible: 12 week waiting period                                      that Entergy will recover all ultimate costs of decommissioning from customers.
Vermont Yankee                                                               Upon implementation of SFAS 143 in 2003, assets and liabilities
   * $3.5 million weekly indemnity                                            increased $1.1 billion for the U.S. Utility segment as a result of
* S435 million maximum indemnity                                          recording the asset retirement obligations at their fair values of
* Deductible: 12 week waiting period                                      S1.1 billion as determined under SFAS 143, increasing utility plant by $287 million, reducing accumulated depreciation by Entergy's U.S. Utility nuclear plants have significantly less or no
                                                                              $361 million, and recording the related regulatory assets of $422 accidental outage coverage. Under the property damage and                 million. The implementation of SFAS 143 for the portion of River accidental outage insurance programs, Entergy nuclear plants could Bend not subject to cost-based ratemanking decreased earnings by be subject to assessments should losses exceed the accumulated
                                                                              $21 million net-of-tax as a result of a one-time cumulative effect of funds available from NEIL. As of December 31, 2004, the 74-I

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued I
accounting change. In accordance with ratemaking treatment and as               $49.6 million reduction in non-utility property, a $40.1 million required by SFAS 71, the depreciation provisions for the domestic               reduction in the related regulatory asset, and a regulatory liability of utility companies and System Energy include a component for                     $17.7 million. For the portion of River Bend not subject to removal costs that are not asset retirement obligations under SFAS              cost-based ratemaking, the revised estimate resulted in the 143. In accordance with regulatory accounting principles, Entergy               elimination of the asset retirement cost that had been recorded has recorded a regulatory asset for certain of its domestic utility             at the time of adoption of SFAS 143 with the remainder recorded companies and System Energy of 586.9 million as of December 31,                 as miscellaneous income of $27.7 million.
2004 and $72.4 million as of December 31, 2003 to reflect an                        In the third quarter of 2004, Entergy's Non-Utility Nuclear estimate of incurred but uncollected removal costs previously                   business recorded a reduction of $20.3 million in decommissioning recorded as a component of accumulated depreciation. The                        liability to reflect changes in assumptions regarding the timing of decommissioning and retirement cost liability for certain of the                when decommissioning of a plant will begin. Entergy considered domestic utility companies and System Energy includes a                         the assumptions as part of recent studies evaluating the economic regulatory liability of $34.6 million as of December 31, 2004 and               effect of the plant in its region. The revised estimate resulted in
$26.8 million as of December 31, 2003 representing an estimate of               miscellaneous income of $20.3 million, reflecting the excess of the collected but not yet incurred removal costs. For the Non-Utility               reduction in the liability over the amount of undepreciated asset Nuclear business, the implementation of SFAS 143 resulted in a                  retirement cost recorded at the time of adoption of SFAS 143.
decrease in liabilities of $595 million due to reductions in                          If Entergy had applied SFAS 143 during prior periods, the decommissioning liabilities, a decrease in assets of $340 million,              following impacts would have resulted:
including a decrease in electric plant in service of $315 million, and For the year ended December 31,                                    2002 an increase in earnings in 2003 of $155 million net-of-tax as a result                                                                         $599,360 Earnings applicable to common stock - as reported of a one-time cumulative effect of accounting change.                            Pro forma effect of SFAS 143                                  S 14,119 The cumulative decommissioning liabilities and expenses                      Earnings applicable to common stock - pro forma               5613,479 recorded in 2004 by Entergy were as follows (in millions):                       Basic earnings per average common share - as reported             52.69 Change in            Liabilities      Pro forma effect of SFAS 143                                      50.06 Liabilities as of          Cash Flow                  as of      Basic earnings per average common share - pro forma               52.75 Dec. 31, 2003 Accretion  Estimate Spending Dec. 31, 2004      Diluted earnings per average common share - as reported           52.64 U. S.Utility          $1,504.1     $98.0 S(274.1)             -  S1,328.0        Pro forma effect of SFAS 143                                      S0.06 Non-Utility Nuclear S 710.4       557.6    S (20.3)     5(9.4)  S 738.3         Diluted earnings per average common share - pro forma             52.70 In addition, an insignificant amount of removal costs associated                    For the Indian Point 3 and FitzPatrick plants purchased with non-nuclear power plants are also included in the                           in 2000, NYPA retained the decommissioning trusts and decommissioning line item on the balance sheet. Entergy                          the decommissioning liability. NYPA and Entergy executed periodically reviews and updates estimated decommissioning costs.                decommissioning agreements, which specify their decommissioning The actual decommissioning costs may vary from the estimates                     obligations. NYPA has the right to require Entergy to assume because of regulatory requirements, changes in technology, and                  the decommissioning liability provided that it assigns the increased costs of labor, materials, and equipment. During 2004,                corresponding decommissioning trust, up to a specified level, Entergy updated decommissioning cost studies for ANO 1 and 2                     to Entergy. If the decommissioning liability is retained by NYPA, and River Bend.                                                                  Entergy will perform the decommissioning of the plants at a price In the first quarter of 2004, Entergy Arkansas recorded a revision            equal to the lesser of a pre-specified level or the amount in the to its estimated decommissioning cost liability in accordance with a             decommissioning trusts. Entergy believes that the amounts new decommissioning cost study for ANO 1 and 2 as a result of                    available to it under either scenario are sufficient to cover the revised decommissioning costs and changes in assumptions                         future decommissioning costs without any additional contributions regarding the timing of when the decommissioning of the plants                   to the trusts.
will begin. The revised estimate resulted in a $107.7 million                       Entergy maintains decommissioning trust funds that are reduction in its decommissioning liability, along with a                         committed to meeting the costs of decommissioning the nuclear
 $19.5 million reduction in utility plant and an $88.2 million                    power plants. The fair values of the decommissioning trust funds reduction in the related regulatory asset.                                       and asset retirement obligation-related regulatory assets of Entergy In the third quarter of 2004, Entergy Gulf States recorded a                  as of December 31, 2004 are as follows (in millions):
revision to its estimated decommissioning cost liability in Regulatory accordance with a new decommissioning cost study for River Bend                                                  Decommissioning Trust             Asset that reflected an expected life extension for the plant. The revised             U. S. Utility                                $1,052.0           5380.1 estimate resulted in a $166.4 million reduction in decommissioning               Non-Utility Nuclear                          51,401.6           5 -
liability, along with a $31.3 million reduction in utility plant, a Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued I/
The Energy Policy Act of 1992 contains a provision that                    Depreciable Property Lives assesses domestic nuclear utilities with fees for the decontamination        During the years 1997 through 2004, Entergy subsidiaries, and decommissioning (D&D) of the DOE's past uranium                          Entergy Services, Entergy Arkansas, Entergy Gulf States, Entergy enrichment operations. Annual assessments in 2004 were                       Louisiana, Entergy Mississippi, Entergy New Orleans, and System 54.4 million for Entergy Arkansas, S1.1 million for Entergy Gulf             Energy Resources reflected changes in tax depreciation methods States, 51.6 million for Entergy Louisiana, and S1.8 million for             with respect to certain types of depreciable property (e.g. street System Energy. The Energy Policy Act calls for cessation of                  lighting, billing meters, and various generation plant equipment).
annual D&D assessments not later than October 24, 2007. At                  The cumulative effect of these changes results in additional December 31, 2004, two years of assessments were remaining.                  depreciation deductions generating a cash flow benefit of D&D fees are included in other current liabilities and other                 approximately 5152 million as of December 31, 2004. The related non-current liabilities and, as of December 31, 2004, recorded               IRS interest exposure if the deduction is ultimately disallowed is liabilities were S8.8 million for Entergy Arkansas, 51.9 million for         544 million at December 31, 2004. This benefit reverses over time Entergy Gulf States, 53.3 million for Entergy Louisiana, and                 and will also fluctuate with each year's addition to those types 53.3 million for System Energy. Regulatory assets in the financial           of assets. Due to the temporary nature of the tax benefit, the statements offset these liabilities, with the exception of Entergy           potential interest charge represents the total net earnings exposure Gulf States' 30% non-regulated portion. These assessments are                of Entergy.
recovered through rates in the same manner as fuel costs.                        For the years under audit, 1996-2001, the IRS challenged Entergy's classification of these assets and proposed adjustments to INCOME TAXES                                                                 the depreciation deductions taken. Entergy disagrees with the Entergy is currently under audit by the Internal Revenue Service             position of the IRS and has protested the disallowance of these (IRS) with respect to tax returns for tax periods subsequent to 1995         deductions to the Office of IRS Appeals. Entergy expects to and through 2001, and is subject to audit by the IRS and other               receive a Notice of Deficiency in 2005 for this item, and plans taxing authorities for subsequent tax periods. The amount and                to vigorously contest this matter. Entergy believes that the timing of any tax assessments resulting from these audits are                contingency provision established in its financial statements uncertain, and could have a material effect on Entergy's financial           sufficiently covers the risk associated with this item.
position and results of operations. Entergy believes that the contingency provisions established in its financial statements will           Mark to Market of Certain Power Contracts sufficiently cover the risk associated with tax matters. Certain             In 2001, Entergy Louisiana changed its method of accounting for material audit matters as to which management believes there is a            tax purposes related to its wholesale electric power contracts. The reasonable possibility of a future tax assessment are discussed below.       most significant of these is the contract to purchase power from the See Note 3 to the consolidated financial statements for additional           Vidalia hydroelectric project. The new tax accounting method discussion of income taxes.                                                  has provided a cumulative cash flow benefit of approximately
                                                                                 $790 million as of December 31, 2004. The related IRS interest Foreign Tax Credits                                                          exposure is $93 million at December 31, 2004. This benefit In July 1997, the UK government enacted the Windfall Tax, which               is expected to reverse in the years 2005 through 2031. The election was a one-time tax imposed on formerly government-owned                       did not reduce book income tax expense. The timing of companies in regulated industries. The Windfall Tax applied to                the reversal of this benefit depends on several variables, including companies that the government had previously privatized in the               the price of power. Due to the temporary nature of the tax telecommunication, airport operation, gas, water, electricity, and           benefit, the potential interest charge represents Entergy's net railway industries. London Electricity, the UK public limited                earnings exposure. Entergy Louisiana's 2001 tax return is currently company purchased and subsequently sold by Entergy, was subject              under examination by the IRS, though no adjustments have yet to the UK Windfall Tax. Entergy fudfilled its obligation with respect        been proposed with respect to the mark to market election. Entergy to the tax in 1997 and 1998. In subsequent tax years, Entergy                believes that the contingency provision established in its financial reported a foreign tax credit for the UK Windfall Tax that London             statements will sufficiently cover the risk associated with this issue.
Electricity paid. Entergy has claimed a net tax benefit of $152 mil-lion related to this foreign tax credit.                                      CASHPOINT BANKRUPTCY During 2004, the IRS proposed to disallow this foreign tax                In 2003, the domestic utility companies entered an agreement with credit. Entergy disagreed with the position of the IRS and                   CashPoint Network Services (CashPoint) under which CashPoint protested the disallowance of the credit to the Office of IRS                was to manage a network of payment agents through which Appeals. Entergy expects to receive a Notice of Deficiency in 2005            Entergy's utility customers could pay their bills. The payment agent for this item, and plans to vigorously contest this matter. The               system allows customers to pay their bills at various commercial amount at issue including tax and interest as of December 31, 2004           or governmental locations, rather than sending payments by is 5195 million. Entergy believes that the contingency provision              mail. Approximately one-third of Entergy's utility customers use established in its financial statements will sufficiently cover the risk     payment agents.
associated with this dispute.
76 -
I

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued On April 19, 2004, CashPoint failed to pay funds due to                   NUCLEAR FUEL LEASES the domestic utility companies that had been collected through               As of December 31, 2004, arrangements to lease nuclear fuel payment agents. The domestic utility companies then obtained a               existed in an aggregate amount up to 5150 million for Entergy temporary restraining order from the Civil District Court for the            Arkansas, $105 million for Entergy Gulf States, 580 million for Parish of Orleans, State of Louisiana, enjoining CashPoint from              Entergy Louisiana, and $110 million for System Energy. As of distributing funds belonging to Entergy, except by paying those              December 31, 2004, the unrecovered cost base of nuclear fuel funds to Entergy. On April 22, 2004, a petition for involuntary              leases amounted to approximately $93.9 million for Entergy Chapter 7 bankruptcy was filed against CashPoint by other                    Arkansas, $71.2 million for Entergy Gulf States, $31.7 million for creditors in the United States Bankruptcy Court for the Southern             Entergy Louisiana, and $65.6 million for System Energy. The lessors finance the acquisition and ownership of nuclear fuel District of New York. In response to these events, the domestic through loans made under revolving credit agreements, the issuance utility companies expanded an existing contract with another of commercial paper, and the issuance of intermediate-term notes.
company to manage all of their payment agents. The domestic The credit agreements for Entergy Arkansas, Entergy Gulf States, utility companies filed proofs of claim in the CashPoint Entergy Louisiana, and System Energy each have a termination bankruptcy proceeding in September 2004. Although Entergy date of October 30, 2006. The termination dates may be extended cannot precisely determine at this time the amount that CashPoint            from time to time with the consent of the lenders. The intermediate-owes to the domestic utility companies that may not be repaid, it            term notes issued pursuant to these fuel lease arrangements have has accrued an estimate of loss based on current information. If no          varying maturities through February 15, 2009. It is expected that cash is repaid to the domestic utility companies, an event Entergy           additional financing under the leases will be arranged as needed to does not believe is likely, the current estimate of maximum exposure         acquire additional fuel, to pay interest, and to pay maturing debt.
to loss is approximately $25 million.                                        However, if such additional financing cannot be arranged, the lessee in each case must repurchase sufficient nuclear fuel to allow EMPLOYMENT LITIGATION                                                        the lessor to meet its obligations in accordance with the fuel lease.
Entergy Corporation and certain subsidiaries are defendants in                  Lease payments are based on nuclear fuel use. The total numerous lawsuits filed by former employees asserting that they              nuclear fuel lease payments (principal and interest) as well as were wrongfully terminated and/or discriminated against on the               the separate interest component charged to operations by the basis of age, race, sex, and/or other protected characteristics.             domestic utility companies and System Energy were $146.6 Entergy Corporation and these subsidiaries are vigorously defend-            million (including interest of $12.8 million) in 2004, $142.0 million ing these suits and deny any liability to the plaintiffs. Nevertheless,      (including interest of $11.8 million) in 2003, and $137.8 no assurance can be given as to the outcome of these cases.                  million (including interest of $11.3 million) in 2002.
SALE AND LEASEBACK TRANSACTIONS NOTE 9. LEASES GENERAL In 1988 and 1989, System Energy and Entergy Louisiana, respectively, sold and leased back portions of their ownership As of December 31, 2004, Entergy had capital leases and non-interests in Grand Gulf and Waterford 3 for 26'A-year and 28-year cancelable operating leases for equipment, buildings, vehicles, and lease terms, respectively. Both companies have options to terminate fuel storage facilities (excluding nuclear fuel leases and the Grand the leases, to repurchase the sold interests, or to renew the leases at Gulf and Waterford 3 sale and leaseback transactions) with the end of their terms.
minimum lease payments as follows (in thousands):
Under System Energy's sale and leaseback arrangements, letters Capital of credit are required to be maintained to secure certain amounts Operating Year                                             Leases          Leases      payable for the benefit of the equity investors by System Energy 2005                                         S 99,246           S 9,660      under the leases. The current letters of credit are effective until 2006                                            85,769            5,724      May 2009.
2007                                            68,557            3,438         Entergy Louisiana did not exercise its option to repurchase the 2008                                            55,155            1,754      undivided interests in Waterford 3 in 1994. As a result, Entergy 2009                                            45,240              237      Louisiana was required to provide collateral for the equity portion Years thereafter                              210,474             2,606      of certain amounts payable by Entergy Louisiana under the leases.
Minimum lease payments                       5564,441          523,419       Such collateral was in the form of a new series of non-interest Less: Amount representing interest                    -           3,388      bearing first mortgage bonds in the aggregate principal amount of Present value of net                                                         $208.2 million issued by Entergy Louisiana in September 1994.
minimum lease payments                     5564,441          520,031          In July 1997, Entergy Louisiana caused the Waterford 3 lessors to issue $307.6 million aggregate principal amount of Waterford 3 Total rental expenses for all leases (excluding nuclear fuel leases       Secured Lease Obligation Bonds, 8.09% Series due 2017, to and the Grand Gulf and Waterford 3 sale and leaseback                        refinance the outstanding bonds originally issued to finance the transactions) amounted to $81.3 million in 2004, $84.3 million in            purchase of the undivided interests by the lessors. In May 2004, 2003, and $92.2 million in 2002.                                             System Energy caused the Grand Gulf lessors to refinance the outstanding bonds that they had issued to finance the purchase of 77-I-

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued
-J                                                                                                                                                           K their undivided interest in Grand Gulf. Both refinancings are at               COMPONENTS OF NET PENSION COST lower interest rates, and Entergy Louisiana's and System Energy's             Total 2004, 2003, and 2002 pension costs of Entergy Corporation lease payments have been reduced to reflect the lower interest costs.          and its subsidiaries, including amounts capitalized, included the As of December 31,2004, Entergy Louisiana and System Energy                 following components (in thousands):
had future minimum lease payments, recorded as long-term debt                                                          2004            2003         2002 (reflecting an overall implicit rate of 7.45% and 5.01%, respectively)         Service cost - benefits as follows (in thousands):                                                      earned during the period           S 76,946     S 70,337       S 56,947 Entergy           System        Interest cost on projected Year                                         Louisiana            Energy benefit obligation                  148,092        134,403      128,387 2005                                        S 14,554          S 45,423 Expected return on assets           (153,584)     (155,460)     (158,202) 2006                                           18,261            46,019 Amortization of transition asset         (763)           (763)        (763) 2007                                           18,754            46,552 Amortization of prior service cost      5,143          5,886         5,993 2008                                           22,606            47,128 Recognized net loss                   21,687          6,399         5,504 2009                                           32,452            47,760 Curtailment loss                           -         14,864             -
Years thereafter                              334,062          302,402 Special termination benefits               -         32,006 Minimum lease payments                      S440,689          $535,284 Less: Amount representing interest                                             Net pension costs                   S 97,521     S 107,672      S 37,866 192,964           138,165 Present value of net PENSION OBLIGATIONS,              PLAN ASSETS, FUNDED minimum lease payments                     5247,725         S397,119 STATUS, AMOUNTS NOT YET RECOGNIZED AND RECOGNIZED IN THE BALANCE SHEET AS OF NOTE 10. RETIREMENT, OTHER POSTRETIREMQENT DECEMBER 31, 2004 AND 2003 (IN                 THOUSANDS):
BENEFITS, AND DEFINED CONTRIBUTION PLANS PENSION PLANS                                                                                                                    2004               2003 Entergy has seven pension plans covering substantially all of                  Change in Projected Benefit its employees: "Entergy Corporation Retirement Plan for                         Obligation (PBO)
Non-Bargaining Employees," 'Entergy Corporation Retirement                      Balance at beginning of year               52,349,565        $1,992,207 Service cost                                  76,946            70,337 Plan for Bargaining Employees,""Entergy Corporation Retirement Interest cost                                 148,092           134,403 Plan II for Non-Bargaining Employees," "Entergy Corporation                     Amendments                                      3,709                227 Retirement Plan II for Bargaining Employees," 'Entergy                          Actuarial loss                                171,146           205,949 Corporation Retirement Plan III," "Entergy Corporation                          Benefits paid                                (117,234)          (97,574)
Retirement Plan IV for Non-Bargaining Employees," and "Entergy                  Employee contributions                          1,212              1,059 Curtailment loss                                     -           10,951 Corporation Retirement Plan IV for Bargaining Employees."
Special termination benefits                        -           32,006 Except for the Entergy Corporation Retirement Plan III, the Balance at end of year                     52,633,436        S2,349,565 pension plans are noncontributory and provide pension Change in Plan Assets benefits that are based on employees' credited service and Fair value of assets at compensation during the final years before retirement. The Entergy                beginning of year                       51,744,975         S1,451,802 Corporation Retirement Plan III includes a mandatory employee                   Actual return on plan assets                  170,964           355,043 contribution of 3% of earnings during the first 10 years of plan                 Employer contributions                        72,825            34,645 participation, and allows voluntary contributions from 1% to 10% of              Employee contributions                         1,212              1,059 earnings for a limited group of employees. Entergy Corporation and               Benefits paid                               (117,234)          (97,574) its subsidiaries fund pension costs in accordance with contribution              Fair value of assets at end of year                        $1,872,742         S1,744,975 guidelines established by the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code                Funded status                              S (760,694)        S (604,590) of 1986, as amended. The assets of the plans include common and                Amounts not yet recognized in the balance sheet preferred stocks, fixed-income securities, interest in a money                  Unrecognized transition asset                     (662)           (1,426) market fund, and insurance contracts. As of December 31,2004 and                Unrecognized prior service cost                29,053            30,467 2003, Entergy recognized an additional minimum pension liability                Unrecognized net loss                         542,391           410,321 for the excess of the accumulated benefit obligation over the fair            Accrued pension cost recognized market value of plan assets. In accordance with SFAS 87, an                     in the balance sheet                      S (189,912)        S (165,228) offsetting intangible asset, up to the amount of any unrecognized             Amounts recognized in prior service cost, was also recorded, with the remaining offset to             the balance sheet Accrued pension cost                      S (189,912)        S (165,228) the liability recorded as a regulatory asset reflective of the recovery         Additional minimum mechanism for pension costs in Entergy's jurisdictions or to other                pension liability                          (244,280)         (180,212) comprehensive income for Entergy's non-regulated business.                       Intangible asset                              26,167            30,832 Entergy's domestic utility companies' and System Energy's pension                Accumulated other costs are recovered from customers as a component of cost of                      comprehensive income                         10,781            15,359 Regulatory asset                             207,332           134,021 service in each of its jurisdictions. Entergy uses a December 31 Net amount recognized                      S (189,912)        S (165,228) measurement date for its pension plans.
Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued K
OTHER POSTRETIRENIENT BENEFITS                                              OTHER POSTRETIRENIENT BENEFIT OBLIGATIONS, Entergy also currently provides health care and life insurance bene-        PLAN ASSETS, FUNDED STATUS, AND AMiOUNTS                                  NOT fits for retired employees. Substantially all domestic employees may        YET RECOGNIZED AND RECOGNIZED                           IN   THE BALANCE become eligible for these benefits if they reach retirement age             SHEET AS OF IECEMBER 31, 2004 AND 2003 while still working for Entergy. Entergy uses a December 31                 (IN    THOUSANDS):
measurement date for its postretirement benefit plans.                                                                                   2004             2003 Effective January 1, 1993, Entergy adopted SFAS 106, which              Change in APBO required a change from a cash method to an accrual method                     Balance at beginning of year                         S 941,803      S 799,506 of accounting for postretirement benefits other than pensions.                Service cost                                             30,947          37,799 At January 1, 1993, the actuarially determined accumulated                    Interest cost                                            53,801          52,746 postretirement benefit obligation (APBO) earned by retirees and               Actuarial loss                                           73,890         115,966 Benefits paid                                           (66,456)        (48,379) active employees was estimated to be approximately S241.4 million Plan amendments"'                                       (60,231)        (84,722) for Entergy (other than Entergy Gulf States) and 8128 million for Plan participant contributions                            9,312            7,074 Entergy Gulf States. Such obligations are being amortized over a                                                                            -          56,369 Curtailment 20-year period that began in 1993. For the most part, the domestic            Special termination benefits                                  -            5,444 utilities and System Energy recover SFAS 106 costs from customers               Balance at end of year                             S 983,066      S 941,803 and are required to fund postretirement benefits collected in rates to      Change in Plan Assets an external trust.                                                            Fair value of assets at beginning of year                                  S 227,446 S 182,692 COMPONENTS            OF NET POSTRETIRENIENT                                  Actual return on plan assets                             15,550          22,794 BENEFIT COST                                                                  Employer contributions                                   63,399          63,265 Total 2004, 2003, and 2002 other postretirement benefit costs of              Plan participant contributions                            9,312            7,074 Entergy Corporation and its subsidiaries, including amounts                   Benefits paid                                           (66,455)        (48,379) capitalized and deferred, included the following components                     Fair value of assets (in thousands):                                                                  at end of year                                    S 249,252 S 227,446 Funded status                                          S(733,814) S (714,357) 2004        2003         2002 Amounts     not  yet recognized Service cost - benefits earned in the balance sheet during the period                 530,947     S 37,799     S 29,199 Unrecognized transition obligation                        5,594          44,815 Interest cost on APBO                53,801       52,746       44,819 Unrecognized prior service cost                         (39,560)        (20,746)
Expected return on assets           (18,825)     (15,810)     (14,066)
Unrecognized net loss                                  391,940         336,005 Amortization of Accrued other postretirement benefit transition obligation               9,429       15,193       17,874 cost recognized in the balance sheet                 S(375,840) S(354,283)
Amortization of prior service cost                 (5,222)        (925)         992        (a) Reflects plan design changes, including a change in the participation assumptionforthe majority of non-bargainingemployees effective August 1, Recognized net (gain)Iloss           15,546       12,369        1,874 2003 and certain bargainingemployees and additionalnon-bargaining Curtailment loss                           -      57,958                         employees effective January 1, 2004.
Special termination benefits               -       5,444 Net other postretirement                                                     PENSION AND OTHER POSTRETIRENIENT benefit cost                      585,676     $164,774     S 80,692        PLANS'      ASSETS Entergy's pension and postretirement plans weighted-average asset allocations by asset category at December 31, 2004 and 2003 are as follows:
Pension                Postretirement 2004       2003         2004        2003 Domestic Equity Securities                46%        56%           38%        37%
International Equity Securities           21%        14%           14%          0%
Fixed-Income Securities                   31%        28%           47%         60%
Other                                      2%         2%            1%          3%
                                                                                                                                                                                                                                       /6

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued
-I K
Entergy's trust asset investment strategy is to invest the assets in                                                              Estimated Future Benefits Payments a manner whereby long-term earnings on the assets (plus cash                       Years                                                 Pension          Postretirement contributions) provide adequate funding for retiree benefit                        2005                                               S115,203                 S 60,932 payments. The mix of assets is based on an optimization study that                 2006                                               5116,894                 S 59,761 identifies asset allocation targets in order to achieve the maximum                2007                                               5119,092                 5 62,392 return for an acceptable level of risk, while minimizing the                       2008                                               5122,728                 S 64,381 expected contributions and pension and postretirement expense.                     2009                                               5127,877                 S 66,444 In the optimization study, Entergy formulates assumptions (or                   2010 - 2014                                        S780,295                 5360,191 hires a consultant to provide such analysis) about characteristics, such as expected asset class investment returns, volatility (risk), and CONTRIBUTIONS correlation coefficients among the various asset classes. The future Entergy expects to contribute $185.9 million (excluding about market assumptions used in the optimization study are determined
                                                                                      $1.2 million in employee contributions) to its pension plans and by examining historical market characteristics of the various asset
                                                                                      $63.3 million to other postretirement plans in 2005.
classes, and making adjustments to reflect future conditions expected to prevail over the study period.
ADDITIONAL INFORMATION The optimization analysis utilized in Entergy's latest study produced the following approved asset class target allocations.                    The change in the minimum pension liability included in other comprehensive income and regulatory assets was as follows for 2004 Pension             Postretirement        and 2003 (in thousands):
Domestic Equity Securities                  45%                        37%                                                                         2004             2003 International Equity Securities             20%                        14%         Increase/(decrease) in the minimum Fixed-Income Securities                     31%                        49%           pension liability included in:
Other (Cash and GACs)                        4%                         0%            Other comprehensive income                                S(4,578)      S (1,639)
Regulatory assets                                         573,311       S(23,768)
These allocation percentages combined with each asset class' ACTUARIAL ASSUMPTIONS expected investment return produced an aggregate return expectation for the five years following the study of 7.6% for                     The assumed health care cost trend rate used in measuring the APBO of Entergy was 10% for 2005, gradually decreasing each pension assets, 5.40% for taxable postretirement assets, and 7.2%
successive year until it reaches 4.5% in 2011 and beyond. The for non-taxable postretirement assets. These returns are not assumed health care cost trend rate used in measuring the Net inconsistent with Entergy's disclosed expected pre-tax return on Other Postretirement Benefit Cost of Entergy was 10% for 2004, assets of 8.50% over the life of the respective liabilities.
gradually decreasing each successive year until it reaches 4.5% in Since precise allocation targets are inefficient to manage security             2010 and beyond. A one percentage point change in the assumed investments, the following ranges were established to produce an                   health care cost trend rate for 2004 would have the following effects acceptable economically efficient plan to manage to targets:                       (in thousands):
Pension             Postretirement                            1 Percentage Point Increase           1 Percentage Point Decrease Domestic Equity Securities           45% to 55%               32% to 42%                                                     Impact                               Impact International Equity Securities      15% to 25%                9% to 19%                                            on the sum of                         on the sum of Fixed-Income Securities             25% to 35%                44% to 54%                            Impact on    service costs and         Impact on service costs and 2004              the APBO          interest cost        the APBO        interest cost Other                                 0% to 10%                  096 to 5%
Entergy Corporation        599,271              511,587        5(89,801)           5(10,061)
AcCUMULATED PENSION BENEFIT OBLIGATION The accumulated benefit obligation for Entergy's pension plans was The significant actuarial assumptions used in determining the
   $2.3 billion and $2.1 billion at December 31, 2004 and 2003, pension PBO and the SFAS 106 APBO for 2004, 2003, and 2002 respectively.
were as follows:
ESTIMATED FUTURE BENEFIT PAYMENTS 2004             2003            2002 Based upon the assumptions used to measure the company's                           Weighted-average discount rate:
pension and postretirement benefit obligation at December 31,                         Pension                                    6.00%            6.25%           6.75%
2004, and including pension and postretirement benefits                               Other postretirement                       6.00%            6.71%           6.75%
attributable to estimated future employee service, Entergy expects                 Weighted-average rate of increase that benefits to be paid over the next ten years will be as follows                 in future compensation levels                3.25%            3.25%           3.25%
(in thousands):                                                                    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%
II IN I

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued
-I The significant actuarial assumptions used in determining the net            In 2004, Entergy continued to record an estimate of the effects periodic pension and other postretirement benefit costs for 2004,          of the Act in accounting for its postretirement benefit plans. In 2003, and 2002 were as follows:                                            mid-2004, the Financial Accounting Standards Board issued Staff Position No. FAS 106-2, Accounting and Disclosure Requirements 2004         2003         2002     Related to the Medicare Prescription Drug, Improvement and Weighted-average discount rate                                             Modernization Act of 2003, which was effective for Entergy's June Pension                              6.25%        6.75%        7.50%      30,2004 interim reporting.
Other postretirement                 6.71%        6.75%        7.50%         In August 2004, the Centers for Medicare and Medicaid Services Weighted-average rate of increase                                          issued proposed regulations to implement the new Medicare law.
in future compensation levels        3.25%        3.25%        4.60%      A ruling from the Centers for Medicare and Medicaid Services Expected long-term rate of                                                 was issued in late January 2005 with final guidance expected later return on plan assets:                                                    this year.
Taxable assets                       5.50%        5.50%        5.50%         The actuarially estimated effect of future Medicare subsidies Non-taxable assets                   8.75%        8.75%        9.00%      reduced the December 31, 2003 and 2004 Accumulated Postretirement Benefit Obligation by $128 million and $161 Entergy's remaining pension transition assets are being                 million, respectively, and reduced the 2004 other postretirement amortized over the greater of the remaining service period of active       benefit cost by $23.3 million.
participants or 15 years ending in 2005, and its SFAS 106 transition obligations are being amortized over 20 years ending in 2012.              DEFINED      CONTRIBUTION          PLANS Entergy sponsors the Savings Plan of Entergy Corporation and VOLUNTARY        SEVERANCE        PROGRAM                                  Subsidiaries (System Savings Plan). The System Savings Plan is a As part of an initiative to achieve productivity improvements with a       defined contribution plan covering eligible employees of Entergy goal of reducing costs, primarily in the Non-Utility Nuclear and           and its subsidiaries. Through January 31,2004, the System Savings U.S. Utility businesses, in the second half of 2003 Entergy offered a      Plan provided that the employing Entergy subsidiary:
voluntary severance program to employees in various departments.
* make matching contributions to the System Savings Plan in an Approximately 1,100 employees, including 650 employees in                     amount equal to 75% of the participants' basic contributions, up nuclear operations from the Non-Utility Nuclear and US. Utility               to 6% of their eligible earnings, in shares of Entergy businesses, accepted the offers. As a result of this program, in the          Corporation common stock if the employees direct their fourth quarter of 2003 Entergy recorded additional pension                    company-matching contribution to the purchase of Entergy and postretirement costs (including amounts capitalized) of                   Corporation's common stock; or S110.3 million for special termination benefits and plan curtailment
* make matching contributions in the amount of 50% of the charges. These amounts are included in the net pension cost and net           participants' basic contributions, up to 6% of their eligible postretirement benefit cost for the year ended December 31, 2003.             earnings, if the employees direct their company-matching contribution to other investment funds.
MEDICARE        PRESCRIPTION        DRUG, IMPROVEMENT AND MODERNIZATION              ACT OF 2003                                 Effective February 1,2004, the employing Entergy subsidiary began In December 2003, the President signed the Medicare Prescription           making matching contributions for non-bargaining employees to the System Savings Plan in an amount equal to 70% of the Drug, Improvement and Modernization Act of 2003 into law. The participants' basic contributions, up to 6% of their eligible Act introduces a prescription drug benefit cost under Medicare earnings. The 70% match is allocated to investments as directed (Part D), starting in 2006, as well as federal subsidy to employers by the employee.
who provide a retiree prescription drug benefit that is at least Entergy also sponsors the Savings Plan of Entergy Corporation actuarially equivalent to Medicare Part D.
and Subsidiaries II (established in 2001), the Savings Plan of At December 2003, specific authoritative guidance on the Entergy Corporation and Subsidiaries III (established in 2002), and accounting for the federal subsidy was pending. As allowed by the Savings Plan of Entergy Corporation and Subsidiaries V Financial Accounting Standards Board Staff Position No. FAS (established in 2002). The plans are defined contribution plans that 106-1, Entergy elected to record an estimate of the effects of the cover eligible employees, as defined by each plan, of Entergy and its Act in accounting for its postretirement benefit plans at December subsidiaries. The employing Entergy subsidiary makes matching 31, 2003, under SFAS 106 and in providing disclosures required by contributions equal to 50% of the participants' participating SFAS No. 132 (revised 2003), Employers' Disclosures about contributions for each of these plans. Effective September 30,2004, Pensions and Other Postretirement Benefits. At December 31, employees participating in the Savings Plan of Entergy 2003, based on actuarial analysis of prescription drug benefits, Corporation and Subsidiaries III (Savings Plan III) were estimated future Medicare subsidies were expected to reduce the transferred into the System Savings Plan and Savings Plan III December 31, 2003 Accumulated Postretirement Benefit Obligation by $56 million. For the year ended December 31, 2003, was terminated.
Entergy's subsidiaries' contributions to defined contribution the impact of the Act on net postretirement benefit cost was plans collectively were &#xa3;32.9 million in 2004, $31.5 million in 2003, immaterial, as it reflected only one month's impact of the Act.
and $29.6 million in 2002. The majority of the contributions were to the System Savings Plan.
81 -
1

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued
-I NOTE 11. BUSINESS SEGMENT INFORMATION                                                    customers the electric power produced by power plants that it owns Entergy's reportable segments as of December 31, 2004 are U.S.                           while it focuses on improving performance and exploring sales or Utility, Non-Utility Nuclear, and Energy Commodity Services.                             restructuring opportunities for its power plants. Such opportunities U.S. Utility generates, transmits, distributes, and sells electric power                 are evaluated consistent with Entergy's market-based point-of-in portions of Arkansas, Louisiana, Mississippi, and Texas, and                          view. Results from Entergy-Koch are reported as equity in earnings provides natural gas utility service in portions of Louisiana.                           of unconsolidated equity affiliates in the financial statements.
Non-Utility Nuclear owns and operates five nuclear power plants                          Entergy's operating segments are strategic business units managed and is primarily focused on selling electric power produced by those                     separately due to their different operating and regulatory plants to wholesale customers. Energy Commodity Services                                 environments. Entergy's chief operating decision maker is includes Entergy-Koch, LP and Entergy's non-nuclear wholesale                            its Office of the Chief Executive, which consists of its assets business. Entergy-Koch engaged in two major businesses:                           highest-ranking officers.
energy commodity marketing and trading through Entergy-Koch                                 "All Other" includes the parent company, Entergy Corporation, Trading, and gas transportation and storage through Gulf South                           and other business activity, including the Competitive Retail Pipeline. Entergy-Koch sold both of these businesses in the fourth                       Services business, which has higher revenues in 2004 as its number quarter of 2004, and Entergy-Koch is no longer an operating                              of customers has increased, and earnings on the proceeds of sales of entity. The non-nuclear wholesale assets business sells to wholesale                     previously-owned businesses.
Entergy's segment financial information is as follows (in thousands):
Energy Non-Utility           Commodity U.S. Utility                Nuclear'             Services'       All Other'     Eliminations        Consolidated 2004 Operating revenues                                  S 8,142,808              $1,341,852             S 216,450       S 486,804        S     (64,190)     S 10,123,724 Deprec., amort. & decomm.                                915,667                 106,408                16,311            6,736                            1,045,122 Interest income                                            40,831                 63,569                17,875           42,729            (55,195)          109,809 Equity in loss of unconsolidated equity affiliates                                                                     (78,727)                                              (78,727)
Interest charges                                         383,032                  53,657                15,560           81,916           (55,142)           479,023 Income taxes (credits)                                   406,864                 142,620              (155,840)        (27,736)                              365,908 Net income                                               666,691                 245,029                 3,778           17,606                (55)          933,049 Total assets                                         22,937,237               4,531,604              2,223,961         199,233         (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                 2,022           13,604                  (5)       1,410,610 2003 Operating revenues                                  S 7,584,857              51,274,983             S 184,888       S 188,228        S    (38,036)     S 9,194,920 Deprec., amort. & decomm.                                890,092                  87,825                13,681            5,005                              996,603 Interest income                                            43,035                 36,874                18,128           27,575           (38,226)            87,386 Equity in earnings (loss) of unconsolidated equity affiliates                               (3)                                   271,650                                               271,647 Interest charges                                         419,111                  34,460                15,193           75,787            (38,225)          506,326 Income taxes (credits)                                   341,044                  88,619               105,903         (45,492)                              490,074 Cumulative effect of accounting change                   (21,333)               154,512                 3,895                                               137,074 Net income (loss)                                        492,574                 300,799               180,454         (23,360)                              950,467 Total assets                                         22,402,314               4,171,777              2,076,921       1,495,903         (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                44,284           10,074                            1,568,943 2002 Operating revenues                                 S 6,773,509              51,200,238             S 294,670       S    40,729      S      (4,111)     S 8,305,035 Deprec., amort. & decomm.                               800,257                  88,733                21,465            5,143                              915,598 Interest income                                            23,231                 71,262                26,140           35,433            (37,741)          118,325 Equity in earnings (loss) of unconsolidated equity affiliates                               (2)                                   183,880                                               183,878 Interest charges                                         465,703                  47,291                61,632           35,579            (37,741)          572,464 Income taxes (credits)                                   313,752                 132,726              (141,288)         (11,252)                             293,938 Net income (loss)                                        606,963                 200,505              (145,830)         (38,566)                             623,072 Total assets                                         21,630,523               4,482,308              2,167,472       1,327,354         (2,103,291)        27,504,366 Investments in affiliates - at equity                         214                                      823,995                                               824,209 Cash paid for long-lived asset additions               1,131,734                 169,756               210,297           18,514                            1,530,301 Businesses marked with *are referredto as the 'competitive businesses,' 'with the exception of the parentcompany, Entergy Corporation,which is included in 111 Other' Eliminations ar" primarily intersegment activity. Substantiallyall ofEntergy's recordedassetfor goodwill is in its US. Utility segment.
_1

Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued 21 In the fourth quarter of 2004, Entergy recorded a charge of                  GEOGRAPHIC AREAS approximately 555 million ($36 million net-of-tax) as a result of an            For the years ended December 31, 2004 and 2003, Entergy derived impairment of the value of the Warren Power plant. Entergy                      less than 1% of its revenue from outside of the United States. For concluded that the value of the plant, which is owned in the                    the year ended December 31, 2002 Entergy derived 3% of its non-nuclear wholesale assets business, was impaired. Entergy                    revenue from outside of the United States.
reached this conclusion based on valuation studies prepared in                       As of December 31, 2004 and 2003, Entergy had almost no connection with the sale of preferred stock in a subsidiary in the              long-lived assets located outside of the United States.
non-nuclear wholesale assets business.
Energy Commodity Services' net loss for the year ended                       NOTE 12. EQUITY METHOD INVESTMENTS December 31, 2002 includes net charges of $428.5 million to                     As of December 31,2004, Entergy owns investments in the follow-operating expenses ($238.3 million net-of-tax). These charges                   ing companies that it accounts for under the equity method of reflect the effect of Entergy's decision to discontinue additional               accounting:
greenfield power plant development and the asset impairments resulting from the deteriorating economics of wholesale power                    Company                     Ownership            Description markets in the United States and the United Kingdom. The net                     Entergy-Koch, LP            50% partnership      Engaged in two major busi-charges consist of the following:                                                                            interest             nesses: energy commodity
* The power development business obtained contracts in October                                                                    marketing and trading through Entergy-Koch 1999 to acquire 36 turbines from General Electric. Entergy's Trading, and gas transporta-rights and obligations under the contracts for 22 of the turbines tion and storage through Gulf were sold to an independent special-purpose entity in May South Pipeline. Entergy-2001. $178.0 million of the charges, including an offsetting Koch sold both of these busi-benefit of $28.5 million ($18.5 million net-of-tax) related to the nesses in the fourth quarter of sale of four turbines to a third party, is a provision for the net 2004, and Entergy-Koch is no costs resulting from cancellation or sale of the turbines subject                                                              longer an operating entity to purchase commitments with the special-purpose entity.                      RS Cogen LLC                50% member           Co-generation project that
   * $204.4 million of the charges result from the write-off of                                                 interest             produces power and steam Entergy Power Development Corporation's equity investment in                                                                  on an industrial and the Damhead Creek project and the impairment of the values of                                                                  merchant basis in the Lake the Warren Power power plant, the Crete project, and the RS                                                                    Charles, Louisiana area.
Cogen project. This portion of the charges reflects Entergy's                Top Deer                     50% member           Wind-powered electric gener-estimate of the effects of reduced spark spreads in the United                                           interest             ation joint venture.
States and the United Kingdom. These estimates are based on various sources of information, including discounted cash flow                    Following is a reconciliation of Entergy's investments in equity projections and current market prices.                                        affiliates (in thousands):
   * $39.1 million of the charges relate to the restructuring of the                                                               2004            2003           2002 non-nuclear wholesale assets business, including impairments of              Beginning of year                       51,053,328 S 824,209            S 766,103 administrative fixed assets, estimated sublease losses, and                  Additional investments                      157,020          4,668         36,372 employee-related costs for approximately 135 affected                         Income (loss) from the investments          (78,727)       271,647        183,878 employees. These restructuring costs, which are included in the               Other income                                  6,232         45,583         21,462 "Provision for turbine commitments, asset impairments, and                    Distributions received                    (888,260)       (105,142)       (73,902) restructuring charges" in the accompanying consolidated                      Dispositions and other adjustments          (17,814)        12,363       (109,704) statement of income, were comprised of the following                         End of year                             S  231,779     51,053,328       S 824,209 (in millions):                        Paid in              Remaining Cash                  Accrual           The following is a summary of combined financial information Restructuring  through Non-Cash            as of       reported by Entergy's equity method investees (in thousands):
Costs Dec. 2004    Portion Dec. 31, 2004 Fixed asset impairments       522.5     5 -        522.5          5   -                                                  2004             2003               2002 Sublease losses                 10.7        5.6         -           5.1       Income Statement Items Severance and related costs      5.9        5.9         -                       Operating revenues                 S 270,177       S 585,404         S 551,853 Total                       $39.1     511.5      522.5          S5.1          Operating income                   5(111,535)      S 207,301         S 159,342 Net income                         S 739,858"'     S 172,595         S 68,095
   * $32.7 million of the charges result from the write-off of Balance Sheet Items capitalized project development costs for projects that will not               Current assets                     S 540,386       52,576,630 be completed.                                                                  Noncurrent assets                  S 418,038       51,675,334
* The net charges include a gain of $25.7 million ($15.9 million                   Current liabilities                S 180,009       51,757,663 net-of-tax) on the sale of projects under development in Spain                 Noncurrent liabilities             S 463,899       51,166,540 in August 2002 and the after-tax gain of $31.4 million realized               (1) Includes gains recorded by Entergy-Koch on the sales of its energy trading and on the sale of Damhead Creek in December 2002.                                    pipeline businesses.
Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued I/
RELATED-PARTY TRANSACTIONS AND GUARANTEES                                 ASSET DISPOSITIONS During 2004, 2003, and 2002, Entergy procured various services            Entergy-Koch Businesses from Entergy-Koch consisting primarily of pipeline transportation         In the fourth quarter of 2004, Entergy-Koch sold its energy trading services for natural gas and risk management services for electricity     and pipeline businesses to third parties. The sales came after a and natural gas. The total cost of such services in 2004, 2003, and       review of strategic alternatives for enhancing the value of Entergy-2002 was approximately $9.5 million, $15.9 million, and $11.2 mil-        Koch, LP. Entergy received $862 million of cash distributions in lion, respectively. In 2003, Entergy Louisiana and Entergy New            2004 from Entergy-Koch after the business sales, and Entergy Orleans entered purchase power agreements with RS Cogen, and              ultimately expects to receive total net cash distributions exceeding purchased a total of $26.0 million of capacity and energy from RS         $1 billion, comprised of the after-tax cash from the distributions of Cogen in 2003. In 2004, Entergy Louisiana and Entergy New                 the sales proceeds and the eventual liquidation of Entergy-Koch.
Entergy currently expects the net cash distributions that it will Orleans purchased a total of $43.6 million of capacity and energy receive will exceed its equity investment in Entergy-Koch, and from RS Cogen. Entergy's operating transactions with its other expects to record a $60 million net-of-tax gain when it receives the equity method investees were not material in 2004, 2003, or 2002.
remaining cash distributions, which it expects will occur in 2006.
In the purchase agreements for the energy trading and the pipeline business sales, Entergy-Koch has agreed to indemnify the Other respective purchasers for certain potential losses relating to any        In January 2004, Entergy sold its 50% interest in the Crete project, breaches of the sellers' representations, warranties, and obligations    which is a 320 MW power plant located in Illinois, and realized an under each of the purchase agreements. Entergy Corporation has            insignificant gain on the sale.
guaranteed up to 50% of Entergy-Koch's indemnification                       In the fourth quarter of 2004, Entergy sold undivided interests in obligations to the purchasers. Entergy does not expect any material       the Warren Power and the Harrison County plants at a price that claims under these indemnification obligations, but to the extent         approximated book value.
that any are asserted and paid, the gain that Entergy expects to             In the first quarter of 2002, Entergy sold its interests in projects record in 2006 may be reduced.                                            in Argentina, Chile, and Peru for net proceeds of $135.5 million.
During the fourth quarter of 2004, an Entergy subsidiary               After impairment provisions recorded for these Latin American purchased from a commercial bank holder $16.3 milion of RS                interests in 2001, the net loss realized on the sale in 2002 was Cogen subordinated indebtedness, due October 2017, bearing                insignificant.
interest at Libor + 4.50%. The debt was purchased at a discount              In August 2002, Entergy sold its interest in projects under of approximately $2.4 million that will be amortized over the             development in Spain for a realized gain on the sale of remaining life of the debt.                                               $25.7 million. In December 2002, Entergy sold its 800 MW Damhead Creek power plant in the UK resulting in an increase in NOTE 13. ACQUISITIONS AND DISPOSITIONS                                    net income of S31.4 million. The Damhead Creek buyer assumed ASSET AcQuISITIONS all market and regulatory risks associated with the facility.
Vermont Yankee NOTE 14. RISK MANAGEMENT AND FAIR VALUES In July 2002, Entergy's Non-Utility Nuclear business purchased the MARKET AND COMMODITY RISKS 510 MW Vermont Yankee nuclear power plant located in Vernon, In the normal course of business, Entergy is exposed to a number of Vermont, from Vermont Yankee Nuclear Power Corporation for market and commodity risks. Market risk is the potential loss that
   $180 million. Entergy received the plant, nuclear fuel, inventories, Entergy may incur as a result of changes in the market or fair and related real estate. The liability to decommission the plant, as     value of a particular instrument or commodity. All financial and well as related decommissioning trust funds of approximately              commodity-related instruments, including derivatives, are subject to
   $310 million, was also transferred to Entergy. The acquisition            market risk. Entergy is subject to a number of commodity and included a 10-year power purchase agreement (PPA) under which             market risks, including:
the former owners will buy the power produced by the plant, which is through the expiration of the current operating license for      Type of Risk                                   Primary Affected Segments the plant. The PPA includes an adjustment clause which provides           Power price risk                                 All reportable segments that the prices specified in the PPA will be adjusted downward            Fuel price risk                                  All reportable segments annually, beginning in December 2005, if power market prices drop         Foreign currency exchange rate risk              All reportable segments below the PPA prices.                                                     Equity price and interest The acquisition was accounted for using the purchase method.            rate risk - investments                US. Utility, Non-Utility Nuclear The results of operations of Vermont Yankee subsequent to the purchase date have been included in Entergy's consolidated results            Entergy manages these risks through both contractual of operations. The purchase price has been allocated to the assets        arrangements and derivatives. Contractual risk management tools acquired and liabilities assumed based on their estimated fair values     include long-term power and fuel purchase agreements, capacity contracts, and tolling agreements. Entergy also uses a variety of on the purchase date.
Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued commodity and financial derivatives, including natural gas and                     Fair Values electricity futures, forwards, swaps, and options; foreign currency                FinancialInstruments forwards; and interest rate swaps as a part of its overall risk                    The estimated fair value of Entergy's financial instruments is management strategy. Except for the energy trading activities                      determined using bid prices reported by dealer markets and by conducted through December 2004 by Entergy-Koch, Entergy                           nationally recognized investment banking firms. The estimated fair enters into derivatives only to manage natural risks inherent in its              value of derivative financial instruments is based on market quotes.
physical or financial assets or liabilities.                                       Considerable judgment is required in developing some of the Entergy's exposure to market risk is determined by a number of                 estimates of fair value. Therefore, estimates are not necessarily factors, including the size, term, composition, and diversification of             indicative of the amounts that Entergy could realize in a current positions held, as well as market volatility and liquidity. For                    market exchange. In addition, gains or losses realized on financial instruments such as options, the time period during which the                      instruments held by regulated businesses may be reflected in future option may be exercised and the relationship between the current                   rates and therefore do not necessarily accrue to the benefit or market price of the underlying instrument and the option's                         detriment of stockholders.
contractual strike or exercise price also affects the level of market                 Entergy considers the carrying amounts of most of its financial risk. A significant factor influencing the overall level of market risk            instruments classified as current assets and liabilities to be a to which Entergy is exposed is its use of hedging techniques to                    reasonable estimate of their fair value because of the short maturity mitigate such risk. Entergy manages market risk by actively                        of these instruments. Additional information regarding financial monitoring compliance with stated risk management policies as                      instruments and their fair values is included in Notes 5 and 6 to the well as monitoring the effectiveness of its hedging policies and                   consolidated financial statements.
strategies. Entergy's risk management policies limit the amount of total net exposure and rolling net exposure during the stated                      NOTE 15. DECOMMISSIONING TRUST FUNDS periods. These policies, including related risk limits, are regularly              Entergy holds debt and equity securities, classified as available-for-assessed to ensure their appropriateness given Entergy's objectives.               sale, in nuclear decommissioning trust accounts. The securities held at December 31, 2004 and 2003 are summarized as follows Hedging Derivatives                                                               (in millions):
Entergy classifies substantially all of the following types of                                                                                                 Total Total derivative instruments held by its consolidated businesses as                                                                          Unrealized         Unrealized 2004                               Fair Value           Gains              Losses cash flow hedges:
Equity                               S 995              $166                 $17 Business Segment       Debt Securities                        1,457                33                  6 Instrument Non-Utility Nuclear,         Total                             52,452             $199                 $23 Natural gas and electricity futures and forwards                       Energy Commodity Services, Competitive Retail Services        2003 Equity                               S 896              S 81                 $11 Foreign currency forwards                  U.S. Utility, Non-Utility Nuclear Debt Securities                        1,383                27                  3 Total                             52,279             S108                 $14 Cash flow hedges with net unrealized losses of approximately
 $99 million at December 31, 2004 are scheduled to mature during The fair value and gross unrealized losses of available-for-sale 2005. Net losses totaling approximately $13 million were realized                  equity and debt securities, summarized by investment type and during 2004 on the maturity of cash flow hedges. Unrealized gains                 length of time that the securities have been in a continuous loss or losses result from hedging power output at the Non-Utility                     position, are as follows at December 31, 2004 (in millions):
Nuclear power stations and foreign currency hedges related to Euro-denominated nuclear fuel acquisitions. The related gains or                                                      Equity Securities             Debt Securities losses from hedging power are included in revenues when realized.                                                                Gross                       Gross Unrealized                  Unrealized The realized gains or losses from foreign currency transactions are                                          Fair Value         Losses       Fair Value     Loss es included in the cost of capitalized fuel. The maximum length of                    Less than 12 months            S 29             S2             $334 time over which Entergy is currently hedging the variability in                   More than 12 months              115               15             37            1 future cash flows for forecasted transactions at December 31, 2004                   Total                        5144             517            $371           $6 is approximately four years. The ineffective portion of the change in the value of Entergy's cash flow hedges during 2004 was insignificant.
Entergy Corporation and Subsidiaries 2004 NOTES to CONSOLIDATED FINANCIAL STATEMENTS concluded
-J Entergy evaluates these unrealized gains and losses at the end of            NOTE 16. QUARTERLY FINANCIAL DATA each period to determine whether an other-than-temporary                        (UNAUDITED) impairment has occurred. This analysis considers the length of time             Operating results for the four quarters of 2004 and 2003 were that a security has been in a loss position, the current performance            (in thousands):
Net of that security, and whether decommissioning costs are recovered Operating           Operating        Income in rates. Due to the regulatory treatment of decommissioning                                                           Revenues             Income          (Loss) collections and trust fund earnings, Entergy Arkansas, Entergy                  2004 Gulf States, Entergy Louisiana, and System Energy record                           First Quarter                    $2,251,549           $378,834       $213,016 regulatory assets or liabilities for unrealized gains and losses on trust          Second Quarter                   $2,485,097           $494,312       $271,011 investments. For the unregulated portion of River Bend, Entergy                   Third Quarter                     $2,963,581           $571,472       $288,047 Gulf States has recorded an offsetting amount of unrealized gains                  Fourth Quarter                   $2,423,497           $208,946       $160,975 2003 or losses in other deferred credits. No significant impairments were First Quarter                    S2,037,723           $363,403       S400,923"'
recorded in 2004 and 2003 as a result of these evaluations.
Second Quarter                   $2,353,909           $461,576       $211,517 The fair value of debt securities, summarized by contractual Third Quarter                    S2,700,125           S619,005       $371,650 maturities, at December 31, 2004 is as follows (in millions):                      Fourth Quarter                   $2,103,163           S 40,571       S (33,623)
(a) Net income before the cumulative effect ofaccounting changesfor thefirst Fair Value          quarterof2003 was *258,001.
Less than 1 year                                                   $ 134 1 year - 5 years                                                       592 EARNINGS PER AVERAGE COMMON SHARE 5 years - 10 years                                                     425 10 years - 15 years                                                    158 2004                       2003 15 years - 20 years                                                      60                                         Basic        Diluted        Basic       Diluted 20 years +                                                               88     First Quarter                      $0.90         $0.88        $ 1.77r')    S 1.73(b)
Total                                                            $1,457        Second Quarter                    $1.16         $1.14        $ 0.91       S 0.89 Third Quarter                      $1.24          $1.22       S 1.60       S 1.57 During the year ended December 31, 2004, the proceeds from                    Fourth Quarter                    $0.71          $0.69       S(0.19)      5(0.18) the dispositions of securities amounted to $37 million with gross                (b) Basic and diluted earnings per average common share before the cumulative gains of $0.7 million and gross losses of $0.7 million, which were                   effect of accounting changesfor thefirst quarter of 2003 were *1.13 and reclassified out of other comprehensive income into earnings during                  *1.10, respectively.
the period.
                                                                                                                                                                                                                                                       /6

Entergy Corporation and Subsidiaries 2004 INVESTOR INFORMATION
,2I                                                                                                                                                    AN-The 2005 Annual Meeting of Shareholders will be held on Friday,            DIVIDEND PAYMENTS May 13, at The Peabody Hotel, Three Statehouse Plaza, Little               The entire amount of dividends paid during 2004 is taxable as Rock, Arkansas. The meeting will begin at 10 a.m. (CDT).                   ordinary income. The Board of Directors declares dividends quarterly and sets the record and payment dates. Subject to Board SHAREHOLDER NEWS                                                           discretion, those dates for 2005 are:
Entergy's quarterly earnings results, dividend action, and other news and information of investor interest may be obtained by calling             Declaration Date             Record Date                  Payment Date Entergy Shareholder Direct at 1-888-ENTERGY (368-3749).                    January28                    February11                       Marchi You may also use this service to receive a printed copy of the             April 12                         May 12                         June 1 quarterly earnings release by fax or mail. Updated quarterly               July 29                       August 12                   September 1 earnings results can be expected in late January, April, July, and          October 28                November 10                     December 1 October. Dividend information will be updated according to the declaration schedule.                                                       Quarterly dividend payments (in cents-per-share):
This and other information, including Entergy's Corporate Quarter            2005        2004          2003    2002         2001 Governance Guidelines, Board Committee Charters for the 1                    54          45            35      33         31%
Corporate Governance, Audit, and Personnel Committees, and 2                                 45            35      33         31%
Entergy's Code of Conduct is available on Entergy's home page on 3                                45            45      33         31%
the internet at wwvwventergycom.
4                                54            45      35           33 For copies of the above and copies of Entergy's 10-K and 10-Q reports filed with the Securities and Exchange Commission or for other investor information, call 1-800-292-9960 or write to:                DIVIDEND REINVESTMENT/STOCK PURCHASE Entergy Corporation                                            Entergy offers an automatic Dividend Reinvestment and Stock Investor Relations                                             Purchase Plan administered by Mellon Investor Services. The plan P.O. Box 61000                                                 is designed to provide Entergy shareholders and other investors New Orleans, LA 70161                                          with a convenient and economical method to purchase shares of the Securities analysts and representatives of financial institutions        company's common stock. The plan also accommodates payments may contact Michele Lopiccolo at 504-576-4879 or                            of up to $3,000 per month for the purchase of Entergy common mlopicc@entergy.com.                                                        shares. First-time investors may make an initial minimum purchase SHAREHOLDER ACCOUNT INFORMATION of $1,000. Contact Mellon by telephone or internet for information and an enrollment form.
Mellon Investor Services, LLC is Entergy's transfer agent, registrar, dividend disbursing agent, and dividend reinvestment and stock              DIRECT REGISTRATION SYSTEM purchase plan agent. Shareholders of record with questions about            Entergy has elected to participate in a Direct Registration System lost certificates, lost or missing dividend checks, or notifications of     that provides investors with an alternative method for holding change of address should contact.                                            shares. DRS will permit investors to move shares between the Mellon Investor Services                                       company's records and the broker dealer of their choice.
85 Challenger Road                                                This option, available to every shareholder who chooses to have Ridgefield Park, NJ 07660                                      shares registered in his or her name on the books of the company, Telephone: 1-800-333-4368                                      will be offered by broker dealers at the time an investor purchases Internet address: www.melloninvestor.com                       shares and requests that they be registered. An additional feature of DRS enables existing registered holders to deposit physical shares COMMON STOCK INFORMATION                                                     into a book account.
The company's common stock is listed on the New York, Chicago, and Pacific exchanges under the symbol 'ETR." The Entergy share              ENTERGY COMIMON STOCK PRICES price is reported daily in the financial press under 'Entergy" in most      The high and low trading prices for each quarterly period in 2004 listings of New York Stock Exchange securities. Entergy common               and 2003 were as follows (in dollars):
stock is a component of the following indices: S&P 500, S&P Utilities Index, and the NYSE Composite Index, among others.                                                      2004                 2003 In June 2004, Entergy's Chief Executive Officer certified to the          Quarter                         High       Low       High        Low New York Stock Exchange that he was not aware of any                         1                              60.20      56.01    49.55       42.26 violation of the NYSE corporate governance listing standards. Also,         2                               59.92      50.64    54.38       45.90 Entergy filed certifications regarding the quality of the company's         3                              61.98      54.43    54.99       47.75 public disclosure, required by Section 302 of the Sarbanes-Oxley             4                              68.67      60.08    57.24       51.06 Act of 2002, as exhibits to its Report on Form 10-K for the fiscal year ended December 31, 2004.                                                ENVIRONMENTAL INFORMATION At year-end 2004 there were 216,829,059 shares of Entergy                 Entergy's Sustainability Report and other information on Entergy's common stock outstanding. Shareholders of record totaled 51,572,            environmental policy is available on Entergy's home page and approximately 81,000 investors held Entergy stock in 'street            at www.entergy.com.
name" through a broker.
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Entergy Corporation and Subsidiaries 2004 DIRECTORS and OFFICERS
-I                                                                                                                                                 K DIRECTORS Maureen S. Bateman                                                         Bismark A. Steinhagen Partner, Holland & Knight, Boston, Massachusetts. An Entergy               Chairman of the Board of Steinhagen Oil Company, Inc.,
director since 2000. Age, 61                                               Beaumont, Texas. An Entergy director since 1993. Age, 70 W.Frank Blount                                                             Steven V.Wilkinson Chairman and Chief Executive Officer, JI Ventures, Inc.,                   Retired Audit Partner, Arthur Andersen LLP, Watersmeet, TTS Management Corp., Atlanta, Georgia. An Entergy                         Michigan. An Entergy director since 2003. Age, 63 director since 1987. Age, 66 Simon D.deBree                                                             OFFICERS Retired Director and Chief Executive Officer of DSM, The Netherlands. An Entergy director since 2001. Age, 67                   J. Wayne Leonard Chief Executive Officer. Joined Entergy in 1998 as President and Claiborne P.Deming                                                         Chief Operating Officer, appointed CEO on January 1, 1999.
President and Chief Executive Officer and Director of Murphy Oil           Former executive of Cinergy. Age, 54 Corporation, El Dorado, Arkansas. An Entergy director since 2002.
Age, 50                                                                    Leo P. Denault Executive Vice President and Chief Financial Officer. Joined Entergy Alexis Herman                                                              in 1999 as Vice President of corporate development. Former Vice Chair and Chief Executive Officer of New Ventures, Inc.,                   President of Cinergy. Age, 45 McLean, Virginia. An Entergy director since 2003. Age, 57 Richard J. Smith Donald C. Hintz                                                           Group President, Utility Operations. Joined Entergy in 2000.
Former President, Entergy Corporation, Punta Gorda, Florida.               Former President of Cinergy Resources, Inc. Age, 53 Joined the Entergy Board in 2004. Age, 61 Curtis L. HFbert J. Wayne Leonard                                                           Executive Vice President, External Affairs. Joined Entergy in 2001.
Entergy Chief Executive Officer. Joined Entergy in April 1998 as           Former Chairman of the Federal Energy Regulatory Commission.
President and Chief Operating Officer; appointed CEO and elected           Age, 42 to the Board of Directors on January 1, 1999. New Orleans, Louisiana. Age, 54                                                         Mark T. Savoff Executive Vice President, Operations. Joined Entergy in 2003.
Robert v.d. Luft                                                          Former President, General Electric Power Systems - GE Nuclear Entergy Chairman. Member of Entergy Board of Directors since               Energy. Age, 48 1992; elected Chairman of the Board on May 26, 1998. Also served as acting CEO from May 26 until December 31, 1998. Chadds Ford,              Robert D.Sloan Pennsylvania. Age, 69                                                      Executive Vice President, General Counsel and Secretary. Joined Entergy in 2003. Former Vice President and General Counsel at Kathleen A. Murphy                                                        GE Industrial Systems. Age, 57 Former Senior Vice President and Chief Financial Officer, Connell Limited Partnership, Stamford, Connecticut. An Entergy director            Gary J. Taylor since 2000. Age, 54                                                       Executive Vice President and Chief Nuclear Officer. Joined Entergy in 2000. Former Vice President of nuclear operations at South Paul W.Murrill                                                            Carolina Electric & Gas Company. Age, 51 Professional Engineer, Baton Rouge, Louisiana. An Entergy director since 1993. Age, 70                                                        Joseph T. Henderson Senior Vice President and General Tax Counsel. Joined Entergy in James R. Nichols                                                           1999. Former Associate General Tax Counsel for Shell Oil. Age, 47 Partner, Nichols & Pratt (family trustees), Attorney and Chartered Financial Analyst, Boston, Massachusetts. An Entergy director since       Nathan E. Langston 1986. Age, 66                                                             Senior Vice President and Chief Accounting Officer. Joined Entergy in 1971 and advanced through various accounting and finance William A. Percy, 11                                                      positions before being promoted to VP & CAO in 1998. Age, 56 Chairman and Chief Executive Officer of Greenville Compress Company, Greenville, Mississippi. An Entergy director since 2000.         William E. Madison Age, 65                                                                    Senior Vice President, Human Resources and Administration.
Joined Entergy in 2001. Former Senior Vice President for Dennis H.Reilley                                                          Avis Group Holdings, Inc. Age, 58 Chairman, President and Chief Executive Officer of PRAXAIR, Inc.,
II Danbury, Connecticut. An Entergy director since 1999. Age, 51              Steven C. McNeal Vice President and Treasurer. Joined Entergy in 1982 as a financial Wm. Clifford Smith                                                        analyst and was given increased responsibility in areas of finance, Chairman of the Board of T. Baker Smith & Son, Inc.,                      treasury, and risk management before being promoted to VP &
Houma, Louisiana. An Entergy director since 1983. Age, 69                  Treasurer in 1998. Age, 48 Entergy Corporation and Subsidiaries 2004 DIRECTORS aI        .
Maureen S. Bateman                 W. Frank Blount                   Simon D. deBree                Claiborne P. Deming Alexis Herman                    Donald C. Hintz                  J. Wayne Leonard                 Robert v.d. Luft Kathleen A. Murphy                  Paul W. Murrill                  James R. Nichols                William A. Percy, 11 W=-
i 11 I
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Dennis H. Reilley               Wm. Clifford Smith               Bismark A. Steinhagen             Steven V. Wilkinson With a wealth of experience and talent, our Board of Directors provides steady guidance for our company ensuring our corporate governance is strong and our strategic direction is clear.
The business and affairs of Entergy Corporation are managed under the direction of the Board of Directors, acting either as a body or through its committees.
In 2004, the Board met 11 times. The Board committees are as follows (number of meetings in 2004 indicated in parentheses): Audit (10), Corporate Governance (6), Executive (1), Finance (6), Nuclear (7), Personnel (7).
I                         h ENTERGY CORPORATION POST OFFICE BOX 61000 NEW ORLEANS, LA 70161 WWW.ENTERGY.COM Entergy I
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One)
X      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2004 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from                           to Commission              Registrant, State of Incorporation,                         IRS Employer File Number             Address of Principal Executive Offices and Telephone Number Identification No.
1-11299                 ENTERGY CORPORATION                                         72-1229752 (a Delaware corporation) 639 Loyola Avenue New Orleans, Louisiana 70113 Telephone (504) 576-4000 1-10764                 ENTERGY ARKANSAS, INC.                                      71-0005900 (an Arkansas corporation) 425 West Capitol Avenue Little Rock, Arkansas 72201 Telephone (501) 377-4000 1-27031                 ENTERGY GULF STATES, INC.                                   74-0662730 (a Texas corporation) 350 Pine Street Beaumont, Texas 77701 Telephone (409) 838-6631 1-8474                  ENTERGY LOUISIANA, INC.                                     72-0245590 (a Louisiana corporation) 4809 Jefferson Highway Jefferson, Louisiana 70121 Telephone (504) 840-2734 1-31508                 ENTERGY MISSISSIPPI, INC.                                   64-0205830 (a Mississippi corporation) 308 East Pearl Street Jackson, Mississippi 39201 Telephone (601) 368-5000 0-5807                   ENTERGY NEW ORLEANS, INC.                                  72-0273040 (a Louisiana corporation) 1600 Perdido Street, Building 505 New Orleans, Louisiana 70112 Telephone (504) 670-3674 1-9067                  SYSTEM ENERGY RESOURCES, INC.                              72-0752777 (an Arkansas corporation)
Echelon One 1340 Echelon Parkway Jackson, Mississippi 39213 Telephone (601) 368-5000

Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange Registrant                      Title of Class                                         on Which Registered Entergy Corporation             Common Stock, $0.01 Par Value - 213,145,161            New York Stock Exchange, Inc.
: 1.                 shares outstanding at February 28, 2005               Chicago Stock Exchange Inc.
Pacific Exchange Inc.
Entergy Arkansas, Inc.          Mortgage Bonds, 6.7% Series due April 2032             New York Stock Exchange, Inc.
Mortgage Bonds, 6.0% Series due November 2032          New York Stock Exchange, Inc.
Entergy Gulf States, Inc.       Preferred Stock, Cumulative, $100 Par Value:
                                  $4.40 Dividend Series                                 New York Stock Exchange,  Inc.
                                  $4.52 Dividend Series                                 New York Stock Exchange,  Inc.
                                  $5.08 Dividend Series                                 New York Stock Exchange,  Inc.
Adjustable Rate Series B (Depository Receipts)        New York Stock Exchange,  Inc.
Entergy Gulf States Capital I    8.75% Cumulative Quarterly Income Preferred            New York Stock Exchange, Inc.
Securities, Series A (guaranteed by Entergy Gulf States, Inc.)
Entergy Louisiana, Inc.         Mortgage Bonds, 7.6% Series due April 2032              New York Stock Exchange, Inc.
Entergy Mississippi, Inc.       Mortgage Bonds, 6.0% Series due November 2032           New York Stock Exchange, Inc.
Mortgage Bonds, 7.25% Series due December 2032         New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Registrant                                 Title of Class Entergy Arkansas, Inc.                     Preferred Stock, Cumulative, $100 Par Value Preferred Stock, Cumulative, $0.01 Par Value Entergy Gulf States, Inc.                  Preferred Stock, Cumulative, $100 Par Value Entergy Louisiana, Inc.                    Preferred Stock, Cumulative, $100 Par Value Preferred Stock, Cumulative, $25 Par Value Entergy Mississippi, Inc.                  Preferred Stock, Cumulative, $100 Par Value Entergy New Orleans, Inc.                  Preferred Stock, Cumulative, $100 Par Value

Indicate by check mark whether the registrants (1) have filed all reports tequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes 4 No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [4]
Indicate by check mark whether the registrant is an accelerated filer. (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
                                                               ,      .                1 Yes            No Entergy Corporation Entergy Arkansas, Inc.                                   4 Entergy Gulf States, Inc. -
Entergy Louisiana, Inc.                                  4 Entergy Mississippi, Inc.                                4 Entergy New Orleans, Inc.                                4 System Energy Resources, Inc.                            i The aggregate market value of Entergy Corporation Common Stock, $0.01 Par Value, held by non-affiliates as of the end of the second quarter of 2004, was $12.7 billion based on the reported last sale price of
$56.01 per share for such stock on the New York Stock Exchange on June 30, 2004. Entergy Corporation is the sole holder of the common stock of Entergy Arkansas, Inc., Entergy Gulf States, Inc., Entergy Louisiana, Inc.,
Entergy Mississippi, Inc., Entergy New Orleans, Inc., and System Energy Resources, Inc.
DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement of Entergy Corporation to be filed in connection with its Annual Meeting of Stockholders, to be held May 13, 2005, are incorporated by reference into Parts I and III hereof.

TABLE OF CONTENTS SEC Form 10-K                 Page Reference Number               Number Definitions                                                                                                        . i Entergy's Business                                                               ,   Part  I. Item   1.               1 Financial Information for U.S. Utility, Non-Utility Nuclear, and Energy                                            2 Commodity Services Strategy                                 -                                                                         3 Report of Management                                                                                                   4 Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis                                   Part II. Item 7.
Results of.Operations.                  .                                                                      5 Liquidity and Capital Resources                                                                               12 Significant Factors and Known Trends                                                                         22 Critical Accounting  Estimates                                                                              .33 Selected Financial Data - Five-Year Comparison                                   Part II. Item 6.                41 Report of Independent Registered Public Accounting Firm                                                          42 Consolidated Statements of Income For the Years Ended December 31, 2004,         Part II. Item  8.             43 2003, and 2002 Consolidated Statements of Cash Flows For the Years Ended December 31,           Part II. Item 8.                44 2004, 2003, and 2002                               1 Consolidated.Balance Sheets, December 31,     2004  and 2003                     Part II. Item 8.                :46 Consolidated Statements of Retained Earnings, Comprehensive      Income, and     Part  II. Item   8.            48 Paid in Capital for the Years Ended December 31, 2004, 2003, and 2002 Notes to Consolidated Financial Statements                                     . Part II. IItem 8.                49 U.S. Utility         '                                                              Part I. It,em1.               105 Customers                                                                                                       105 Electric Energy Sales                                                                                           105 Retail Rate Regulation                                                                                      *:  107 Property and Other Generation Resources                                                                         113 Fuel Supply                                                                                                     116 Federal Regulation                                                                                              119 Service Companies                                                                                              128 Earnings Ratios                                                                                                 128 Non-Utility Nuclear                                                               *.Part  I. It em  1.           129 Property                                                                                                       129 Energy and Capacity Sales                                                                                      129 Fuel Supply                                                                                                    130 Other Business Activities                                                                                      131 Energy Commodity Services                                                           Part  I. It em  1.            131 Non-Nuclear Wholesale Assets Business                                                                          132 Entergy-Koch, LP.                                                                                              132 Regulation of Entergy's Business                                                    Part I. It em l..             133 PUHCA                                                                                                          133 Federal Power Act                                                                              *    -133 State Regulation                                                                                                134 Regulation of the Nuclear Power Industry                                                                        135 Environmental Regulation                                                                                .:      137 Litigation                                                                                                         142 Research Spending                                                                                                  146 Employees                                                                                                          146

Entergy Arkansas, Inc.
Management's Financial Discussion and Analysis                          Part II. Item 7.
Results of Operations                                                                   147 Liquidity and Capital Resources                                                         147 Significant Factors and Known Trends                                                    150 Critical Accounting Estimates                                                           154 Report of Independent Registered Public Accounting Firm                                    164 Income Statements For the Years Ended December 31, 2004, 2003, and 2002 Part II. Item 8. 165 Statements of Cash Flows For the Years Ended December 31, 2004, 2003,   Part II. Item 8. 167 and 2002 Balance Sheets, December 31, 2004 and 2003                              Part II. Item 8. 168 Statements of Retained Earnings for the Years Ended December 31, 2004,  Part II. Item 8. 170 2003, and 2002 Selected Financial Data - Five-Year Comparison                          Part II. Item 6. 171 Entergy Gulf States, Inc.
Management's Financial Discussion and Analysis                          Part II. Item 7.
Results of Operations                                                                    172 Liquidity and Capital Resources                                                          176 Significant Factors and Known Trends                                                    179 Critical Accounting Estimates                                                            188 Report of Independent Registered Public Accounting Firm                                     193 Income Statements For the Years Ended December 31, 2004, 2003, and 2002 Part
                                                                            ,    I Item 8. 194 Statements of Cash Flows For the Years Ended December 31, 2004, 2003,   Part II. Item 8. 195 and 2002 Part II. Item 8.
Balance Sheets, December 31, 2004 and 2003
* 196 Statements of Retained Earnings and Comprehensive Income for the Years  Part H. Item 8. 198 Ended December 31, 2004, 2003, and 2002 Selected Financial Data - Five-Year Comparison                          Part II. Item 6. 199 Entergy Louisiana, Inc.
Management's Financial Discussion and Analysis                          Part II. Item 7.
Results of Operations                                                                   200 Liquidity and Capital Resources                                                         203 Significant Factors and Known Trends
* 207 Critical Accounting Estimates                                                           213 Report of Independent Registered Public Accounting Firm                                    218 Income Statements For the Years Ended December 31, 2004, 2003, and 2002 Part II. Item 8. 219 Statements of Cash Flows For the Years Ended December 31, 2004, 2003,   Partil. Item 8. 221 and 2002 Balance Sheets, December 31, 2004 and 2003                              Part II. Item 8. 222 Statements of Retained Earnings for the Years Ended December 31, 2004,  Part II. Item 8. 224 2003, and 2002 Selected Financial Data - Five-Year Comparison                          Part II. Item 6. 225 Entergy Mississippi, Inc.'
Management's Financial Discussion and Analysis                          Part II. Item 7.
Results of Operations                                                                   226 Liquidity and Capital Resources                                                         228 Significant Factors and Known Trends                                                   .231 Critical Accounting Estimates                                                           236 Report of Independent Registered Public Accounting Firm                                    239 Income Statements For the Years Ended December 31, 2004, 2003, and 2002 Part II. Item 8. 240 Statements of Cash Flows For the Years Ended December 31, 2004, 2003,   Part II. Item 8. 241 and 2002 Balance Sheets, December 31, 2004 and 2003                              Part II. Item 8. 242 Statements of Retained Earnings for the Years Ended December 31, 2004,  Part II. Item 8. 244 2003, and 2002 Selected Financial Data - Five-Year Comparison                          Part II. Item 6. 245

Entergy New Orleans, Inc.
Management's Financial Discussion and Analysis                             Part II. Item 7.
Results of Operations                                                                        246 Liquidity and Capital Resources Significant Factors and Known Trends         .                                                251 Critical Accounting Estimates ,           ,    ,.                                            257 Report of Independent Registered Public Accounting Firm                                          260 Statements of Operations For the Years Ended December 31, 2004, 2003, and Part II. Item 8.      261 2002                                 ,
Statements of Cash Flows For the Years Ended December 31, 2004, 2003,     Part H.Item,        -,263
     ,and 2002 Balance Sheets, December 31, 2004 and 2003                                Part JI, Item 8.
* 264, 4 Statements of Retained Earnings for the Years Ended December 31, 2004,    Part II. Item 8;      266i..
2003, and 2002                                                                                      26.
7 Selected Financial Data - Five-Year Comparison                            Part II. Item 6.      267 System Energy Resources, Inc.
Management's Financial Discussion and Analysis                            Part II. Item 7.
Results of Operations                                                                        268 Liquidity and Capital Resources                                                              268 Significant Factors and Known Trends                                                         271 Critical Accounting Estimates                                                                272 Report of Independent Registered Public Accounting Firm                                         276 Income Statements For the Years Ended December 31, 2004, 2003, and 2002    Part II. Item 8. 277 Statements of Cash Flows For the Years Ended December 31, 2004, 2003,      Part II. Item 8. 279 and 2002 Balance Sheets, December 31, 2004 and 2003                                 Part II. Item 8. 280 Statements of Retained Earnings for the Years Ended December 31, 2004,     Part II. Item 8. 282 2003, and 2002 Selected Financial Data - Five-Year Comparison                             Part II. Item 6. 283 Notes to Respective Financial Statements for the Domestic Utility Companies    Part II. Item 8. 284 and System Energy Properties                                                                     Part I. Item 2.      349 Legal Proceedings                                                              Part I. Item 3.      349 Submission of Matters to a Vote of Security Holders                            Part I. Item 4.       349 Directors and Executive Officers of Entergy Corporation                       Part III. Item 10. 349 Market for Registrants' Common Equity and Related Stockholder Matters          Part II. Item 5.      351 Selected Financial Data                                                        Part II. Item 6.      352 Management's Discussion and Analysis of Financial Condition and Results of     Part II. Item 7.      352 Operations Quantitative and Qualitative Disclosures About Market Risk                    Part II. Item 7A.      352 Financial Statements and Supplementary Data                                    Part II. Item 8.      353 Changes in and Disagreements with Accountants on Accounting and Financial      Part II. Item 9.      353 Disclosure Controls and Procedures                                                       Part II. Item 9A.      353 Attestation Report of Registered Public Accounting Firm                       Part II. Item 9A.      354 Other Information                                                             Part II. Item 9B.      368 Directors and Executive Officers of the Registrants                           Part III. Item 10. 369 Executive Compensation                                                        Part III. Item 11. 373 Security Ownership of Certain Beneficial Owners and Management                Part III. Item 12. 383 Certain Relationships and Related Transactions                                Part III. Item 13. 386 Principal Accountant Fees and Services                                        Part IV. Item 14       387 Exhibits, Financial Statement Schedules, and Reports on Form 8-K              Part IV. Item 15.      390 Signatures                                                                                           391 Consent of Independent Registered Public Accounting Firm                                             398 Report of Independent Registered Public Accounting Firm                                              400 Index to Financial Statement Schedules                                                                S-1 Exhibit Index                                                                                        E-1

This combined Form 10-K is separately filed by Entergy Corporation, Entergy Arkansas, Inc.,
Entergy Gulf States, Inc., Entergy Louisiana, Inc., Entergy Mississippi, Inc., Entergy New Orleans, Inc., and System Energy Resources, Inc. Information contained herein relating to any Individual company is filed by such company on Its own behalf. Each company makes representations only as to itself and makes no other representations whatsoever as to any other company.
The report should be read in its entirety as it pertains to each respective registrant. No one section of the report deals with all aspects of the subject matter. Separate Item 6, 7, and 8 sections are provided for each registrant, except for the Notes to the financial statements. The Entergy Corporation Notes to the financial statements are separately presented, but the Notes to the financial statements for the other registrants are combined. These two sets of Notes are marked by headers. All other Items are combined for the registrants.
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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 performance. Such statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although Entergy believes that these forward-looking statements and the underlying assumptions are reasonable, it cannot provide assurance that they will prove correct. Except to the extent required by the federal securities laws, Entergy undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Forward-looking statements involve a number of risks and uncertainties, and there are factors that could cause actual results to differ materially from those expressed or implied in the statements. Some of those factors (in addition to others described elsewhere in this report and in subsequent securities filings) include:
* resolution of pending and future rate cases and negotiations, including various performance-based rate discussions, and other regulatory proceedings, including those related to Entergy's System Agreement and Entergy's utility supply plan                       i
* Entergy's ability to manage its operation and maintenance costs, particularly at its Non-Utility Nuclear generating facilities
* the performance of Entergy's generating plants, and particularly the capacity factors at its nuclear generating facilities
* prices for power generated by Entergy's unregulated generating facilities, the ability to extend or replace the existing purchased power agreements for those facilities, including the Non-Utility Nuclear plants, and the prices and availability of power Entergy must purchase for its utility customers
* Entergy's ability to develop and execute on a point of view regarding prices of electricity, natural gas, and other energy-related commodities
* changes in the financial markets, particularly those affecting the availability of capital and Entergy's ability to refinance existing debt, execute its share repurchase program, and fund investments and acquisitions
* actions of rating agencies, including changes in the ratings of debt and preferred stock, and changes in the rating agencies' ratings criteria
* changes in inflation and interest rates
* Entergy's ability to purchase and sell assets at attractive prices and on other attractive terms
* volatility and changes in markets for electricity, natural gas, uranium, and other energy-related commodities
* changes in utility regulation, including the beginning or end of retail and wholesale competition, the ability to recover net utility assets and other potential stranded costs, the establishment of a regional transmission organization that includes Entergy's utility service territory, and the application of market power criteria by the FERC
* changes in regulation of nuclear generating facilities and nuclear materials and fuel, including possible shutdown of Indian Point or other nuclear generating facilities -
* uncertainty regarding the establishment of interim or permanent sites for spent nuclear fuel storage and disposal
* resolution of pending or future applications for license extensions or modifications of nuclear generating facilities
* changes in law resulting from proposed energy legislation
* changes in environmental, tax, and other laws, including requirements for reduced emissions of sulfur, nitrogen, carbon, mercury, and other substances
* the economic climate, and particularly growth in Entergy's service territory
* variations in weather and the occurrence of hurricanes and other storms and disasters
* advances in technology
* the potential effects of threatened or actual terrorism and war
* the effects of Entergy's strategies to reduce current tax payments
* the effects of litigation and government investigations
* changes in accounting standards, corporate governance, and securities law requirements
* Entergy's ability to attract and retain talented management and directors

DEFINITIONS.,                      .
Certain abbreviations or acronyms used in the text1lnd n6tes are defined below:
                                                                      , Term, Abbreviation or Acronym                                            -? . Term       "
AFUDC                            Allowance for Funds Used During Construction ALJ                              Administrative Law Judge A'NO 1 and2                      Units '1' and' 2 of Arkansas"'Nuclear One Steam' Electric Generating Station i                (nuclear), owned by Entergy'Aikansas APSC                             Arkansas Public Service Comm ission'                          -
Board.                 -         Board of Directors of Entergy Corporation.
Cajun                  .         Cajun Electric-Power Cooperative, Inc.;-I capacity factor                  Actual plant output divided by maximum potential plant output for the period City Council or Council          Council of the City of New Orleans, Louisiana!
CPI-U                            Consumer Price Index - Urban DOE                              United States Department of Energy domestic utility companies       Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans, collectively EITF                             FASB's Emerging Issues Task Force.
Energy Commodity Services,       Entergy's business segment that includes Entergy-Koch, LP and Entergy's non-nuclear wholesale assets business Entergy                          Entergy Corporation and its direct and indirect subsidiaries Entergy Corporation      .       Entergy Corporation, a Delaware corporation Entergy-Koch                     Entergy-Koch, LP, a joint. venture equally owned by subsidiaries of Entergy and Koch Industries, Inc.
EPA                              United States Environmental Protection Agency EPDC                             Entergy Power Development Corporation, a wholly-owned subsidiary of Entergy Corporation FASB                             Financial Accounting Standards Board FEMA i                           Federal Emnergency Management Agency FERC                             Federal En'erg' Regulator'y'Commission firm liquidated damrages         Transactioni that requires receipt or delivery of energy at a specified delivery point (usually at a market hib not associated with a specific asset); if a party fails to deliver or receive energy, the defaulting party must compensate the other party as specified in tlhe contract                    -      !
FSP                              FASB Staff Position Grand Gulf                       Unit No. I of Grand Gulf Steam Electric Generating Station (nuclear), 90% owned or leased by System Energy GWh                        '     Gigawatt-hour(s); which equals one million kilowatt-hours Independence                     Independence Steam Electric Station (coal), owned 16% by Entergy Arkansas, 25%
by Entergy Mississippi; and 7% by Entergy Power                   -
IRS               .      -       Intemal Revenue Service ISO                              Independent System Operator kV                               Kilovolt ;                   .         .           .            .   ,
kW                               Kilowatt, kWh                              Kilowatt-hour(s)
(I Ior .ji.                                             I.-,
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DEFINITIONS (Continued)
Abbreviation or Acronym                                  Term LDEQ                    Louisiana Department of Environmental Quality LPSC                    Louisiana Public Service Commission Mcf                     1,000 cubic feet of gas MMBtu                   One million British Thermal Units MPSC                    Mississippi Public Service Commission MW                      Megawatt(s), which equals one thousand kilowatt(s)
MWh                     Megawatt-hour(s)
Nelson Unit 6           Unit No. 6 (coal) of the Nelson Steam Electric Generating Station, owned 70% by Entergy Gulf States Net debt ratio          Gross debt less cash and cash equivalents divided by total capitalization less cash and cash equivalents Net MW in operation     Installed capacity owned or operated Net revenue             Operating revenue net of fuel, fuel-related, and purchased power expenses; and other regulatory credits Non-Utility Nuclear     Entergy's business segment that owns and operates five nuclear power plants and sells electric power produced by those plants to wholesale customers NRC                     Nuclear Regulatory Commission NYPA                    New York Power Authority PPA                     Purchased power agreement production cost         Cost in $IMMBtu associated with delivering gas, excluding the cost of the gas PRP                     Potentially responsible party (a person or entity that may be responsible' for remediation of environmental contamination)
PUCT                    Public Utility Commission of Texas PUHCA                   Public Utility Holding Company Act of 1935, as amended PURPA                   Public Utility Regulatory Policies Act of 1978 Ritchie Unit 2          Unit 2 of the R.E. Ritchie Steam Electric Generating Station (gas/oil)
River Bend              River Bend Steam Electric Generating Station (nuclear), owned by Entergy Gulf States SEC                     Securities and Exchange Commission SFAS                    Statement of Financial Accounting Standards as promulgated by the FASB SMEPA                   South Mississippi Electric Power Agency, which owns a 10% interest in Grand Gulf spark spread            Dollar difference between electricity prices per unit and natural gas prices after assuming a conversion ratio for the number of natural gas units necessary to generate one unit of electricity System Agreement        Agreement, effective January 1, 1983, as modified, among the domestic utility companies relating to the sharing of generating capacity and other power resources System Energy           System Energy Resources, Inc.
System Fuels            System Fuels, Inc.
ii

DEFINITIONS (Concluded)
Abbreviation or Acronym                                     Term TWh                        Terawatt-hour(s), which. equals one billion kilowatt-hours                       '
unit-contingent            Transaction under which, power is supplied from a specific generation asset; if the specified generation asset is unavailable as a result of forced outage 'or unanticipated event or circumstance, the: seller is not liable to the buyer for any damages resulting from the selldes failure to deliver power                              :
unit-contingent with       Transaction under which power is supplied from a specific generation asset; if the availability guarantees   specified generation asset is unavailable as a result of forced outage 'or unanticipated event or circumstance, the seller is not liable to the buyer for any damages resulting from the seller's failure to deliver power unless the actual availability, over a specified period of time is below an availability threshold specified in the contract Unit Power Sales Agreement Agreement, dated as of June 10, 1982, as amended and approved by FERC, among Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy, relating to. the, sale of capacity and energy from System Energy's share of Grand Gulf UK                         The United Kingdom of Great Britain and Northern Ireland U.S. Utility               Entergy's business segment that generates,, transmits, distributes, and sells electric power, with a small amount of natural gas distribution Waterford 3                Unit No. 3 (nuclear) of the Waterford Steam Electric Generating Station, 100%
owned or leased by Entergy Louisiana weather-adjusted usage     Electric usage excluding the effects of deviations from normal weather White Bluff                White Bluff Steam Electric Generating Station, 57% owned by Entergy Arkansas
                                                                                                              ;i -J II i,     . .                                                                              AfI I    " I
                                                                                                   '. _ I1:
Hii

ENTERGY'S BUSINESS Entergy Corporation is an integrated energy company engaged primarily in electric power production and retail electric distribution operations. Entergy owns and operates power plants with approximately 30,000 MW of electric generating capacity, and it is the second-largest nuclear power generator in the United States. Entergy delivers electricity to 2.7 million utility customers in Arkansas, Louisiana, Mississippi, and Texas. Entergy generated annual revenues of over $10 billion in 2004 and had approximately 14,400 employees as of December 31, 2004.
Entergy operates primarily through three business segments: U.S. Utility, Non-Utility Nuclear, and Energy Commodity Services.
* U.S. Utility generates, transmits, distributes, and sells electric power in a four-state service territory that includes portions of Arkansas, Mississippi, Texas, and Louisiana, including the City of New Orleans; and operates a small natural gas distribution business.
* Non-Utility Nuclear owns and operates five nuclear power plants located in the northeastern United States and sells the electric power produced by those plants to wholesale customers. This business also provides services to other nuclear power plant owners.
* Energy Commodity Services includes Entergy-Koch and Entergy's non-nuclear wholesale assets business.
Entergy-Koch engaged in two major businesses: energy commodity marketing and trading through Entergy-Koch Trading, and gas transportation 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.
The non-nuclear wholesale assets business sells to wholesale customers the electric power produced by power plants that it owns while it focuses on improving performance and exploring sales or restructuring opportunities for its power plants. Such opportunities are evaluated consistent with Entergy's market-based point-of-view. The non-nuclear wholesale assets business terminated new greenfield power development activity in 2002.
I

OPERATING INFORMATION For the Years Ended December 31, 2004, 2003, and 2002 Energy Non-Utility             Commodity           Entergy U.S. Utility             Nuclear                 Services        Consolidated (a)
(In Thousands) 2004 Operating revenues                                                         $8,142,808              $1,341,852                 $216,450       $10,123,724 Operating expenses                                                         $6,795,146                 $978,688                $308,226         $8,470,160 Other income                                                                  $108,925                  $78,141               ($44,727)          $124,416 Interest and other charges                                                   $383,032                   $53,657                $15,560           $479,023 Income taxes                                                                 $406,864                 $142,620              ($155,840)           $365,908 Net income                                                                    $666,691                $245,029                  $3,778           $933,049 2003 Operating revenues                                                         $7,584,857              $1,274,983                 $184,888         $9,194,920 Operating expenses                                                         $6,274,830              $1,039,614                 $224,567         $7,710,365 Other income                                                                  ($35,965)                 $33,997               S337,334           $325,238 Interest and other charges                                                   $419,111.                  $34,460                $15,193           $506,326 Income taxes                                                                  $341,044                  $88,619               $105,903           $490,074 Cumulative effect of accounting change                                        ($21,333)               $154,512                   $3,895          $137,074 Net income                                                                    S492,574                $300,799               $180,454            $950,467 2002 Operating revenues                                                         $6,773,509               $1,200,238                $294,670         $8,305,035 Operating expenses                                                         $5,434,694                 $868,288                $769,834         $7,163,314 Other income                                                                   $47,603                  $48,572               $249,678           $347,753 Interest and other charges                                                    S465,703                ' $47,291                $61,632.          $572,464 Income taxes                                                                  $313,752                $132,726              ($141,288)           $293,938 Net income (loss)                                                             $606,963                $200,505              ($145,830)           $623,072 CASH FLOW INFORMATION For the Years Ended December 31, 2004, 2003, and 2002 Energy
* Non-Utility             Commodity           Entergy U.S. Utility         _ Nuclear                   Services        Consolidated (a)
II          (in Thousands) 2004 Net cash flow provided by operating activities                              $2,207,876                S414,518                $479,91! 9       $2,929,319 Net cash flow provided by (used in) investing activities                  ($1,198,009)               ($386,023)               $248,61, 2      ($1,140,075)
Net cash flow used in financing activities                                   ($824,579)                ($37,894)             ($724,53' 4)     ($1,671,859) 2003 Net cash flow provided by (used in) operating activities                    $1,675,069                $182,524              ($111,291)         $2,005,820 Net cash flow used in investing activities                                ($l,441,992)               ($184,913)               ($78,120)       ($1,783,130)
Net cash flow provided by (used in) financing activities                     ($919,983)                  ($6,672)             $166,165          ($869,130) 2002 Net cash flow provided by (used in) operating activities                    S2,341,161                $281,589                  ($3,714)       $2,181,703 Net cash flow used in investing activities                                (S1,020,087)               (S438,664)                   ($760)      ($1,388,463)
Net cash flow provided by (used in) financing activities                     ($688,201)               $176,162                ($66,151)         ($212,610)
FINANCIAL POSITION INFORMATION As of December 31, 2004 and 2003 Energy Non-Utility             Commodity            Entergy U.S. Utility              Nuclear                 Services       Consolidated (a)
(In Thousands) 2004 Current assets                                                              $2,323,801                $590,580             $1,282,578          $3,108,118 Other property and investments                                              $1,200,246              $1,403,222                $569,975         $2,995,894 Property, plant and equipment - net                                       $16,502,155               $1,850,481                $310,793       $18,695,631 Deferred debits and other assets                                            $2,911,035                $687,321                  $60,632        $3,511,134 Current liabilities                                                        $1,756,011                 $787,668               $205,348         $2,470,770 Non-current liabilities                                                   $15,214,095               $1,694,090                $279,730        $17,543,320 Shareholders' equity                                                       $5,967,131              $2,049,847             $1,738,900          $8,296,687 2003 Current assets                                                             $2,117,260                $542,837                $466,132         $2,919,244 Other property and investments                                             $1,151,538              $1,326,347             $1,137,069          $3,746,926 Property, plant and equipment - net                                      $16,242,775               $1,557,025                $463,403       $18,298,797 Deferred debits and other assets                                           $2,890,741                $745,568                 $10,317         $3,562,421 Current liabilities                                                        $1,671,607                $330,684                $478,693         $2,282,223 Non-current liabilities                                                  $15,309,482               $1,891,805                 $41,450        S17,568,329 Shareholders! equity                                                       $5,448,047              S1,949,288             $1,614,620          $8,703,658 (a) In addition to the 3 operating segments presented here, Entergy Consolidated also includes Entergy Corporation (parent company),
other business activity, and intercompany eliminations.
2

The following shows the principal subsidiaries and affiliates within Entergy's business segments.
Companies that file reports and other information with the SEC under the Securities Exchange Act of 1934 are identified in bold-faced type.
l Entergy Corporation U. S.Utility                      Non-Utilit Nuclear               l           Ener   Commodi     Services Entergy Arkansas, Inc.            Entergy Nuclear Operations, Inc.           Entergy-Koch, LP       Non-Nuclear Wholesale Assets Entergy Gulf States, Inc.         Entergy Nuclear Finance, Inc.              (50% ownership)
Entergy Louisiana, Inc.           Entergy Nuclear Generation Co. (Pilgrim)                       .Entergy Power Development Corp.
Entergy Mississippi, Inc.         Entergy Nuclear FitzPatrick LLC                                 -Entergy Asset Management, Inc.
Entergy New Orleans, Inc.         Entergy Nuclear Indian Point 2, LLC                              Entergy Power, Inc.
System Energy Resources, Inc. Entergy Nuclear Indian Point 3, LLC Entergy Operations, Inc.         Entergy Nuclear Vermont Yankee, LLC Entergy Services, Inc.           Entergy Nuclear, Inc.
System Fuels, Inc.               Entergy Nuclear Fuels Company Entergy Nuclear Nebraska LLC In addition to its three primary operating segments, Entergy's Competitive Retail Services business markets and sells electricity, thermal energy, and related services in competitive markets, primarily the ERCOT region in Texas, where it has over 105,000 customers. Competitive Retail Services contributed approximately 5% of Entergy's revenue in 2004, but does not currently have significant levels of net income or loss, or total assets, and Entergy reports this business as part of All Other in its segment disclosures.
Stratev Entergy aspires to achieve industry leading total shareholder returns by leveraging the scale and expertise inherent in its core nuclear and utility operations. Entergy's scope includes electricity generation, transmission and distribution as well as natural gas transportation and distribution. Entergy focuses on operational excellence with an emphasis on safety, reliability, customer service, sustainability, cost efficiency and risk management. Entergy also focuses on portfolio management to make periodic buy, build, hold, or sell decisions based upon its analytically-derived points of view which are continuously updated as market conditions evolve.
Availability of SEC filings and other information on Entergy's website Entergy's internet address is www.entergy.com. Entergy's annual reports on Form 10-K, quarterly reports on Form 1O-Q, current reports on Form 8-K, and amendments to any of these reports, are available free of charge through Entergy's website as soon as reasonably practicable after filing with the SEC. Financial presentations and news releases are also available through Entergy's. website. Additionally, Entergy's Corporate Governance Guidelines, Board Committee Charters for the Corporate Governance, Audit, and Personnel Committees, and Entergy's Codes of Conduct are posted on Entergy's website. This information is also available in print to any investor that requests it. In June 2004, Entergy's chief executive officer certified to the New York Stock Exchange that he was not aware of any violation by Entergy of the New York Stock Exchange corporate governance listing standards.
Part I, Item I is continued on page 105.
3

ENTERGY CORPORATION AND SUBSIDIARIES REPORT OF MIANAGENIENT 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 Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Management acknowledges, however, that all internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable assurance with respect to financial statement preparation and presentation.
As a supplement to management's assessment, Entergy's independent auditors conduct an objective assessment of the degree to which management meets its responsibility for fairness of financial reporting and issue an attestation report on the adequacy of management's assessment. They evaluate Entergy's internal control over financial reporting and perform 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 Audit Committee of. the Board of Directors, composed solely of independent 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, and reviews with the independent auditors the scope and results of the audit effort.
The Committee also meets periodically with the independent auditors and the chief internal auditor without management, 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, 2004. 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 presented in accordance with generally accepted accounting principles.
J. WAYNE LEONARD                                              LEO P. DENAULT Chief Executive Officer of Entergy Corporation                Executive Vice President and Chief Financial Officer of Entergy Corporation                                   -
HUGH T. MCDONALD                                              JOSEPH F. DOMINO Chairman, President, and Chief Executive Officer of Entergy   Chairman of Entergy Gulf States, Inc., President and Chief Arkansas, Inc.                                                Executive Officer - Texas of Entergy Gulf States, Inc.
E. RENAE CONLEY                                               CAROLYN C. SHANKS Chairiman, President, and Chief Executive Officer of Entergy  Chairmaan, President, and Chief Executive Officer of Entergy Louisiana, Inc.; President and Chief Executive Officer-       Mississippi, Inc.
Louisiana of Ehtergy Gulf States, Inc.
DANIEL F. PACKER                                              GARY J. TAYLOR Chairman, President, and Chief Executive Officer of Entergy   Chairman, President, and Chief Executive Officer of System, New Orleans, Inc.                                             Energy Resources, Inc.
THEODORE H. BUNTING, JR.                                      JAY A. LEWIS Vice President and Chief Financial Officer of System Energy   Vice President and Chief Financial Officer of Entergy Arkansas, Resources, Inc.                                               Inc., Entergy Gulf States, Inc., Entergy Louisiana, Inc., Entergy Mississippi, Inc., and Entergy New Orleans, Inc.
4

ENTERGY CORPORATION AND SUBSIDIARIES MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS Entergy Corporation is an investor-owned public utility holding company that operates primarily through three business segments.,
* U.S. Utility generates, transmits, distributes, and sells electric power in a four-state service territory that includes portions of Arkansas, Mississippi, Texas, and-Louisiana, including the City of New Orleans; and
     - operates a small natural gas distribution business.
* Non-Utility Nuclear owns and operates five nuclear power plants located in the northeastern United States and sells the electric power produced by those plants to wholesale customers. This business also provides services to other nuclear power plant owners.
* Energy Commodity Services includes Entergy-Koch and Entergy's non-nuclear wholesale assets business.
Entergy-Koch engaged in two major businesses:en ergy commodity marketing and trading through Entergy-Koch Trading, and gas transportation 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.,
The non-nuclear wholesale assets business sells to wholesale customers the electric power produced by power plants that it owns while it focuses on improving performance and exploring sales or restructuring opportunities f9r its power plants. Such opportunities are evaluated consistent with Entergy's market-based point-of-view. The non-nuclear wholesale assets business terminated new greenfield power development activity in 2002.          -
Following are the percentages of Entergy's consolidated revenues and net income generated by these segments and the percentage of total assets held by them:
                                         % of Revenue                   e%of Net Income                 % of Total Assets
          , Segment                2004      2003        2002       2004       2003      2002      2004       2003       2002 U.S. Utility                           81        82        82          72          52      97         80        79         79 Non-Utility Nuclear                    13       ,14         14         26          32      32         16        15         16 Energy Commodity Services               2         .2         4           -         19     (23)          3     . 7          8 Parent & Other                          4         .2         -          2       (3)      (6).           1   -   (1)        (3)
Results of Operations Earnings applicable to common stock for the years ended December 31, 2004, 2003, and 2002 by operating segment are as follows:                                                - ,
Operating Segment                   .
2004      (T 2003 a 2002 -
                                                                           - I (In Thousands)       .
U.S. Utility                                         $643,408        $469,050       $583,251 Non-Utility Nuclear                                   .245,029        300,799        200,505 Energy Commodity Services                                 3,481       180,454       (145,830)
Parent & Other                                           17,606       (23,360)        (38,566)
Total                                              $909,524;       $926,943     .,$599,360 Following is a discussion of Entergy's income before taxes according to the business segments listed above.
Earnings for 2004 include a $97 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 $36 million net-of-tax impairment charge in the non-nuclear wholesale assets business, both of which are discussed below.
5

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis Earnings for 2003 include the $137.1 million net-of-tax cumulative effect of changes in accounting principle that increased earnings in the first quarter of 2003, almost entirely resulting from the implementation of SFAS 143. 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 reducing 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 nuclear operations from the Non-Utility Nuclear and U.S. Utility businesses, accepted the offers.
Earnings for 2002 were negatively affected by net charges ($238.3 million net-of-tax) reflecting the effect of Entergy's decision to discontinue additional greenfield power plant development and asset impairments resulting from the deteriorating economics of wholesale power markets principally in the United States and the United Kingdom. The net charges are discussed more fully below in the Energy Commodity Services discussion. See Note 11 to the consolidated financial statements for further discussion of Entergy's business segments and their financial results in 2004, 2003, and 2002.
Refer to "SELECTED FINANCIAL DATA                       -  FIVE-YEAR COMPARISON OF ENTERGY CORPORATION AND SUBSIDIARIES" which accompanies Entergy Corporation's consolidated financial statements in this report for further information with respect to operating statistics.
U.S. UTILITY                      -
The increase in earnings for the U.S. Utility for 2004 from $469 million to $643 million was primarily due to the following:
* 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;
:.* l ower 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;
* the $21.3 million net-of-tax cumulative effect of a change in accounting principle that reduced earnings at Entergy Gulf States in the first quarter of 2003 upon implementation of SFAS 143. See "Critical Actounting Estimates - SFAS 143" below for discussion of the implementation of SFAS 143;
* miscellaneous other income of $27.7 million (pre-tax) in 2004 resulting from a revision of the decommissioning liability for River Bend, as discussed in Note 8 to the consolidated financial statements;
* higher net revenue; and
* lower interest charges.
The decrease in earnings for the U.S. Utility for 2003 from $583 million to $469 million was primarily due to:
* 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;
     * $99.8 million ($70.1 million net-of-tax) of charges recorded in 2003 in connection with the voluntary severance program; and
* the $21.3 million net-of-tax cumulative effect of a change in accounting principle that reduced earnings at Entergy Gulf States in the first quarter of 2003 upon implementation of SFAS 143. See "Critical Accounting Estimates - SFAS 143" below for discussion of the implementation of SFAS 143.
Partially offsetting the decrease in earnings in 2003' were higher net revenue and lower interest charges.
6

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis Net Revenue                     ;                I 2004 Compared to 2003 Net revenue, which is Entergy's measure of gross margin, consists of operating revenues net of: 1) fuel, fuel-related, and purchased power expenses and 2) other regulatory credits. Following is an analysis of the change in net revenue comparing 2004 to 2003.
(In Millions) 2003 net revenue                                    $4,214.5 Volumne/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 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 GWh in the industrial and commercial sectors.
The summer capacity charges variance was due to the amortization 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.i 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 dedrease in fuel price in 2004 caused primarily by the effect of nuclear plant outages in 2003 on average fuel costs.
Grossoperatingrevenues andregulatorycredits
       .; Gross operating revenues include an increase in fuel cost recovery revenues of $475 million and $18 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 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 $14.3 million of capacity charges related to generation resource planning as allowed by the LPSC;
* the deferral in 2004 by Entergy Louisiana of $11.4 million related to the voluntary severance program, in accordance with a proposed stipulation entered into with the LPSC staff; and 7

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis
* the deferral in August 2004 of $7.5 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.
2003 Compared to 2002 Net revenue, which is Entergy's measure of gross margin, consists of operating revenues net of: 1) fuel, fuel-related, and purchased power expenses and 2) other regulatory credits. Following is an analysis of the change in net revenue comparing 2003 to 2002.
(In Millions) 2002 net revenue                                   $4,209.6-'-
Base rate increases                                     66.2 Base rate decreases                                   (23.3)
Deferred fuel cost revisions                            56.2 Asset retirement obligation                             42.9 Net wholesale revenue                                   23.2-March 2002 Ark. settlement agreement                 (154.0)
Other                                                   (6.3) 2003 net revenue                                    $4,214.5 Base rates increased net revenue due to base rate increases at Entergy Mississippi and Entergy New Orleans that became effective in January 2003 and June 2003, respectively. Entergy Gulf States implemented base rate decreases in its Louisiana jurisdiction effective June 2002 and January 2003. The January 2003 base rate decrease of
$22.1 million had a minimal impact on net income due to a corresponding reduction in nuclear depreciation and decommissioning expenses associated with the change in accounting estimate to reflect an assumed extension of River Bend's useful life.
The deferred fuel cost revisions variance was due to a revised unbilled sales pricing estimate made in December 2002 and further revision of that estimate in the first quarter of 2003 to more closely align the fuel component of that pricing with expected recoverable fuel costs at Entergy Louisiana.
The asset retirement obligation variance, was due to the implementation of SFAS 143, "Accounting for Asset Retirement Obligations," adopted in January 2003.                 See "Critical Accounting Estimates - Nuclear Decommissioning Costs" for more details on SFAS 143. The increase was offset by increased depreciation and decommissioning expenses and had an insignificant effect on net income.
The increase in net wholesale revenue was primarily due to an increase in sales volume to municipal and cooperative customers.
The March 2002 settlement agreement variance reflects the absence in 2003 of the effect of recording the ice storm settlement approved by the APSC in 2002. This settlement resulted in previously deferred revenues at Entergy Arkansas per the transition cost account mechanism being recorded in net revenue in the second quartet of 2002. The decrease was offset by a corresponding decrease in other operation and maintenance expenses and had a. minimal effect on net income.
Gross operatingrevenues andregulatorycredits
        - Gross operating revenues include an increase in fuel cost recovery revenues of $682 million and $53 million in electric and gas sales, respectively, primarily due to higher fuel rates in 2003 resulting from increases in the market prices of purchased power and natural gas. As such, this revenue increase was offset by increased fuel and purchased power expenses.                                                                                                    &#xa3; 8

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis Other regulatory credits decreased primarily due to the APSC-approved March 2002 settlement agreement mentioned above, which increased other regulatory credits in 2002 to offset other operation and maintenance expenses of $159.9 million related to the December 2000 ice storms. The decrease was partially offset by the asset retirement obligation mentioned above, which increased other regulatory credits in 2003 to offset the increases in depreciation and decommissioning expenses.
Other Income Statement Variances 2004 Compared to 2003 Other operation and maintenance expenses decreased from $1.613 billion in 2003 to $1.569 billion in 2004 primarily due to voluntary severance program accruals of $99.8 million in 2003 partially offset by an increase of $30.5 million as a result of higher customer service support costs in 2004 and an increase of approximately $33 million as a result of higher benefits costs in 2004. Entergy expects benefit costs to continue to increase in 2005. See "Critical Accounting Estimates - Pension and Other Retirement Benefits" and Note 10 to the consolidated financial statements for further 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 $108.9 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 environmental clean-up site.
Interest on long-term debt decreased from $433.5 million in 2003 to $390.7 million in 2004 primarily due to the net retirement and refinancing of long-term debt in 2003 and the first six months of 2004. See Note 5 to the consolidated.financial statements for details on long-term debt.
2003 Compared to 2002 Other operation and maintenance expenses decreased from $1.679 billion in 2002 to $1.613 billion in 2003 primarily due to decreased expenses at Entergy Arkansas. The March 2002 settlement agreement that became final in the second quarter of 2002, allowing Entergy Arkansas to recover a large majority of 2000 and 2001 ice storm repair expenses through the previously-collected transition cost account amounts, increased Entergy Arkansas' expenses by
 $159.9 million in 2002. This increase in expenses in 2002 was offset by a regulatory credit resulting in no effect on net income. The decrease was partially offset by an increase of $99.8 million in benefit costs as a result of voluntary severance program accruals in 2003.
Decommissioning expense increased from $30.5 million in 2002 to $92.5 million in 2003 primarily due to the implementation of SFAS 143, "Accounting for Asset Retirement Obligations." The increase in decommissioning expense was offset by increases in other regulatory credits and interest and dividend income and had an insignificant effect on net income.
Depreciation and amortization expenses increased from $769.8 million in 2002 to $797.6 million in 2003 primarily due to an increase in plant in service. The increase was also due to the implementation of SFAS 143. The increase in depreciation and amortization expense due to SFAS 143 implementation was offset by increases in other regulatory credits and interest and dividend income and has an insignificant effect on net income.
9

Entergy Corporation and Subsidiaries Maiiagemenfs Financial Discussion and Analysis
         -Other income (deductions) 'changed from $4,7.6imillibn in 2002 to ($36.0 million) in 2003 primarily due to a decrease in "miscellaneous -net" as a result of a $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. The decrease was partially offset by an increase in interest and dividend income as a result of the implementation of SFAS 143.
Interest on long-term debt decreased from $462.0 million in 2002 to $433.5 million in 2003 primarily due to the redemption and refinancing of long-term debt.
r    I;   '   ,    ' NON-UTIL1TYNUCLEAR Following are key performance measures for Non-Utility Nuclear; -
:'e204                --  2003            2002 Net MW in operation at December 31                             4,058            4,001         3,955
              "-;Average realized price per MNMh                        -*$4X.26         I     $39.38         $40.07 i Generation in GWh for the year                   .  ,        32,524          -32,379       ; 29,953 Capacity factor for the year                                    92%             92%            93%
2004'Coniparedto2003              i     "
The decrease in earnings for Non-Utility Nuclear from $300.8 million to $245.0 million was primarily due to the $1545 imillion net-of-tax cumulative effect of a change in accounting principle that increased earnings in the first quarter of 2003 upon implementatiohn'of SEAS' 143.' See "Crtical 'Accountin! Estimates'- SFAS 143" below for discussion of the implementation'of SFAS'143. Earnings before the cumulative effect of accounting change increased by $98.7 million primarily due to the following:-
* 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;                              '       ,         '      '     .       '
higherifevenues,I-which increased from $1.275 billion'in 2)03 to $1.342 billion in 2004, primarily'resulting' from higher contract pricing. The addition of a support- services contract for the Cooper Nuclear Station and increased generation in 2004 due to power uprates completed in 2003 and fewer planned and unplanned outages in 2004 also contributed to the higher revenues; and
* miscellaneous income resulting from a reduction in the decommissioning liability for a plant, as discussed in Niot'et8 to the consolidated financiat statements.'                                                    - .
* Partially offsetting this increase were the following:    e'               ' '   '                              -
      ' higher income taxies, which increased from $88.6 million in 2003 to $142.6 million in 2004; and
      ' 'higher'!d'epreciatio'n expense, which increased from $34.3' million in 2003 to'$48.nmillion in 2004, due to' additions to plant in service.                                                                i ;               ,
2003Comnpared to 2002               '                                i
                        , ,c  ." ..                . . !aam tlt  Nu  Cg'fr
                                                               ,o- 'Qkt' lir'                          .   ,'.
  '       The increase i earnings for Non-Utility Nuclear from $200.5 million to $300.8 million was primarily due to the $154.5 million net-of-tax cumulative effect of a change in accounting principle recognized in the- first quarter of 2003 upon implementation of SFAS 143. See "Critical Accountin! Estimates - SFAS 143" below for discussion of th 'implementatibn of SPAS 143. Income before the cumulative effect of accounting change decreased by $54.2 million. 'The decrease was pritnarily dueto $83,0 million ($5(.6 million net-of-tax) of charges recorded in conhection with the voluntary severice 'program. Except for the'effect of the voluntary severance program, operation and maintenance expenses in 2003 per MWh of generation were iine with 2002 operation and maintenance expenses.'
10

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis ENERGY COMMODITY SERVICES Sales of Entergy-Koch Businesses In the fourth quarter of 2004, Entergy-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
$862 million of cash distributions in 2004 from Entergy-Koch after the business sales, and Entergy ultimately expects to receive total net cash distributions exceeding $1 billion, comprised of the after-tax cash from the distributions of the sales proceeds and the eventual liquidation of Entergy-Koch. Entergy currently expects that it will receive the remaining cash distributions in 2006, and expects that the net cash distributions will exceed its equity investment in Entergy-Koch. Entergy expects to record a $60 million net-of-tax gain when the remainder of the proceeds are received in 2006.
In the purchase agreements for the energy trading and the pipeline business sales, Entergy-Koch has 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.
Results of Operations 2004 Compared to 2003 The decrease in earnings for Energy Commodity Services from $180.5 million to $3.5 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,
* Entergy recorded a charge in 2004 of approximately $55 million ($36 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 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 $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.
2003 Compared to 2002 The increase in earnings for Energy Commodity Services in 2003 from a $145.8 million loss to $180.5 million in earnings was primarily due to net charges recorded to operating expenses in 2002, as discussed below.
Higher earnings from Entergy's investment in Entergy-Koch also contributed to the increase in earnings. The income from Entergy's investment in Entergy-Koch was $73 million higher in 2003 primarily as a result of higher earnings in its trading business.
In 2002, Entergy recorded charges to reflect the effect of Entergy's decision to discontinue additional greenfield power plant development and to reflect asset impairments resulting from the deteriorating economics of wholesale power markets principally in the United States and the United Kingdom. The net charges of $428.5 million
($238.3 million net-of-tax) consisted of the following:
11

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis
* The power development business obtained contractsin October 1999 to acquire 36 turbines from General Electric. Entergy's rights and obligations under the contracts for 22 of the turbines were sold to an independent special-purpose entity in May 2001. $178.0 million of the charges, including an offsetting net-of-tax benefit of $18.5 million related to the subsequent sale of four turbines to a third party, was a provision for the net costs resulting from cancellation or sale of the turbines subject to purchase commitments with the special-purpose entity;' -
     * $204.4 million of the charges resulted from the write-off of Entergy Power Development Corporation's equity investment in the Damhead Creek project and the impairment of the values of its Warren Power power plant and its Crete and RS Cogen projects, This portion of the charges reflected Enterg'is estimate of the effects of reduced spark spreads in the United States and the United Kingdom. Damhead Creek was sold in December 2002, resulting in net income of $31.4 million;
     * $39.1 million of the charges related to the restructuring of the non-nuclear wholesale assets business, which was comprised of $22.5 million of impairments of administrative fixed assets, $10.7 million of estimated sublease losses, and $5.9 million of employee-related costs; i $32.7 million of the charges resulted from the write-off of capitalized project devel6pment costs for projects that would not be completed; and             i              ;         ,
* a gain of $25.7 million ($15.9 million net-of-tax) realized on the sale in August 2002 of an interest in-projects under development in Spain.           '
PARENT & OTHER 2004 Compared to 2003 The increase in earnings for Parent'& Other from a $23.4 million loss to $17.6 million-in earnings was primarily due to the following:
* realization of $16.7 million of tax benefits related to the Entergy-Koch investment; and                  i
     *Entergy's competitive retail business earned a very small profit in 2004 compared to reporting a $14.4 million loss in 2003.
2003 Compared to 2002 The loss from Parent & Other decreased in 2003 from $38.6 million to $23.4 million primarily due to lower income tax expense..
:  .   . .  - .. X, .   ..   -     ,   F. ;.    ..     ,..,                     ,     -. i:
Income' Taxes I                                                                            ' j..',
The effective income tax rates for 2004, 2003, and 2002 were 28.2%, 37.9%, and 32.1%, respectively. See Note 3 to the consolidated financial 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 'I*
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.
Capital Structure               ,-       -                                                    '    '
Entergy's capitalization is balanced between equity and debt, as shown in, the following table. The reduction in the debt to capital percentage from 2002 to 2003 is the result of reduced debt outstanding in the U.S.
12

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis Utility and Non-Utility Nuclear businesses, and an increase in shareholders' equity, primarily due to increased retained earnings.
2004           2003             2002 Net debt to net capital at the end of the year                       44.7%           45.3%            47.7%
Effect of subtracting cash from debt                                  2.7%            2.2%              4.1%
Debt to capital at the end of the year                               47.4%           47.5%            51.8%
Net debt consists of debt less cash and cash equivalents. Debt consists of notes payable, capital lease obligations, preferred stock with sinking fund, and long-term debt, including the currently maturing portion. Capital consists of debt, common shareholders' equity, and preferred stock without sinking fund. Net capital consists of capital less cash and cash equivalents. The preferred stock with sinking fund is included in debt pursuant to SFAS 150, which Entergy implemented in the third quarter of 2003. The 2002 ratio does not reflect that type of security as debt, but does include it in net capital, which is how Entergy presented those securities prior to implementation of SFAS 150.
Entergy uses the net debt to net capital ratio in analyzing its financial condition and believes it provides useful information to its investors and creditors in evaluating Entergy's financial condition.
Long-term debt, including the currently maturing portion, makes up over 90% of Entergy's total debt outstanding. Following are Entergy's long-term debt principal maturities as of December 31, 2003 and 2004 by operating segment. The figures below include principal payments on the Entergy Louisiana and System Energy sale-leaseback transactions, which are included in long-term debt on the balance sheet.
Long-term debt maturities               2004         2005         2006        2007        2008-2009        after 2009 (In Millions)
As of December 31. 2003 U.S. Utility                                $450        $355          $28        $573              $721           $4,305 Non-Utility Nuclear                            74          72          76          80                 40             173 Energy Commodity Services Parent and Other                                 -         60            -           -              539              301 Total                                       $524        $487         $104        $653            $1,300           $4,779 As of December 31. 2004 U.S. Utility                                           $359          $27         $98              $749           $4,880 Non-Utility Nuclear                             -         77          76          80                 40              173 Energy Commodity Services Parent and Other                                -         60            -         50                539             301 Total                                                   $496        $103        $228            $1,328           $5,354 Note 5 to the consolidated financial statements provides more detail concerning long-term debt.
In May 2004, Entergy Corporation replaced its 364-day bank credit facility with two separate facilities, a new 364-day credit facility and 'a three-year credit facility. The three-year credit facility, which expires in May 2007, has a borrowing capacity of $965 million, of which $50 million was outstanding at December 31, 2004.
In December 2004, Entergy Corporation refinanced the 364-day bank credit facility by entering into a five-year credit facility. The five-year credit facility, which expires in December 2009, has a borrowing capacity of $500 million, none of which was outstanding at December 31, 2004.
Entergy also has the ability to issue letters of credit against the total borrowing capacity of both credit facilities, and $50 million of letters of credit had been issued against the three-year facility at December 31, 2004.
Entergy Corporation's credit facilities require it to maintain a consolidated debt ratio of 65% or' less of its total capitalization, and maintain an interest coverage ratio of 2 to 1. If Entergy fails to meet these limits, or if 13

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis Entergy or the domestic utility companies 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:
2005           2006            2007        2008-2009           after 2009 (In Millions)
Capital lease payments, including nuclear fuel leases                                          $136          $143              $3                 $2                    $3 Notes payable, which include borrowings outstanding on credit facilities with original maturities of less than one year, were less than $1 million as of December 31, 2004. Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans each have 364-day credit facilities available as follows:
Amount of           Amount Drawn as of Company                     Expiration Date            Facility            Dec. 31, 2004 Entergy Arkansas                          April 2005            $85 million Entergy Louisiana                         April 2005         $15 million (a)
Entergy Mississippi                       May 2005              $25 million Entergy New Orleans                       April 2005         $14 million (a)
(a) The combined amount borrowed by Entergy Louisiana and Entergy New Orleans under these facilities at any one time cannot exceed $15 million.
Onerating Lease Obligations and Guarantees of Unconsolidated Obligations                                                !
Entergy has a minimal amount of operating lease obligations and guarantees 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, 2004 on non-cancelable operating leases with a term over one year:
2005           2006            2007        2008-2009           after.2009 (In Millions)
Operating lease payments                            $99            $86             $69           $100                  $210 The operating leases are discussed more thoroughly in Note 9 to the consolidated financial statements.
Summarv of Contractual Obligations of Consolidated Entities Contractual Obligations                   2005         2006-2007           2008-2009      after2009          ; -Total (InMillions)
Long-term debt (I)                                $496             $331              $1,328          $5,354            $7,509 Capital lease payments (2)                        $136             $146                   $2              $3               $287 Operating leases (2)                               $99             $155,               $100             $210           I $564 Purchase obligations (3)                        $1,160           $1,402                $962          $1,156            $4,680 (1)   Long-term debt is discussed in Note 5 to the consolidated financial statements.             d s      N         9    to  t (2)   Capital lease payments include nuclear fuel leases. Lease obligations are discussed in Note 9 to the consolidated financial statements.
14

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis (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 to fuel and purchased power obligations that are recovered in the normal course of business through various fuel cost recovery mechanisms in the U.S. Utility business.
In addition to these contractual obligations, Entergy expects to contribute $185.9 million to its pension plans and
$63.3 million to other postretirement plans in 2005.
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.
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 2005 through 2007:
Planned construction and capital investments              2005          2006            2007 (In Millions)
Maintenance Capital:
U.S. Utility                                              $734          $699            $763 Non-Utility Nuclear                                         72             72             60 Energy Commodity Services                                    3              4               6 Parent and Other                                            11             19              11 820           794             840 Capital Commitments:
U.S. Utility                                               571           349             201 Non-Utility Nuclear                                         90             67             43 Energy Commodity Services Parent and Other 661           416             244 Total                                                       $1,481        $1,210          $1,084 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:
Replacement of the ANO I steam generators and reactor vessel closure head. Management estimates the cost of the ANO I project to be approximately $235 million, of which approximately $96 million has been 15

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis incurred through 2004. $115 million is expected to be incurred in 2005, with the remainder expected to be spent in 2006. Entergy expects the replacement to occur during a planned refueling outage in 2005. Entergy Arkansas filed with the APSC in January 2003 a request for a declaratory order that the investment in the replacement is in the public interest. The APSC issued the requested order in May 2003. This order is analogous to the order received in 1998 prior to the replacement of the ANO 2 steam generators.
* Purchase of the Perryville power plant in Louisiana. In January 2004, Entergy Louisiana signed a definitive agreement to acquire the 718 MW Perryville power plant for $170 million. The agreement has subsequently been amended to allow the current plant owner to retain the interconnection facilities associated with the plant, resulting in a decrease in the acquisition price to $162 million. As a result of the amended terms, the FERC issued an order in October 2004 disclaiming jurisdiction over the acquisition. This order currently is subject to rehearing by the FERC. The plant is owned by a subsidiary of Cleco Corporation, which subsidiary submitted a bid in response to Entergy's Fall 2002 request for proposals for supply-side resources. The signing of the agreement followed a voluntary Chapter 11 bankruptcy filing by the plant's owner. Entergy expects that Entergy Louisiana will own 100 percent of the Perryville plant, and that Entergy Louisiana will sell 75 percent of the output to Entergy Gulf States under a long-term cost-of-service power purchase agreement. In addition, Entergy Louisiana and Entergy (ulf States executed an interim power purchase agreement with the plant's owner through the date of the acquisition's closing (as long as that occurs by December 2005) for 100 percent of the output of the Perryville power plant. In April 2004, the bankruptcy court approved Entergy Louisiana's agreement to acquire the plant. In March 2004, Entergy Gulf States and Entergy Louisiana filed with the LPSC for its approval of the acquisition and long-term cost-of-service power purchase agreement. Entergy is seeking approval from the LPSC of cost recovery for the acquisition, giving consideration to the need for the power and the prudence of Entergy Louisiana and Entergy Gulf States in engaging in the transaction. Hearings are scheduled for March 2005. Assuming regulatory approval by the LPSC, Entergy Louisiana expects the Perryville acquisition to close in mid-2005.
* 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.
Entergy expects to spend $170 million on high voltage transmission infrastructure to be completed in phases between mid-2005 to mid-2007.
* Purchase-of additional generation supply sources within the U.S. Utility's service territory.
* Nuclear power plant uprates, dry cask spent fuel storage, and license renewals.
From time to time, Entergy considers other capital investments as potentially being necessary or desirable in the future,, including additional nuclear plant power uprates, generation supply assets, various transmission upgrades, environmental compliance expenditures, or investments in new businesses or assets. Because no contractual obligation, commitment, or Board-approval exists to pursue these investments, they are not included in Entergy's planned construction and capital investments. These potential investments are also subject to evaluation and approval in accordance with Entergy's policies before amounts may be spent. In addition, Entergy's capital spending plans do not include spending for transmission upgrades requested by merchant generators, other than projects currently underway.
Estimated capital expenditures are subject to periodic review and modification and may vary based on the ongoing effects of business restructuring, regulatory constraints, environmental regulations, business opportunities, market volatility, economic trends, and the ability to access capital.
Dividends and Stock Repurchases Declarations of dividends on Entergy's common stock are made at the discretion of the Board. Among other things, the Board evaluates the level of Entergy's common stock dividends based upon Entergy's earnings, financial strength, and future investment opportunities. At its October 2004 meeting, the Board increased Entergy's quarterly dividend per share by 20%, to $0.54. In 2004, Entergy paid approximately $428 million in cash dividends on its common stock.
In accordance with Entergy's stock-based compensation plan, Entergy periodically grants stock options to its employees, which may be exercised to obtain shares of Entergy's common stock. According to the plan, these 16

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis shares can be -newly issued shares, treasury stock, or shares purchased on the open market. Entergy's management has been authorized to repurchase on the open market shares up to an amount sufficient to fund the exercise of grants under the plans. In addition to this authority, the Board has approved a program under which Entergy will repurchase up to $1.5 billion of its common stock through 2006. The amount of repurchases under the program may vary as a result of material changes in business results or capital spending, or as a result of material new investment opportunities. In 2004, Entergy repurchased 16,631,800 shares of common stock under both programs for a total purchase price of $1.018 billion.
PUHCA Restrictions on Uses of Capital Entergy's ability to invest in electric wholesale generators and foreign utility companies is subject to the SEC's regulations under PUHCA. As authorized by the SEC, Entergy is allowed to invest earnings in electric wholesale generators and foreign utility companies in an amount equal to 100% of its average consolidated retained earnings. As of December 31, 2004, Entergy's investments subject to this rule totaled $2.7 billion constituting 55.9% of Entergy's average consolidated retained earnings.
Entergy's ability to guarantee obligations of Entergy's non-utility subsidiaries is also limited by SEC regulations under PUHCA. In August 2000, the SEC issued an order, effective through December 31, 2005, that allows Entergy to issue up to $2 billion of guarantees for the benefit of its non-utility companies. In February 2005, Entergy requested that the SEC increase this limit to $4 billion.
Under PUHCA, the SEC imposes a limit equal to 15% of consolidated capitalization on the amount that may be invested in "energy-related" businesses without specific SEC approval. Entergy has made investments in energy-related businesses, including power marketing and trading. Entergy's available capacity to make additional investments at December 31, 2004 was approximately $1.9 billion.
Sources of Capital Entergy's sources to meet its capital requirements and to fund potential investments include:
* internally generated funds;
* cash on hand ($808 million as of December 31, 2004);
* securities issuances;
* bank financing under new or existing facilities; and
* sales of assets.
The majority of Entergy's internally generated funds come from the U.S. Utility. Circumstances such as weather patterns, price fluctuations, and unanticipated expenses, including unscheduled plant outages and storms, could affect the level of internally generated funds in the future. In the following section, Entergy's cash flow activity for the previous three years is discussed.
Provisions within the Articles of Incorporation or pertinent indentures and various other agreements relating to the long-term debt and preferred stock of certain of Entergy Corporation's subsidiaries restrict the payment of cash dividends or other distributions on their common and preferred stock. As of December 31, 2004, Entergy Arkansas and Entergy Mississippi had restricted retained earnings unavailable for distribution to Entergy Corporation of $394.9 million and $68.5 million, respectively. Additionally, PUHCA prohibits Entergy Corporation's subsidiaries from making loans or advances to Entergy Corporation. All debt and common and preferred stock issuances by the domestic utility companies and System Energy require prior regulatory approval and their preferred stock and debt issuances are also subject to issuance tests set forth in corporate charters, bond indentures, and other agreements. The domestic utility companies and System Energy have sufficient capacity under these tests to meet foreseeable capital needs.
The short-term borrowings of Entergy's subsidiaries are limited to amounts authorized by the SEC. The current limits authorized are effective through November 30, 2007. In addition to borrowing from commercial banks, Entergy's subsidiaries are authorized under the SEC order to borrow from Entergy's money pool. The 17

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis money pool is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries' dependence on external short-term borrowings. Borrowings from the money pool and external borrowings combined may not exceed the SEC authorized limits. As of December 31, 2004, Entergy's subsidiaries' aggregate authorized limit was
$1.6 billion and the aggregate outstanding borrowing from the money pool was $151.6 million. There were no borrowings outstanding from external sources. Under the SEC order and without further SEC authorization, the domestic utility companies and System Energy cannot issue new short-term indebtedness unless (a) Entergy Corporation and the issuer each maintain common equity of at least 30% of its capital and (b) with the exception of money pool borrowings, the debt security to be issued (if rated) and all outstanding securities of the issuer and Entergy Corporation that are rated must be rated investment grade. See Note 4 to the consolidated financial statements for further discussion of Entergy's short-term borrowing limits.
The short and long-term securities issuances of Entergy Corporation also are limited to amounts authorized by the SEC. Under its current SEC order, and without further SEC authorization, Entergy Corporation cannot incur additional indebtedness or issue other securities unless (a) Entergy Corporation and each of its public utility subsidiaries maintain common equity ratios of at least 30% and (b) the security to be issued (if rated) and all outstanding securities of Entergy Corporation that are rated, are rated investment grade.
The long-term securities issuances of Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and System Energy also are limited to amounts authorized by the SEC. Under the current SEC orders of Entergy Gulf States, Entergy Louisiana, and Entergy Mississippi, and without further SEC authorization, the issuer cannot incur additional indebtedness or issue other securities unless (a) it and Entergy Corporation maintain a common equity ratio of at least 30% and (b) the security to be issued (if rated) and all outstanding securities of the issuer (other than preferred stock of Entergy Gulf States), as well as all outstanding securities of Entergy Corporation, that are rated, are rated investment grade.
Cash Flow Activity As shown in Entergy's Statements of Cash Flows, cash flows for the years ended December 31, 2004, 2003, and 2002 were as follows:
2004             2003'             2002 (In Millions)
Cash and cash equivalents at beginning of period                        $692           $1,335             $752 Cash flow provided by (used in):
Operating activities                                                  2,929           2,006             2,181 Investing activities                                                 (1,140)         (1,783)           (1,388)
Financing activities                                                 (1,672)           (869)             (213)
Effect of exchange rates on cash and cash equivalents                      (1)               3                 3 Net increase (decrease) in cash and cash equivalents                    116            (643)              583 Cash and cash equivalents at end of period                               $808            $692            $1,335 18

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis Operating Cash Flow Activity 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 $2,208 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 approximately $400 million of the increase in cash from operating activities in 2004. Improved recovery Qf fuel costs and a reduction 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 intercompany 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 $41 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 $70 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 $146 million in cash from operating activities in 2004 compared to providing $209 million in 2003 primarily due to higher intercompany income tax payments.
As discussed in Note 3 to the consolidated financial statements, in 2003, the domestic utility companies and System Energy filed, with the IRS, a change in tax accounting method notification for their respective calculations of cost of goods sold. The cash benefit from the method change was $74 million on a consolidated basis in 2004.' This accounting method change is an issue across the utility industry and will likely be challenged by the IRS on audit.
As of December 31, 2004, Entergy has a consolidated net operating loss (NOL) carryforward for tax purposes of
$2.9 billion, principally resulting from the change in tax accounting method related to cost of goods sold. If the tax accounting method change is sustained, Entergy expects tofiully utilize the NOL carryforward through 2006.
2003 Compared to 2002 Entergy's cash flow provided by operating activities decreased in 2003 primarily due to the following:
* The U.S. Utility provided $1,675 million in operating cash flow in 2003 compared to providing $2,341 million in 2002. The decrease primarily resulted from the tax'accounting election made by Entergy Louisiana, as discussed below. Also contributing to the decrease were higher payments for fuel during the period, which also significantly increas&d the amount of deferred fuel costs.
* The non-nuclear wholesale assets business used $70 million in operating cash flow in 2003 compared to providing $43 million in 2002 primarily due to a decrease of $64 million in the income tax refund received in 2003 compared to 2002. Also contributing to the increase in cash used was a one-time $33 million paymeft in 2003 related to a generation'contract in the non-nuclear wholesale'assets business.
* The Non-Utility Nuclear segment provided $183 million in operating'cash flow in 2003 compared to providing $282 million in 2002 primarily due to higher tax payments and unplanned outages.
* Operating cash flow used by the investment in Entergy-Koch, LP decreased by $6 million in 2003. This decrease in cash flow used was due to the receipt of $100 million in dividends from Entergy-Koch in 2003.
Almost entirely offsettink the dividends received was an increase in tax payments related to Entergy's investment in Entergy-Koch due to increased income from the investment.
Partially offsetting the decrease in cash flow in 2003 was an increase due to the parent company providing $209 million in operating cash flow in 2003 compared to using $439 million in 2002 primarily due to the payment that 19

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis Entergy Corporation made to Entergy Louisiana in 2002 pursuant to the tax accounting election made by Entergy Louisiana.
In 2001, Entergy Louisiana changed its method of accounting for tax purposes related to its wholesale electric power contracts. The most significant of these is the contract to purchase power from the Vidalia project (the contract is discussed in Note 8 to the consolidated financial statements). The new tax accounting method has provided a cumulative cash flow benefit of approximately $790 million through 2004, which is expected to reverse in the years 2005 through 2031. The election did not reduce book income tax expense. The timing of the reversal of this benefit depends on several variables, including the price of power. Approximately half of the consolidated cash flow benefit of the election occurred in 2001 and the remainder occurred in 2002. In accordance with Entergy's intercompany tax allocation agreement, the cash flow benefit for Entergy Louisiana occurred in the fourth quarter of 2002.
In a September 2002 settlement of an LPSC proceeding that concerned the Vidalia contract, the LPSC approved Entergy Louisiana's proposed treatment of the regulatory impact of the tax accounting election. In general, the settlement permits Entergy Louisiana to keep a portion of the tax benefit in exchange for bearing the risk associated with sustaining the tax treatment. The LPSC settlement divided the term of the Vidalia contract into two segments: 2002-2012 and 2013-2031. During the first eight years of the 2002-2012 segment, Entergy Louisiana agreed to credit rates by flowing through its fuel adjustment calculation $11 million each year, beginning monthly in October 2002. Entergy Louisiana must credit rates in this way;,and by this amount even if Entergy Louisiana is unable to sustain the tax deduction. Entergy Louisiana also must credit rates by $11 million each year for an additional two years unless either the tax accounting method elected is retroactively repealed or the Internal Revenue Service denies the entire deduction related to the tax accounting method.. Entergy Louisiana agreed to credit ratepayers additional amounts unless the tax accounting election is not sustained if it is challenged. During 2013-2031, Entergy Louisiana and its ratepayers would share the remaining benefits of this tax accounting election.
Investing Activities' 2004 Compared to 2003 Net cash used in investing activities decreased in 2004 primarily due to the following:
* Construction expenditures were $158 million lower in 2004 than in 2003, including decreases of
         $81 million in the U.S. Utility business, $39 million in the Non-Utility Nuclear business, and $42 million in the non-nuclear wholesale assets business.
* Entergy received net returns of invested capital from Entergy-Koch of $284 million in 2004 after the sale by Entergy-Koch of its trading and pipeline businesses. This activity is reported in the "Decrease in other investments" line in the cash flow statement.
* Approximately $60 million of the cash collateral for a letter of credit that secures the installment obligations owed to NYPA for the acquisition of the FitzPatrick and Indian Point 3 nuclear power plants was released to Entergy in 2004. Approximately $172 million of this cash collateral was released to Entergy in 2003, and the letter of credit is no longer secured by cash collateral. This activity is reported in the "Decrease in other investments" line in the cash flow statement.
* The non-nuclear wholesale assets business realized $75 million in net proceeds from sales of portions of three of its power plants in 2004.
* Entergy made temporary investments of $50 million in 2003, and these investments matured in the,first quarter of 2004.
* Entergy Arkansas used $7 million, Entergy Gulf States used $77 million, and Entergy Mississippi used $73 million for other regulatory investments in 2003 as a result of fuel cost under-recovery. In 2004, Entergy Arkansas used $4 million and Entergy Gulf States used $50 million for other regulatory investments related to fuel cost under-recovery. See Note I to the consolidated financial statements for discussion of the accounting treatment of these fuel cost under-recoveries.,L 20

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis 2003 Compared to 2002 Net cash used in investing activities increased in 2003 primarily due to the following:
* The non-nuclear wholesale assets business realized $215 million in net proceeds from sales of businesses in 2002.
* Temporary investments of $150 million matured in 2002, which provided cash flow in 2002.
* Temporary investments of $50 million were made in 2003, which used cash flow in 2003.
* Entergy Gulf States had $77 million and Entergy Mississippi had $73 million of other regulatory investments in 2003 as a result of fuel cost under-recoveries. See Note I to the consolidated financial statements for discussion of the accounting treatment of these fuel cost under-recoveries. See Note 2 to the consolidated financial statements for discussion of the change in Entergy Mississippi's energy cost recovery rider.
Partially offsetting these uses of cash, approximately $172 million of the cash collateral for a letter, of credit that secures the installment obligations owed to NYPA for the acquisition of the FitzPatrick and Indian Point 3 nuclear power plants was released to Entergy during 2003.
Financing Activities               -
2004 Compared to 2003 Net cash used in financing activities increased in 2004 primarily due to the following:
* Entergy Corporation issued $538 million of long-term notes in 2003.
* Entergy Corporation repurchased $1.018 billion of its common stock in 2004, as discussed above in the "Uses of Capital" section.
* Entergy Corporation paid $65 million more in common stock dividends in 2004 than in 2003.
Offsetting the factors that caused an increase in cash used in financing activities in 2004 were the following:
* Retirements of long-term debt net of issuances by the U.S. Utility segment used $345 million in 2004 and used $359 million in 2003. See Note 5 to the consolidated financial statements for the details of the long-term debt activity in 2004.
* In 2003, Entergy Corporation decreased the net borrowings on its credit facility by $500 million, while in
        '2004, net borrowings on its credit facilities increased by $50 million.
i The non-nuclear wholesale assets business retired the $79 million Top of Iowa wind project debt at its maturity in January 2003.
2003 Compared to 2002 Net cash used in financing activities increased in 2003 primarily due to the following:
* Net long-term debt retirements by the U.S: Utility segment were approximately $470 million in 2003 compared to net issuances of approximately $76 million in 2002. See Note 5 to the consolidated financial statements for the details of Entergy's long-term debt outstanding.
* The net borrowings under Entergy Corporation's credit facilities decreased $500 million in 2003 compared to an increase of $244 million in 2002.
The items causing cash used to increase in 2003 were partially offset by the following:
* Entergy Corporation issued $538 million of long-term notes in 2003 compared to $267 million in 2002.
* The non-nuclear wholesale assets business retired $268 million of long-term debt in 2002 related to the repurchase of the rights to acquire turbines discussed in "Results of Operations" above. Partially 21

Entergy Corporation and Subsidiaties Managemenfs Financial Discussion and Analysis offsetting this was the retirement of the $79 million Top of Iowa wind project debt at its maturity in January 2003.
* Entergy repurchased $8 million of its common stock in 2003'compared to $118 million in 2002.
In a non-cash transaction in 2002, long-term debt was reduced by -$488 million in the sale bf the Damhead Creek plant when the purchaser assumed the Damhead Creek debt along with the acquisition of the plant.
Signiflcant Factors and Known Trend' 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 r 'The rates that the' domestic utility companies and System Energy charge for their services are an important item influencing Entergy's 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 MPSC, the 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.
Authorized                I      '    '  P, en' ' !I . ',Pr o ceedi ,      1 Company                ROE                                     Pending Proceedings/Events Entergy Arkansas ......          11.0%     *No base rate cases are pending;. Transition cost. recovery rider approved to collect $8.5 million effective October 2004 with recovery expected over subsequent 16 months. It is likely that a rate filing will-be made i 2005 in connection with the ANO I steam generator and reactor vessel head replacement.                         -                    :; , i  *.
Entergy Gulf States-            10. 9 5 %/ Base rates are currently set, at rates approved. by the: PUCT in June 1999.
Texas.......................             Entergy Gulf States filed a retail electric rate case with the PUCT. in August 2004. In October 2004, the PUCT issued a written order in which it dismissed the rate case. indicating that fntergy Gulf States is still subject to a pte freeze based on an agreement,. approved by PUCT order in 2001, stipulating that a
         .. I                             rate freeze would remain in effect until retail open, access, commenced in Entergy Gulf States' service territory, unless lifted by the PUCT prior thereto.
Entergy Gulf States has appealed this decision and intends to pursue other available remedies, including legislation that would clarify that it is no longer operating under a rate freeze. In February 2005, bills were filed in the Texas legislature that would clarify that Entergy Gulf Stateq isnp longer operating under a rate freeze and specify that retail open access will not commence in Entergy Gulf States' territory until the PUCT.certifies a powerregion.
Entergy Gulf States-             11.1%     In December 2003, the LPSC staff recommended a $30.6 million rate refund Louisiana..............                  and a prospective rate reduction of approximately $50 million as a result of the ninth post-merger earnings analysis (2002). Hearings concluded in May 2004.
In January 2005, Entergy Gulf States and Entergy Louisiana filed testimony with the LPSC in support of a proposed settlement that would resolve, among other dockets, Entergy Gulf States' ninth postmrnerger review, and dockets established to consider issues concerning the companies' power purchases for the summers of 2001, 2002, 2003, and 2004. The proposed settlement currently includes an offer to refind $76 million to Entergy Gulf States' 22

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis Louisiana customers through a credit on bills rendered in March 2005, with no immediate change in the current base rates. The settlement also proposes a formula rate plan with an ROE mid-point of 10.65%. The LPSC has solicited comments on the proposed settlement from the parties to the various proceedings at issue in the settlement. The proposed settlement is scheduled to be presented to the LPSC for consideration on March 23, 2005.
Entergy Louisiana ..... 9.7%-      In January 2004, Entergy Louisiana filed with the LPSC an application for a 11.3%(1)      $167 million base rate increase and an ROE of 11.4%. The currently authorized ROE midpoint is 10.5%. Hearings in this matter concluded in December 2004. Based on the evidence submitted at the hearing, the LPSC staff is recommending approximately a $7 million base rate increase. The LPSC staff proposed the implementation of a formula rate plan that includes a provision for the recovery of incremental capacity costs, including those related to the proposed Perryville acquisition. A decision by the LPSC is expected in mid- to late-March 2005 on these issues.
In January 2005, Entergy Gulf States and Entergy Louisiana filed testimony with the LPSC in support of a proposed settlement with the LPSC that would resolve, among other dockets, dockets established to consider issues concerning the companies' power purchases for the summers of 2001, 2002, 2003, and 2004. The proposed settlement currently includes an offer to refund
                                      $14 million to Entergy Louisiana's customers. The LPSC has solicited comments on the proposed settlement from the parties to the various proceedings at issue in the proposed settlement. The proposed settlement is scheduled to be presented to the LPSC for consideration on March 23, 2005.
Entergy Mississippi...      9.3%-     An annual formula rate plan is in place. Entergy Mississippi made its annual 12.2%(2      formula rate plan filing in March 2004 based on a 2003 test year. There was no change in rates based on an adjusted ROE midpoint of 10.77%.
Entergy New Orleans      10.25%-      The midpoint ROE of the electric and gas plans is 11.25%, with a target equity 12.25%(2      component of the capital structure of 42%. Entergy New Orleans made a formula rate plan filing in April 2004. The City Council ordered that electric and gas rates remain unchanged from levels set in 2003. Entergy New Orleans will file its formula rate plan for the year ended December 31, 2004 by May 1, 2005 and also intends to file for an extension of the formula rate plan by September 1, 2005. If the formula rate plan is not extended by the City Council, the rate adjustments in effect based on the December 31, 2004 test year shall continue.
System Energy             ..10.94%    ROE approved by July 2001 FERC order. No cases pending before FERC.
(1) Entergy Louisiana's formula rate plan expired with the 2001 test year. Under the expired formula, if Entergy Louisiana earned outside of the bandwidth range, rates would be adjusted on a prospective basis. If earnings were above the bandwidth range, rates would be reduced by 60 percent of the amount necessary to bring earnings down to the top of the bandwidth, and if earnings were below the bandwidth range, rates would be increased by 60 percent of the corresponding shortfall.
(2) Under Mississippi law and Entergy Mississippi's formula rate plan, if Entergy Mississippi's earned ROE is above the top of the range-of-no-change at the top of the bandwidth, then Entergy Mississippi's rates are reduced by 50 percent of the difference between the earned ROE and the top of the bandwidth. In such circumstaice, Entergy Mississippi's "Allowed ROE" for the next twelve-month period is the point halfway between such earned ROE and the top of the bandwidth - Entergy Mississippi's retail rates are set at that halfway-point ROE; level. (Before the comparison is made of the earned ROE to the bandwidth, the bandwidth can be 'adjusted for performance measures by as much as 1%. Rates are adjusted pursuant to 23

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis Entergy Mississippi's formula rate plan, on a prospective basis, only.)        In the situation where Entergy Mississippi's earned ROE is not above the top of the range-of-no-change at the top of the bandwidth, then Entergy Mississippi's "Allowed ROE" for the next twelve-month period is the top of the range-of-no-change at the top of the bandwidth. If earnings are below the bandwidth range, rates are increased by 50 percent of
       *thedifference between the earned ROE and the bottom of the bandwidth. Under the provisions of Entergy Mississippi's formula rate plan, each annual formula rate plan filing incorporates a revised calculation of the benchmark ROE.
(3) If Entergy New Orleans earns outside the bandwidth range, rates will be adjusted on a prospective basis.
Under the gas formula rate plan, if earnings are above the bandwidth range, rates are reduced by 100 percent of the overage, and if below, increased by 100 percent of the shortfall. In addition, if the ROE falls between 11.5% and 12.25%, rates are reduced by 60 percent of the difference (between 11.5% and 12.25%), and if the ROE falls between 10.25% and 11%, rates are increased by 40 percent of the difference (between 10.25% and 11%). Under the electric formula rate plan, rates are adjusted accordingly by 100 percent of the amount of any overage or shortfall. Entergy New Orleans may earn up to. 13.25% under the electric formula rate plan provided that the increase is caused by its share of energy cost savings under the generation performance-based recovery plan.
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.          .
Federal Regulation           -        -           l                      :
The FERC regulates wholesale rates (including Entergy intrasystem sales pursuant to the System Agreement) and interstate transmission of electricity, as well as rates for System Energy's sales of capacity and energy from Grand Gulf I to Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans pursuant to the Unit Power. Sales Agreement.
System Agreement Litigation The domestic utility companies historically have engaged in the coordinated planning, construction, and operation of generating and transmission facilities under the terms of an agreement called the System Agreement that has been approved by the' FERC. Litigation involving the System Agreement is being pursued by the LPSC at both the FERC and before itself. These proceedings include challenges to the allocation of costs as defined by the System Agreement, raise questions, of. imprudence by the domestic utility companies in their execution of the System Agreement, and, seek support for local regulatory authority over System Agreement issues. Regarding the proceeding. at the LPSC, Entergy believes that state and local regulators are preempted by federal law from reviewing and deciding System Agreement issues for, themselves. An unrelated case between the LPSC and Entergy Louisiana raised the question of whether a state regulator is preempted by federal law from reviewing and interpreting FERC rate schedules that are part of the System Agreement, and from subsequently enforcing that
'interpretation. The LPSC interpreted a System Agreement rate schedule in the unrelated case, and then sought to enforce its interpretation. The Louisiana Supreme Court affirmed the LPSC's decision. In 2003, the U.S. Supreme Court ruled in Entergy Louisiana's favor and reversed the decisions of the LPSC and the Louisiana Supreme rCourt.
In February 2004, a FERC ALJ issued, an Initial Decision in the LPSC-initiated proceeding at the FERC.
The Initial Decision decided some issues in favor of the relief sought by the LPSC, and decided sonme issues against the relief sought by the LPSC. Several parties, including Entergy, the LPSC, the APSC, the MPSC, the City Council, and the FERC Staff, filed briefs on exceptions in response to the ALJ's Initial. Decision. . Entergy's exceptions to the ALUs Initial Decision include: the practical effect of the Initial Decision is fill. production cost equalization, which was rejected in the Initial Decision and previously has been rejected by the FERC; resource planning for the Entergy System would be impeded if the Initial Decision were adopted; the remedy in the-Initial Decision is inconsistent with the history, structure, and. precedent regarding the Systemir-Agreement; the Initial Decision's remedy ignores the historical pattern of production cost disparities on the Entergy System and would result in substantial, sudden transfers of costs between groups of Entergy customers; the numerical standards 24

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis proposed in the Initial Decision are arbitrary and are so complex that they would be difficult to implement; the Initial Decision improperly rejected Entergy's resource planning remedy; the Initial Decision erroneously determined that the full costs of the Vidalia project should be included in Entergy Louisiana's production costs for purposes of calculating relative production costs; and the Initial Decision erroneously adopted a new method of calculating reserve sharing costs rather than the current method.
If the FERC grants the relief requested by the LPSC in the proceeding, the relief may result in a material increase in the total production costs the FERC allocates to companies whose costs currently are projected to be less than the Entergy System average, and a material decrease in the total production costs the FERC allocates to companies whose costs currently are projected to exceed that average. If the FERC adopts the AL's Initial Decision, the amount of production costs that would be reallocated among the domestic utility companies would be determined through consideration of each domestic utility company's relative total production cost expressed as a percentage of Entergy System average total production cost. The ALUs Initial Decision would reallocate production costs of the domestic utility companies whose percent of Entergy System average production cost are outside an upper or lower bandwidth. This would be accomplished by payments from domestic utility companies whose production costs are below Entergy System average production cost to domestic utility companies whose production costs are above Entergy System average production cost.
An assessment of the potential effects of the AL's Initial Decision requires assumptions regarding the future  total  production cost of each domestic utility company, which assumptions include the mix of solid fuel and gas-fired generation available to each company and the costs of natural gas and purchased power. Entergy Louisiana and Entergy Gulf States are more dependent upon gas-fired generation than Entergy Arkansas, Entergy Mississippi; or Entergy New Orleans. Of these, Entergy Arkansas is the least dependent upon gas-fired generation.
Therefore, increases in natural gas prices likely will increase the amount by which Entergy Arkansas' total production costs are below the average production costs of the domestic utility companies. Considerable uncertainty exists regarding future gas prices. Annual average Henry Hub gas prices have varied significantly over recent years, ranging from $1.72/mmBtu to $5.85/mrnBtu for the 1995-2004 period, and averaging $3.43/mmBtu during the ten-year period 1995-2004 and $4.58/mmBtu during the five-year period 2000-2004. Recent market conditions have resulted in gas prices that have averaged $5.85/mmBtu for the twelve months ended December 2004. Based upon analyses considering the effect on future production costs if the FERC adopts the AL's Initial Decision, the following potential annual production cost reallocations among the domestic utility companies could result assuming annual average gas prices range from $6.39/mnmBtu in 2005 declining to $4.97/mmBtu by 2009:
Average Annual Range of Annual Payments        Payments or (Receipts) or (Receipts)              for 2005-2009 Period (In Millions)                   (In Millions)
Entergy Arkansas                   $154 to $281.                       $215 Entergy Gulf States              ($130) to ($15)                        ($63)
Entergy Louisiana                ($199) to ($98)                      ($141)
Entergy Mississippi                  ($16) to $8                          $1 Entergy New Orleans                 ($17) to ($5)                       ($12)
Management believes that any changes in the allocation of production costs resulting from a FERC decision and related retail proceedings should result in similar rate changes for retail customers. The timing of recovery of these costs in rates could be the subject of additional proceedings at the APSC and elsewhere, however, and a delay in full recovery of any increased allocation of production costs could result in additional financing requirements. Although the outcome and timing of the FERC, APSC, and other proceedings cannot be predicted at this time, Entergy does not believe that the ultimate resolution of these proceedings will have a material effect on its financial condition or results of operation.
In February 2004, the APSC issued an "Order of Investigation," in which it discusses the negative effect that implementation of the FERC AL's Initial Decision would have on Entergy Arkansas' customers. The APSC order establishes an investigation into whether Entergy Arkansas' continued participation in the System Agreement 25

Entergy Corporation and Subsidiaries Managemenfs Financial Discussion and Analysis is in the best interest of its customers, and whether there are steps that Entergy Arkansas or the APSC can take "to protect [Entergy Arkansas' customers] from future attempts by Louisiana, or any other Entergy retail regulator, to shift its high costs to Arkansas.": Entergy Arkansas filed testimony in response to the APSC's Order of Investigation. The testimony emphasizes that the ALJ's Initial Decision is not a final order by the FERC; briefly discusses some of the aspects of the Initial Decision that are included in Entergy's exceptions filed with the FERC; emphasizes that Entergy will seek to reverse the production cost-related portions of the Initial Decision; and states that Entergy Arkansas believes that it is premature, before the FERC makes a decision, for Entergy Arkansas to determine whether its continued participation in the System Agreement is appropriate.
In April 2004, the APSC commenced the investigation into Entergy Louisiana's Vidalia purchased power contract and requested historical documents, records, and information from Entergy Arkansas, which Entergy Arkansas has provided to the APSC. Also in April 2004, the APSC issued an order directing Entergy Arkansas to show cause why Entergy Arkansas should not have to indemnify and hold its customers harmless from any adverse financial effects related to Entergy Louisiana's pending acquisition of the Perryville power plant, or show that the Perryville unit will produce economic benefits for Entergy Arkansas' customers. Entergy Arkansas filed a response in May 2004 stating that Entergy will seek to reverse the production cost-related portions of the ALJ's Initial Decision in the System Agreement proceeding at the FERC, that the Perryville acquisition is part of Entergy's request for proposal generation planning process, that Entergy Arkansas is not in a position to indemnify its retail customers from actions taken by the FERC, and that the Perryville acquisition is expected to reduce the domestic utility companies' overall production costs. Procedural schedules have not been established in these APSC investigations.
In April 2004, the City Council issued a resolution directing Entergy New Orleans and Entergy Louisiana to notify the City Council and obtain prior approval for any action that would materially modify, amend, or terminate the System Agreement for one or more of the domestic utility companies. Entergy New Orleans and Entergy Louisiana appealed to state court the City Council's resolution on the basis that the imposition of this requirement with respect to the System Agreement, a FERC-approved tariff, exceeds the City Council's jurisdiction and authority. In July 2004, the City Council answered the appeal and filed a third party demand and counterclaim against Entergy, the domestic utility companies, Entergy Services, and System Energy, seeking a, declaratory judgment that Entergy and its subsidiaries cannot terminate the System Agreement until obligations owed under a March 2003 rate case settlement are satisfied. In August 2004, Entergy New Orleans and Entergy Louisiana, as well as the named third party defendants, filed pleadings objecting to the City Council's third party demand and counterclaim on various grounds, including federal preemption. In February 2005, the state court issued an oral decision dismissing the City Council's claims for lack of subject matter jurisdiction and prematurity.
Transmission In 2000, FERC issued an order encouraging utilities to voluntarily 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, and 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. Assuming applicable regulatory support and approvals can be obtained, Entergy proposed to contract with the ICT to oversee the granting of transmission service on the Entergy system as well as the implementation of the proposed weekly procurement process (WPP).
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.
Entergy also proposed to have the ICTi administer a transmission expansion pricing protocol that will increase the efficiency of transmission pricing on the Entergy system and that will be designed to protect Entergy's 26

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis native load customers from bearing the cost of transmission upgrades not required to reliably serve these customers' needs. Entergy intends for the ICT to determine whether transmission upgrades associated with new requests for service should be funded directly by the party requesting such service or by a broader group of transmission customers, including Entergy's native load customers. This determination would be made in accordance with protocols approved by the FERC, and any party contesting such determination, including Entergy, would be required to seek review at the FERC. Several technical conferences regarding the ICT proposal, or various components thereof, were held in 2004. Entergy has also responded to discovery requests that resulted from these conferences.
In January 2005, Entergy filed a petition for declaratory order with the FERC requesting that the FERC provide guidance on two important issues: (1) whether the functions performed by the ICT will cause it to become
: a. "public utility" under the Federal Power Act or the "transmission provider" under Entergy's open access transmission tariff; and (2) whether Entergy's transmission pricing proposal, as administered by the ICT, satisfies the FERC's transmission pricing policy. The petition also indicates that, subject to the outcome of the petition and obtaining support of Entergy's retail regulators, Entergy would be willing to have the ICT perform the following additional functions: (a) grant or deny requests for transmission service; (b) calculate available flowgate capacity; (c) administer Entergy's OASIS; and (d) perform an enhanced planning function (integrating the plans of Entergy and other potential transmission owners to identify regional synergies.) Comments and interventions on the petition were filed by market participants and retail regulators on February 4, 2005. In their individual comments, the APSC, LPSC, and City Council supported Entergy's position that the ICT would not become a "public utility" or "transmission provider" and that the transmission pricing proposal satisfies the FERC's transmission pricing policy. Certain other parties urged the FERC to reject the petition for declaratory order or, in the alternative, that the FERC assert jurisdiction over the ICT and determine that Entergy's proposed pricing policy is inconsistent with FERC's current pricing policy. FERC action on the petition is expected during the first half of 2005.
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 comments 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. Additionally, 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 on the transmission pricing aspects of the ICT proposal is scheduled for May 2005, with a separate hearing on the WPP portion of the proposal currently scheduled for August 2005.
FERC's Supply Margin Assessment In November 2001, FERC issued an order that established a new generation market power screen (called Supply Margin Assessment) for purposes of evaluating a utility's request for market-based rate authority, applied that new screen to the Entergy System (among others), determined that Entergy and the others failed the screen within their respective control areas, and ordered these utilities to implement certain mitigation measures as a condition to their continued ability to buy and sell at market-based rates. Among other things, the mitigation measures would require that Entergy transact at cost-based rates when it sells in the hourly wholesale market within its control area. Entergy requested rehearing of the order, and FERC delayed the implementation of certain mitigation measures until such time as it had the opportunity to consider the rehearing request. In June 2003, the FERC proposed and ultimately adopted new market behavior rules and tariff provisions that would be applied to any market-based sale. Entergy modified its market-based rate tariffs to reflect the new provisions but requested rehearing of FERC's order.
In April 2004, the FERC issued its Order on Rehearing and Modifying Interim Generation Market Power Analysis and Mitigation Policy. In its April 2004 order, the FERC established a new interim generation market power analysis that will consider two indicative market power screens: (1) the pivotal supplier screen that is designed to measure an applicant's market power based on the applicant's share of uncommitted capacity at the time of the control area market's annual peak demand; and (2) the market share screen that is designed to evaluate an 27

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis applicant's market share of uncommitted capacity on a seasonal basis.- An integrated utility's native load obligation will be reflected in both screens; however, the proxy for native load obligation differs between the screens. For the uncommitted pivotal supplier screen, the proxy for native load is the ayerage of the daily native load peaks during the month in which the annual peak load day occurs; for the uncommitted market share screen the proxy for native load is the minimum peak load day for each season. In the event an applicant fails either of these screens, there will be a rebuttable presumption that market power exists. The applicant will then have the opportunity to either: (1) submit a more detailed market power analysis that reflects market prices and measures an applicant's "economic capacity" and "available economic capacity" under the "delivered price test;" or (2) propose case-specific mitigation tailored to the applicant's specific circumstances or adopt cost-based rates for sales within the applicant's control area .                                               -jC; +/-            .             l'.
i.j&#x17d;;..              *A. i.i       _:        . Ai               .
     --j    In its April 2004 order, the FERC also: (1) determined that trans-missiobnmaiket pow& and the need to employ an independent entity to operate and administer an applicant's OASIS site is more properly considered in other proceedings, to the extent appropriate, and would not be considered in evaluating an applicant's generation market power for purposes of granting market-based rate authority; and (2) eliminated the exemption from the generation market power analysis for sales within an RTO/ISO that had approved market monitoring, Several parties, including Entergy, filed for rehearing of the April 2004 order. Among other things, Entergy argued that the market share screen is overly conservative and overstates vertically integrated utilities' ability to exercise market power.              --                .-<                           Lu.     -                    ol<    i.                   '      -,. -      .                I:;    f   m In July 2004, the FERC issued an order on rehearing reaffirming the use of the pivotal supplier and market share screens and clarified certain instructions for performing such analysis. With regard to the delivered price test analysis, the FERC declined to make a determination on whether an applicant's native load obligations will be reflected when evaluating an applicant's generation market power, but instead indicated that it would evaluate the arguments of both the applicant and intervenors as to which measure (one with or without native load obligations) more accurately reflects market conditions. Entergy appealed the April 2004 and July 2004 orders to the United States Court of Appeals for the District of Columbia Circuit. In February 2005, the D.C. Circuit granted the FERC's motion to dismiss Entergy'sappeal on the grounds that Entergy's claims were premature. The D.C. Circuit found that Entergy's petition w~as prematute because the D.C. Circuit was not yet in a position to evaluate the manner in which the FERC will apply its new market power te'sts r whether the tests will have adverse consequences for Entergy. Thus, the D.C. Circuit did not rule on the-merits of Entergy's appeal.                 t J
i                     trlibfl  5              .                  XJi..>Li       a o     JUntntL             .;3         e    .   ..    .;;
          '"!591*f '               tlieys    &#xa3;                    th   3).        .U     ;    1_
Entergy filed with the FERC its generation market power analysis pursuant to the two indicative scieens in August 2004. Entergy's analysis indicated that it passed the pivotal supplier screen for all relevant geographical regions, but failed the market share screen within its control area. At the same time, Entergy submitted the results of the delivered price test for Entergy, which indicate that Entergy does not have market power in any wholesale market when Entergy's native load obligations are reflected.                                                                                         I- - I In December 2004, the FERC issued an order pursuant to Section 206 of the Federal Power Act: (1) finding that Entergy failed the market share sciren; (2) indicating that the FERC is continuing to review the delivered price test analysis submitted by Entergy; (3) establishing a refund effective date for Entergy's market-based wholesale sales within its control area; and (4) indicating that the FERC believes that it can reach a decision concerning Entergy's market-based rate authority by the second quarter of 2005.                                                       *             .
               ' int;'
s    .'tr   i..        inuiv' . Jtu ii r:,jZ          .3,.          . ae tVtsj  .--      f'jJ j-,j.a,                 .                                i If the FERC were to revoke Entergy's or the domestic utility companies' market-based rate authority for wholesale sales within the Entergy control area, these entities would be limited to making wholesale sales pursuant to cost-based rate schedules approved by the FERC. The wholesale sales of the domestic utility companies and their affiliates, including Entergy's non-nuclear wholesale assets business, within the Entergy control area could either be cost-justified or are of such a limited amount that management does not believe that the revo6ation of their market-based rate authority would have a material effect on the financial results of Entergy. Because Entergy believes that it does not possess market power and that the FERC's tests are flawed, Enteigy intends to vigorously defend its market-based rate authority.                                               .            i -fJ,4x 'i;                             . . L The FERC has also initiated a rulemaking proceeding to address, among other things, whether the FERC should retain or modify its existing four-prong test-for evaliating market-based rate applications (i.e., whether the 28

Entergy Corporation and Subsidiarie's Manageme'nt's Financial Discussion and Analysis applicant has generation or transinissibn market power, whether the applicant can erect barriers to' entty/' and whether there are affiliate abuse or reciprocal dealing concerns), and whether the FERC should adopt different approaches for affiliate transactions. The FERC has held a series of technical conferences to discuss these issues.
Additionally, in February 2005 the FERC adopted revised repotiing obligations for changes in statas'that apply to public utilities authorized"to mftake wholesale sales of Oowef at market-based rates. The FERC determined'fb replace the current triennial reporting requirement with more detailed guidelines concerning the types of events that will trigger a reporting obligation and the timing and format for such reports. The new rules will become 'part of all existing market-based rate tariffs during March 2005.
Interconnection Orders
         " the doiimestic utility -^'cao p                   (e~xce~pt'e                       -diOsB ar&                                'defendants to sevra  '--tritly cditinpjfaints 'and iehe'a#r i'          eTh before the        FARC       in             indepini&
iwhich              'tgeneration         entities     (GeniCos)'   ar'  eeking a refund of moriies "taithe    tGehdsCy'                                           to'ti                    n 'fb# fhcil ities                 sary t 'cAle"'t their generitio-n faacilities t6 Enitfts 'fismismo'n sys er.ii:'TheMF Cfihas issuid                                        initial   oriders  in  responsiie it {o of thecomplai'ns and              'ialifother dock''             ori ordering                    to refinda pproximatly ' 100 million in ex anid&tax ligaiions previously paid byfhe' G'                          . rTh're'fuids         wit bein ihe form of transission credits th'ai will 6
ver'          'the' GeCI   os     take   tiaAnimi'ssihn       eriefrom                      it.,' I'.-i-' ' 3 me<
Ei~ ~~~-',~_',                                     Lf;
                                                                                                                                                    ;.e:&#xa3;'
btiW          ) ;! i, I1---I,-
be' tilized           jin4~e's                                                                                                      , J al: J                         v, In addition, Entergy Louisiana was recently directed, effective as of March 2001, to provide transmission credits, with interest, associated with a specific generator that asserted to the FERC that it ietainea In its c hoiracl' fr interconnection a right to execute the latest form of Entergy's standagd interconnection agreement in lieu of its existig contract, whcn thereby wo{uld apply iC's                                 most recent intericoTnnehion cost allocatiin oiicies to that generator. Fowing an ALJ' s nitial Decision and an order afining such decision by FERC, approximately $iJ million in expenses and tax obligations previously paid by the generator have been ordered refunded in the form of transmission credits, to be utilized over time and applied to Entergy transmission service bills incurred after March 260 l.has                sougtehst re e rif.g of the BERGC s                         -                                         .order'.          V I<
To the exytent the           tergy copmpanles are 'ordered to provide such refund&sect;, these kosts will qualify for iin :ithe Eni iis i6n                               amesni&    raties The-re66V~ry' Oi &6-c'ostsfis' not autoratic, howvi'                          - ii , ' eYiaslly at the retail level, where the majority of the cost recovery would occur. Entergy intends to pursue all regulatory and legal av nuievva iIb1le1 it 'ii '                16rt'hp"liote veh"     thes' 6de )'W irse1 !                         the affected int"Er'oTiec'fio
                                                                                                        '~dnl!&                                                             t teirhst ad'es reed to oiginalfybyt~e gbfenerators.
                                                                   ).
: c.             7                                       <.
Available Flowgate Capacity Proceeding On December 17, 2004, the FERC issued an order initiating a hearing and investigation concerning the justness and reasonableness of the Available Flowgate Capacity (AFC) methodology, the methodology used to evaluate short-term transmission service requests under the domestic utility companies' open access transmission tariff, and establishing a refund effective date. In its order, the FERC indicated that although it "appreciates that Entergy is attempting to explore ways to improve transmission access on its system," it believed that an investigation was warranted to gather more evidence in light of the concerns raised by certain transmission customers and certain issues raised in a FERC audit report finding 'errors and problems with the predecessor methodology used by Entergy for evaluating short-term transmissicn' requests, the Generator Operating Limits methodology. The FERC order indicates that the investigation will include an examination of (i) Entergy's implementation Of the AFC program;,1(fi) whether Efifergy's implementation has complied with prior FERC orders and open access transmission tariff provisions addressing the AFC program, and (iii) whether Entergy's prtvision''
of access to short-term transmission on its transmission system was just, reasonable, and not unduly discriminatory.
Entergy has submitted an Eniergency Interim Request for Reheating requesting the FERC to defer ihe hearing process 'and instead proceed initially with an independent audit of the AFC program 'atd the expansion of the current process involving other mark-et participants to address a broader range of issues. Entergy believes that this type of approach is a more efficient and effective mechanism for evaluating the AFC' pTrhfit.I Following the completion of the independent audit and process involving other market participants, the FERC could determine'

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis whether other procedural steps are necessary. The FERC has not yet ruled on the, Emergency Interim Request for Rehearing submitted by Entergy.
Entergy believes that it has complied with the provisions of its open access transmission tariff, including the provisions addressing the implementation of the AFC methodology; however, the ultimate scope of this proceeding cannot be predicted at this time. A hearing in the AFC proceeding is currently scheduled to commence in August 2005.
Federal Legislation Federal legislation intended to facilitate wholesale competition in the electric power industry has been seriously considered by the United States Congress for the past several years. In the last Congress, both the House and Senate passed separate versions of comprehensive energy legislation, negotiated a conference package, and fell two votes short of bringing the conferenced bill up for a vote in the Senate. The bill contained electricity provisions that would, among other things, allow for participant funding of transmission interconnections and upgrades, repeal PUHCA, repeal or modify PURPA, enact a mechanism for establishing enforceable reliability standards, provide the FERC with new authority over utility mergers and acquisitions, and codify the FERC's authority over market-based rates. It is expected that the United States House and Senate will again craft and consider energy legislation in the 109th Congress.
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 Enterg6'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.
Entergy is also exposed to credit risk. Credit risk is the risk of loss from nonperformance by suppliers, customers, or financial counterparties to a contract or agreement. Where it is a significant consideration, counterparty 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 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 at fixed prices:-
2005          2006         2007       2008       2009 1Non-Utility Nuclear:
Percent of planned generation sold forward:
Unit-contingent                                               36%           20%          17%         1%         0%
Unit-contingent with availability guarantees                  54%         - 52%,        .38%        25%         0%
Firm liquidated damages                                        4%
* 4%           2%         0%
* 0%
Total                                                         94%.          76%       1 57%         26%         0% '
Planned generation (TWh)                                             34            35.:        34         34         35 Average contracted price per MWh                                    $39           $41         $42         $44       N/A 30

Entergy Corporati on and Subsidiaries Management's Financial Discussion and Analysis The Vermont Yankee acquisition included a-10-year PPA under which the formerowners 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 will be adjusted downward monthly, beginning in November 2005, if power market prices drop below PPA prices. Accordingly, because the price is not fixed, the table above does not report power from that plant as sold forward after November 2005.
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 unit to generate power at or above a specified availability threshold. To date, Entergy has not incurred any payment obligation to any power purchaser pursuant to an availability guarantee. All of Entergy's outstanding availability guarantees provide for dollar limits on Entergy's maximum liability under such guarantees.
Some of the agreements to sell the power produced by Entergy's Non-Utility,Nuclear power plants 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 business sells its power. The primary form of the collateral to-satisfy these requirements would be an Entergy Corporation guaranty. Cash and letters of credit are also acceptable forms of collateral. At December 31, 2004, based on power prices at that time, Entergy had in place as collateral $545.5 million of Entergy Corporation guarantees and $47,5 million of letters of credit. In the event of a decrease in Entergy Corporation's credit rating to specified levels 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 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 forward:
2005           2006         2007           2008         2009 Non-Utility Nuclear:
Percent of capacity sold forward:
Bundled capacity and energy contracts                         13%         .13%            13%           13%           13%
Capacity contracts                i     .                     58%           67%           36%           22%           10%
8 0%/         49%           35%          23%
Total,     ;;        .         -      ,                       71%
Planned   net MW    in operation ,      -                        4,155         4,200           ,200      - 4,200        4,200 Average capacity contract price per kW per month.                 $1.2-         $1.1          $1.1          $1.0         $0.9 Blended Capacity and Energy (based on revenues),
% of planned generation and capacity sold forward                 93%.          87%           65%           36%           12%
Average contract revenue per MWh                                  $40       ,    $42         -.$43           $44          $43 As of December 31, 2004, approximately 99%/o of Entergy's counterparties to Non-Utility Nuclear's energy and capacity contracts have investment grade credit ratings.
31

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis 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:
                                                               -2005         2006      2007        2008        2009 Energy Commodity Services:
Capacity Planned MW in operation                                         1,578        1,578     1,578       1,578       1,578
% of capacity sold forward                                      44%           33%      29%          29%         19%
Energy Planned generation (TWh)                                          3             3         3          3           4
% of planned generation sold forward                            69%           54%      45%         45%         35%
Blended Capacity and Energy (based on revenues!
% of planned energy and capacity sold forward                   63%           44%       38%         39%        22%
Average contract revenue per MWh                                 $24           $24      $28         $28         $21 Entergy continually monitors industry trends in order to determine whether asset impairments or other losses could result from a decline 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 power 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 95.5 million Euro and the forward currency rates range from
 .8641 to 1.33020. The maturities of these forward contracts depend on the purchase contract payment dates and range in time from January 2005 to January 2007. The mark-to-market valuation of the forward contracts at December 31, 2004 was a net asset of $28.1 million. The counterparty banks obligated on these agreements are rated by Standard & Poor's Rating Services at AA on their senior debt obligations as of December 31, 2004.
Interest Rate and Eguitv Price Risk - Decommissioning Trust Funds Entergy's nuclear decommissioning trust funds are exposed to fluctuations in equity prices and interest rates. The NRC requires Entergy to maintain trusts to fund the costs of decommissioning ANO 1, 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 primarily in equity securities; fixed-rate, fixed-income securities; and cash and cash equivalents. Managemenit believes that exposure of the various 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 approximately $952 million of fixed-rate, fixed-income securities as of December 31, 2004. These securities have an average coupon rate of approximately 5.4%, an average duration of approximately 5.2 years, and an average maturity of approximately 7.9 years. The Pilgrim, Indian Point l'and 2, and Vermont Yankee trust funds also collectively hold equity securities worth approximately $450 million as of December 31, 2004. 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.
32

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis Nuclear Matters The domestic utility companies, System Energy, and Non-Utility Nuclear subsidiaries own and operate ten nuclear power generating units and the shutdown Indian Point 1 nuclear reactor. Entergy is, therefore, subject to the risks related to owning and operating nuclear plants. These include risks from the use, storage, handling, and disposal of high-level and low-level radioactive materials, limitations on the amounts and types of insurance commercially available for losses in connection with nuclear operations, and technological and financial uncertainties related to decommissioning nuclear plants at the end of their licensed lives, including the sufficiency of funds in decommissioning trusts. In the event of an unanticipated early shut-down of any of Entergy's nuclear plants, Entergy may be required to provide additional funds or credit support to satisfy regulatory requirements for decommissioning.
Concerns are being expressed in public forums about the safety of nuclear generating units and nuclear fuel, in particular in the northeastern United States, which is where the Non-Utility Nuclear units are located.
These concerns have led to, and are expected to continue to lead to, various proposals to federal regulators as well as governing bodies in some localities where Entergy owns nuclear plants for legislative and regulatory changes that could lead to the shut-down of nuclear units, denial of license extension applications, municipalization of nuclear units, restrictions on nuclear units as a result of unavailability of sites for nuclear fuel disposal, or other adverse effects on owning and operating nuclear power plants. Entergy believes that its generating units are in compliance with NRC requirements and Entergy vigorously responds to these concerns and proposals.
Litigation Entergy and its subsidiaries are involved in the ordinary course of business in a substantial amount of employment, commercial, asbestos, hazardous material, and other environmental and rate-related proceedings and litigation. Entergy uses legal and appropriate means to contest vigorously litigation threatened or filed against it, but litigation poses a significant business risk to Entergy.
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 facility 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 Escalation Factors - Entergy's decommissioning revenue requirement studies include an assumption that decommissioning costs will 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 11.0%.
* 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, or an assumption could be made that the plant 33

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis 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 to its estimated decommissioning cost liability for four of its nuclear power plants to reflect changes in assumptions regarding license renewal. Increases in the probability of decommissioning the plants at a date later than the original license expiration lowered the estimate of the decommissioning cost liability. The changes in probability for the unregulated portion of Entergy Gulf States and Entergy's Non-Utility Nuclear business increased income by approximately $28.9 million net-of-tax for the excess of the reduction in the liability over the amount of undepreciated asset retirement cost at the time of adoption of SFAS 143. The changes in probability for ANO I and ANO 2 had no effect on net income because, as discussed further below, any amounts recorded related to SFAS 143 are offset by the recording of regulatory assets or regulatory liabilities when projected decommissioning costs are collected in rates. 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 liability 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 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 Mountain, Nevada. Until this site is available, however, nuclear plant operators must provide for interim spent fuel storage on the nuclear plant site, which can require the construction and maintenance of dry cask storage sites or other facilities. The costs of developing and maintaining these facilities can have a significant effect (as much as 16% of estimated decommissioning costs). Entergy's decommissioning studies include cost estimates for spent fuel storage. However, these estimates could change in the future based on the timing of the opening of the Yucca Mountain facility, the schedule for shipments to that facility when it is opened, or other factors.
* Technology and Regulation - To date, there is limited practical experience in the United States with actual decommissioning of large nuclear facilities. 'As experience is gained and technology changes, cost estimates could also change. If regulations regardin'g nuclear decommissioning were to change, this' could
     ''have a potentially significant effect on cost estimates. The effect of these potential changes' is not presently determinable. Entergy's decommissioning cost studies assume current technologies and regulations.
SFAS 143              '
Entergy implemented SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. Nuclear decommissioning costs comprise substantially all of Entergy's asset retirement obligations, and the measurement and recording of Entergy's decommissioning obligations changed significantly with the impleinentation of SFAS 143. The most 'significant differences in the measurement of these obligations are outlined below:
* Recording of full obligation - SFAS 143 requires that the fair value of an asset'retirement obligation be recorded when it is incurred. This caused the recorded decommissioning obligation in Entergy's U.S.
Utility business to increase significantly, as Entergy had previously only recorded this obligation as the related costs were collected from customers, and as earnings were recorded on the related trust funds.
* Fair value approach - SFAS 143 requires that these obligations be measured using a fair value approach.
Among other things, this entails the assumption that the costs will be incurred by a third party and will therefore include appropriate profit margins and risk' remiums. Entergy's decommissioning studies had been based on Entergy performing the work, and did not include any such margins or ptemiumsn.
* Discount rate - SFAS 143 requires that these obligations be discounted using a credit-adjusted,'risk-fre' rate.                                     - -                                           '
34

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis The net effect on Entergy's financial statements of implementing SFAS 143 for the U.S. Utility and Non-Utility Nuclear businesses follows:
* For the U.S. Utility business, the implementation of SFAS 143 for the rate-regulated business of the domestic utility companies and System Energy 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 are based on the original or historical cost standard that allows Entergy to recover all ultimate costs of decommissioning existing assets from current and future customers. As a result of this treatment, SFAS 143 is expected to be earnings neutral to the rate-regulated business of the domestic utility companies and System Energy. Upon implementation of SFAS 143 in 2003, assets and liabilities increased by $1.1 billion for the U.S. Utility segment as a result of recording the asset retirement obligations at their fair values of $1.1 billion as determined under SFAS 143, increasing utility plant by $288 million, reducing accumulated depreciation by $361 million and recording the related regulatory assets of $422 million. The implementation of SFAS 143 for the portion of River Bend not subject to cost-based ratemaking decreased earnings by $21 million net-of-tax ($0.09 per share) as a result of a one-time cumulative effect of accounting change. In accordance with ratemaking treatment and as required by SFAS 71, the depreciation provisions for Entergy's utility subsidiaries include a component for removal costs that are not asset retirement obligations under SFAS 143. Approximately 6% of the U.S. Utility's current depreciation rates, on a weighted-average basis, represents a component for the net of salvage value and removal costs.
* For the Non-Utility Nuclear business, the implementation of SFAS 143 in 2003 resulted in a decrease in liabilities of $595 million due to reductions in decommissioning liabilities, a decrease in assets of $340 million, including a decrease in electric plant in service of $315 million, and an increase in earnings of
           $155 million net-of-tax as a result of the one-time cumulative effect of accounting change.
Also, beginning in 2003 Entergy's earnings for the Non-Utility Nuclear business have an increase of $18 million after-tax because of the change in accretion of the liability and depreciation of the adjusted plant costs from the 2002 levels. This effect will gradually decrease over future years as the accretion of the liability increases.
Management expects that applying SFAS 143 post-implementation will have a minimal effect on ongoing earnings for the U.S. Utility business.
In the first quarter of 2004, Entergy Arkansas recorded a revision to its estimated decommissioning cost liability in accordance with a new decommissioning cost study for ANO I and 2 as a result of revised decommissioning costs and changes in assumptions regarding the timing of when the decommissioning of the plants will begin. The revised estimate resulted in a $107.7 million reduction in its decommissioning liability, along with a
$19.5 million reduction in utility plant and an $88.2 million reduction in the related regulatory asset.
In the third quarter of 2004, Entergy Gulf States recorded a revision to its estimated decommissioning cost liability in accordance with a new decommissioning cost study for River Bend that reflected an expected life extension for the plant. The revised estimate resulted in a $116.8 million reduction in decommissioning liability, along with a $31.3 million reduction in utility plant, a $40.1 million reduction in the related regulatory asset, and a regulatory liability of $17.7 million. For the portion of River Bend not subject to cost-based ratemaking, the revised estimate resulted in the elimination of the asset retirement cost that had been recorded at the time of adoption of SFAS 143 with the remainder recorded as miscellaneous income of $27.7 million.
In the third quarter of 2004, Entergy's Non-Utility Nuclear business recorded a reduction of $20.3 million in its decommissioning cost liability to reflect changes in assumptions regarding the timing of when the decommissioning of a plant will begin. Entergy considered the assumptions as part of recent studies evaluating the economic effect of the plant in its region. The revised estimate resulted in miscellaneous income of $20.3 million, reflecting the excess of the reduction in the liability over the amount of undepreciated asset retirement cost recorded at the time of adoption of SFAS 143.
35

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis Unbilled Revenue-As discussed in Note I to the consolidated financial statements, Entergy records an estimate of the revenues earned for energy delivered since the latest customer billing. Each month the estimated unbilled revenue amounts are recorded as revenue and a receivable, and the prior month's estimate is reversed. The difference between the estimate of the unbilled receivable at the beginning of the period and the end of the period is the amount of unbilled revenue recognized during the period. The estimate recorded is primarily based upon an estimate of customer usage during the unbilled period and the billed price to customers in that month, including fuel price. Therefore, revenue recognized may be affected by the estimated price and usage at the beginning and end of each period and fuel price fluctuations, in addition to changes in certain components of the calculation including changes to estimates such as line loss, which affects the estimate of unbilled customer usage, and assumptions regarding price such as the fuel cost recovery mechanism.
Impairment of Long-lived Assets Entergy has significant investments in long-lived assets in all of its segments, and Entergy evaluates these assets against the market economics and under the accounting rules for impairment whenever there are indications that impairments may exist. This evaluation involves a significant degree of estimation and uncertainty, and these estimates are particularly important in Entergy's U.S. Utility and Energy Commodity Services segments. In the U.S. Utility segment, portions of River Bend and Grand Gulf are not included in rate base, which could reduce the revenue that would otherwise be recovered for the applicable portions of those units' generation. In the Energy Commodity Services segment, Entergy's investments in merchant generation assets are subject to impairment if adverse market conditions arise.
In order to determine if Entergy should recognize an impairment of a long-lived asset that is to be held and used, accounting standards 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.
These estimates are based on a number of key assumptions, including:
* Future power and fuel 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 currently an oversupply of electricity throughout the U.S., including 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 of generation assets - Valuing assets held for sale requires estimating the current muarket 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.
Due to the oversupply of power that existed throughout the U.S. and the UK in 2002, and the resulting decreases in spark spreads, consistent with Entergy's point of view, Entergy's impairment tests indicated that a number of impairments were required to be recognized in 2002 in the Energy Commodity Services segment. These impairments, which were also accompanied by other charges related to the restructuring of Entergy's independent power business, are further detailed in Note 11 to the consolidated financial statements.
36

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis In 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 concluded 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."
Pension and Other Postretirement Benefits Entergy sponsors 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 statements, 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 obligations, Entergy reviews market yields on high-quality corporate debt and matches these rates with Entergy's projected stream of benefit payments. Based on recent market trends, Entergy reduced its discount rate used to calculate benefit obligations from 6.75% in 2002 to 6.25% in 2003 and to 6% in 2004. 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, 2004 accumulated postretirement benefit obligation to -a10%
increase in health care costs in 2005 gradually decreasing each successive year, until it reaches a 4.5% annual increase in health care costs in 2011 and beyond.
In determining its expected long-term rate of return on plan assets, Entergy reviews past long-term performance, asset allocations, and long-term inflation assumptions. Entergy targets an asset allocation for its pension plan assets of roughly 65% equity securities, 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 2002 and 2003 to 8.5% in 2004. The assumed rate-of increase in future compensation levels used to calculate benefit obligations was 3.25% in 2002, 2003, and 2004.
37

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis Cost Sensitivity The following chart reflects the sensitivity of pension cost to changes in certain actuarial assumptions (in thousands):
Change in          Impact on 2004         Impact on Projected Actuarial Assumption                  Assumption           Pension Cost           Benefit Obligation Increase/(Decrease)
Discount rate                                  (0.25%)               $10,268                    $94,903 Rate of return on plan assets                  (0.25%)                $4,388 Rate of increase in compensation                0.25%                 $4,928                    $29,134 The following chart reflects the sensitivity of postretirement benefit cost to changes in certain actuarial assumptions (in thousands):
Impact on Accumulated Change in              Impact on 2004              Postretirement Benefit Actuarial Assumption                Assumption        Postretirement Benefit Cost              Obligation Increase/(Decrease)
Health care cost trend                    0.25%                       $4,150                         $23,892 Discount rate                            (0.25%)                      $2,715                         $28,719 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 utilizes a number of accounting mechanisms that reduce the volatility 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 necessary, the excess is amortized over the average remaining service period of active employees.
Additionally, Entergy accounts for the effect of asset performance on pension expense over a twenty-quarter phase-in period through a "market-related" value 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 pension plan assets experienced in 2062 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 accordance with SFAS 87.
Costs and Funding In 2004,. Entergy's total pension cost was $98 million. Entergy anticipates 2005 pension cost to increase to
$117 million due to decreases in the discount rate (from 6.25% to 6.00%) and the expected rate of return (from 8.75%. to 8.5%) used to calculate benefit obligations. Pension funding was $73 million for 2004 and in 2005 is projected to be $186 million. The rise in pension funding requirements is due to declining interest rates and the phased-in effect of asset underperformance from 2000 to 2002, offset by the Pension Funding Equity Act relief passed in April 2004.
Entergy's accumulated benefit obligation at December 31, 2004, 2003, and 2002 exceeded plan assets. As a result, Entergy was required to recognize an additional minimum pension liability as prescribed by SFAS 87. At December 31, 2004, Entergy increased its additional minimum pension liability to $244 million ($218 million net of related pension assets) from $180 million ($149 million net of related pension assets) at December 31, 2003.
Other comprehensive income decreased to $6.6 million at December 31, 2004 from $9.3 million at December 31, 2003, after reductions for the unrecognized prior service cost, amounts recoverable in rates, and taxes. Net income for 2004, 2003, and 2002 was not affected.
38

Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis Total postretirement health care and life insurance benefit costs for Entergy in 2004 were $86 million, including $23 million in savings due to the estimated effect of future Medicare Part D subsidies. Entergy expects 2005 postretirement health care and life insurance benefit costs to approximate $96 million, including a projected
$27 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 discount rate (from 6.25% to 6.00%) and an increase in the health care cost trend rate used to calculate benefit obligations.
Other Contingencies Entergy, as a company with multi-state domestic utility operations, and which also had investments in international projects, 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:
* 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.
* The identification of additional sites or the filing of other complaints in which Entergy may be asserted to be a potentially responsible party.
* 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 litigation 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 transaction, 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, additional transactions contemplated by Entergy, or completion of reviews of the tax treatment of certain transactions or issues by taxing authorities. Tax reserves not expected to reverse within the next year are reflected as non-current taxes accrued in the financial statements. Entergy does not expect a material adverse effect on earnings from these matters.
39

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ENTERGY CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA - FIVE-YEAR COMPARISON 2004             2003            2002              2001           2000 (In Thousands, Except Percentages and Per Share Amounts)
Operating revenues                          $10,123,724         $9,194,920      $8,305,035        $9,620,899    $10,022,129 Income before cumulative effect of accounting change                              $933,049          $813,393         $623,072         $727,025        $710,915 Earnings per share before cumulative effect of accounting change Basic                                              $4.01            $3.48            $2.69             $3.18         $3.00 Diluted                                            $3.93            $3.42            $2.64             $3.13         $2.97 Dividends declared per share                         $1.89            $1.60            $1.34             $1.28         $1.22 Return on common equity                             10.70%           11.21%            7.85%            10.04%         9.62%
Book value per share, year-end                      $38.25           $38.02           $35.24            $33.78        $31.89 Total assets                                $28,310,777        $28,527,388     $27,504,366      $25,910,311     $25,451,896 Long-term obligations (1)                    $7,180,291         $7,497,690      $7,488,919        $7,743,298     $8,214,724 (1) Includes long-term debt (excluding currently maturing debt), preferred stock with sinking fund, and noncurrent capital lease obligations.
2004             2003,            2002              2001          2000 (Dollars In Millions)   :
Electric Operating Revenues:
Residential       -     i                         $2,842           $2,683           $2,440            $2,613        $2,525 Commercial                                         2,045            1,882            1,673             1,860          1,700 Industrial                                         2,311            2,082            1,850             2,299         2,177 Governmental                                         200,             195              179               205            185 Total retail                                i    7,398            6,842            6,142             6,977         6,587 Sales for resale                                     390              371              330               395            424 Other (1)                                            145              184              174  -
(127)           209 Total                            '              $7,933           $7,397     -     $6,646            $7,245        $7,,20 Billed Electric Energy Sales (GWh):
Residential                                       32,897           32,817           32,581            31,080     I 31,998 Commercial                                        26,468           25,863           25,354            24,706        24,657 Industrial                                        40,293           38,637           41,018        i '41,577       ' 43,956 Governmental                                       2,568            2,651            2,678             2,593         2,605 Total retail                                   102,226           99,968          101,631            99,956       103,216 Sales for resale                                   8,623            9,248            9,828.            8,896          9,794 Total                                          110,849          109,216          111,459           108,852       113,010 (1) 2001 includes the effect of a reserve for rate refund at System Energy.
41

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Entergy Corporation:
We have audited the accompanying consolidated balance sheets of Entergy Corporation and subsidiaries (the "Corporation") as of December 31, 2004 and 2003, and the related consolidated statements of income; of retained earnings, comprehensive income, and paid-in capital; and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Corporation's management. Our responsibility 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 31, 2003 includes $180,110,000 for 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 auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Entergy Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Notes 1, 5 and 8 to the Form 10-K consolidated financial statements, Entergy Corporation adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, and Statement of Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable InterestEntities, in 2003, and SFAS No. 142, Goodwill and OtherIntangibleAssets, in 2002.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Corporation's internal control over financial reporting as of Decembler 31, 2004, 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 8, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Corporation's internal control over financial reporting and an unqualified opinion on the effectiveness of the Corporation's internal control over financial reporting.
DELOITTE & TOUCHE LLP New Orleans, Louisiana March 8, 2005 42

ENTERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December31, 2004                 2003                     2002 (I. Thousands, Except Share Data)
OPERATING REVENUES Domestic electric                                                 $7,932,577           $7,397,175              $6,646,414 Natural gas                                                           208,499      , ,j     186,176          :      125,353 Competitive businesses ,                                            1,982,648            1,611,569               1,533,268            -.
TOTAL                                                              10,123,724            9,194,920               8,305,035 OPERATING EXPENSES Operating and Maintenance:
Fuel, fuel-related expenses, and gas purchased for resale                                         2,488,208           *1,987,217               2,154,596 Purchased power                                                   2,092,922            1,728,526                  833,829 Nuclear refueling outage expenses                                   166,072               159,995                 105,592 Provisions for turbine commitments, asset impairments and restructuring charges                                            55,000                (7,743)'  -           428,456 Other operation and maintenance                                   2,303,561            2,453,869               2,486,617 Decommissioning                                                        149,529              146,100                   76,417 Taxes other than income taxes                                         409,886               405,659                 380,462 Depreciation and amortization                                         895,593               850,503                 839,181 Other regulatory credits - net                                         (90,611)             (13,761)               (141,836)
TOTAL                                                               8,470,160            7,710,365               7,163,314 OPERATING INCOME                                                    1,653,564             1,484,555               1,141,721, i              . . .
OTHER-INCOME Allowance for equity funds used during construction                     39,582                42,710                  31,658 Interest and dividend income                                           109,809             . 87,386 i                118,325 Equity in earnings (loss) of unconsolidated equity affiliates          (78,727)             271,647                  183,878 Miscellaneous - net                                                     53,752              (76,505)                   13,892 TOTAL                                                              - 124,416
                                                                        -         -       -325,238 -- -             347,753.
INTEREST AND OTHER CHARGES Interest on long-term debt                                            463,384               485,964                 526,442 Other interest - net                                                    41,380                533,553 '               70,560 Allowance for borrowed funds used during construction                  (25,741)              (I3,191)                (24,538)
TOTAL                         -                                       479,023               506,326            '- 572,464 I I 9: : .7 .                      3 INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES                          - 1,298,957     '        1,303,467       r .'      ;917,010' I .
Income taxes                                                           365,908              490,074                 293,938
                                                                                                          ,-      I    . I. .- : I ,
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES                                                  933,049              813,393 i               623,072 CUMULATIVE EFFECT OF ACCOUNTING CHANGES (net of Income taxes of S89,925)                                                     137,074 CONSOLIDATED NET INCOME                                                933,049              950,467                  623,072 Preferred dividend requirements and other                               23,525                23,524                   23,712 EARNINGS APPLICABLE TO COMMON STOCK                                                         $909,524              $926,943                S599,360 Earnings per average common share before cumulative effect ofaccounting changes:
Basic                                                                  $4.01                 $3A8                     $2.69 Diluted                                                                S3.93                 S3.42                    $2.64 Earnings per average common share:
Basic                                                                  $4.01                 $4.09                    $2.69 Diluted                                                                $3.93                 $4.01                    $2.64 Dividends declared per common share                                       $1.89                 $1.60                    $1.34 Average number of common shares outstanding:
Basic                                                           226,863,758          226,804,370             223,047,431 Diluted                                                         231.193.686          231.146.040             227.303.103 See Notes to Consolidated Financial Statements.
43

ENTERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2004                     2003               2002 (In Thousands)
OPERATING ACTIVITIES Consolidated net income         .                                    ..                $933,049                $950,467           $623,072 Adjustments to reconcile consolidated net income to net cash flow provided by operating activities:
Reserve for regulatory adjustments                                                        33;533.     -           13,090            18,848 Other regulatory credits - net                                                          (90,611)                 (13,761)        (141,836)
Depreciation, amortization, and decommissioning                                       1,045,122                996,603            915,597 Deferred income taxes and investment tax credits                                        275,458              1,189,531           (256,664)
Cumulative effect of accounting changes                                                                       (137,074)
Equity in earnings (loss) of unconsolidated equity affiliates - net of dividends        608,141               (176,036)          (181,878)
Provisions for turbine commitments, asset impairments, and restructuring charges          55,000                  (7,743)         428,456 Changes in working capital:
Receivables                                                                          (2 10,419)             (140,612),           (43,957)
Fuel inventory                                                                        (16,769)                 (14,015)            1,030 Accounts payable                                                                        95,306                 (60,164)         286,230 Taxes accrued                                                                           75,055              (882,446)           462,956 Interest accrued                                                                         5,269                 (35,837)            7,209 Deferred fuel                                                                         213,627                  (33,874)          156,181 Other working capital accounts                                                          41,008'.
* 16,809         (286,232)
Provision for estimated losses and reserves                                             (18,041)                196,619             10,533 Changes in other regulatory assets                                                        48,626                  22,671            71,132 Other                                                                                  (164,035)
* 121,592            111,026 Net cash flow provided by operating activities                                       2,929,319                2,005,820          2,181,703 INVESTING ACTIVITIES Construction/capital expenditures                                - -                (1,410,610)              (1,568,943)        (1,530,301)
Allowance for equity funds used during construction                                        39,582                  42,710            31,658 Nuclear fuel purchases                .                                                 (238,170)    -      ' (224,308>           (250,309)
Proceeds from sale/leaseback of nuclear fuel                                             109,988                 150,135            183,664 Proceeds from sale of assets and businesses                                                75,430                  25,987          215,088 Investment in nonutility properties      --                                                (6,420)                (71,438)        (216,956)
Decrease in other investments         -                                                  383,498                  172,187            38,964 Changes in other temporary investments                                                     50,000          .      (50,000).,        150,000 Decommissioning trust contributions and realized change in trust assets                   (89,807)                (91,518)          (84,914)
Other regulatory investments                                                             (53,566)              (156,446)            (39,390)
Other                  .,                                                                        -                (11,496)          114,033 Net cash flow used in investing activities                                          (1,140,075)              (1,783,130)        (1,388,463)
:  .             - t'         -    -     C;.:
See Notes to Consolidated Financial Statements.
                                                                                                        ,;W 44

ENTERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2004                   2003           2002 (In Thousands)
FINANCING ACTIVITIES Proceeds from the issuance of:
Long-term debt                                                                      1,059,824           - 2,221,164       1,197,330 Common stock and treasury stock                                                        170,237               217,521          130,061 Retirement of long-term debt                                                        (1,478,894)            (2,409,917)    (1,341,274)
Repurchase of common stock                                                          (1,017,996)                 (8,135)      (118,499)
Redemption of preferred stock                                                             (3,450)               (3,450)         (1,858)
Changes in credit line borrowings - net                                                   49,846             (499,975)         244,333 Dividends paid:
Common stock                                                                          (427,901)             (362,814).      (298,991)
Preferred stock                                                                         (23,525)              (23,524)        (23,712)
Net cash flow used in financing activities                                          (1,671,859)              (869,130)       (212,610)
Effect of exchange rates on cash and cash equivalents                                      (1,882)               3,345           3,125 Net increase (decrease) in cash and cash equivalents                                    115,503              (643,095)         583,755 Cash and cash equivalents at beginning of period                                        692,233             1,335,328          751,573 Cash and cash equivalents at end of period                                            $807,736               $692,233     $1,335,328 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest - net of amount capitalized                                                S477,768               $552,017        $633,931 Income taxes                                                                         $28,241              $188,709          $57,856 Noncash investing and financing activities:
Debt assumed by the Damhead Creek purchaser                                                                                $488,432 Decommissioning trust funds acquired in nuclear power plant acquisitions                                                   $310,000 Long-term debt refunded with proceeds from long-term debt issued in prior period                                                                                    ($47,000)
See Notes to Consolidated Financial Statements.
a , : s 45

ENTERGY CORPORATION AND SUBSIDIARIES
* CONSOLIDATED BALANCE SHEETS,          ,
ASSETS December 31, 2004                   2003 (In Thousands)
CURRENT ASSETS Cash and cash equivalents:
Cash                                                                         $79,136             $115,112 Temporary cash investments- at cost, which approximates market.                                                  728,600               576,813 Special deposits                                                                                       308 Total cash and cash equivalents                                            807,736               692,233 Other temporary investments                                                                          50,000 Notes receivable                                                                  3,092               1,730 Accounts receivable:
Customer     --                                                              435,191               398,091 Allowance for doubtful accounts                                             (23,758)              (25,976)
Other                                                                        342,289               246,824 Accrued unbilled revenues                                                    460,039               384,860 Total receivables                                                       1,213,761              1,003,799 Deferred fuel costs                                                             85,911              245,973 Accumulated deferred income taxes                                               76,899 Fuel inventory - at average cost.                                             127,251               110,482 Materials and supplies - at average cost                                      569,407               548,921 Deferred nuclear refueling outage costs                                       107,782               138,836 Prepayments and other                                                         116,279               127,270 TOTAL                                                                      3,108,118             2,919,244 OTHER PROPERTY AND INVESTMENTS                        ji';,  ,'     ;   !, '
Investment in affiliates - at equity                                          231,779            1,053,328 .
Decommissioning trust funds                                                2,453,406             2,278,533 Non-utility property - at cost (less accumulated depreciation)                219,717              262,384   -.. ,;
Other                                                                           90,992              152,681.
TOTAL                                                                      2,995,894             3,746,926 PROPERTY, PLANT AND EQUIPMENT Electric                                                                 29,053,340            28,035,899 Property under capital lease                                                  738,554              751,815 Natural gas                                                                  262,787               236,622 Construction work in progress                                              1,197,551             1,380,982 Nuclear fuel under capital lease                                              262,469              278,683 Nuclear fuel                                                                  320,813              234,421 TOTAL PROPERTY, PLANT AND EQUIPMENT                                      31,835,514            30,918,422 Less - accumulated depreciation and amortization                         13,139,883             12,619,625 PROPERTY, PLANT AND EQUIPMENT - NET                                      18,695,631             18,298,797 DEFERRED DEBITS AND OTHER ASSETS Regulatory assets:
SFAS 109 regulatory asset - net                                              746,413              830,539 Other regulatory assets                                                   1,429,261             1,398,323 Long-term receivables                                                          39,417                20,886 Goodwill                                                                      377,172              377,172 Other                                                                        918,871               935,501 TOTAL                                                                      3,511,134             3,562,421 TOTAL ASSETS                                                           S28,310,777            $28,527,388 See Notes to Consolidated Financial Statements.
46

ENTERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY December 31, 2004                 2003 (In Thousands)
CURRENT LIABILITIES Currently maturing long-term debt                                       $492,564             $524,372 Notes payable                                                                  193                 351 Accounts payable                                                          896,528             796,572 Customer deposits                                                         222,320             199,620 Taxes accrued                                                             224,011             224,926 Accumulated deferred income taxes                                                               22,963 Nuclear refueling outage costs                                                                   8,238 Interest accrued                                                          144,478             139,603 Obligations under capital leases                                          133,847             159,978 Other                                                                     218,442             145,453 TOTAL                                                                  2,332,383            2,222,076 NON-CURRENT LIABILITIES Accumulated deferred income taxes and taxes accrued                    5,067,381            4,779,513 Accumulated deferred investment tax credits                               399,228             420,248 Obligations under capital leases                                          146,060             153,898 Other regulatory liabilities                                              329,767             291,239 Decommissioning and retirement cost liabilities                        2,066,277            2,215,490 Transition to competition                                                  79,101               79,098 Regulatory reserves                                                       103,061               69,528 Accumulated provisions                                                    549,914             506,960 Long-term debt                                                         7,016,831            7,322,940 Preferred stock with sinking fund                                          17,400               20,852 Other                                                                    ,541331            1,407,551 TOTAL                                                                 17,316,351           17,267,317 Commitments and Contingencies Preferred stock without sinking fund                                      365,356             334,337 SHAREHOLDERS' EQUITY Common stock, $.01 par value, authorized 500,000,000 shares; issued 248,174,087 shares in 2004 and in 2003                       2,482               2,482 Paid-in capital                                                        4,835,375            4,767,615 Retained earnings                                                      4,984,302            4,502,508 Accumulated other comprehensive loss                                     (93,453)              (7,795)
Less - treasury stock, at cost (31,345,028 shares in 2004 and 19,276,445 shares in 2003)                                           1,432,019              561,152 TOTAL                                                                  8,296,687            8,703,658 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                           S28,310,777         S28,527,388 See Notes to Consolidated Financial Statements.
47

                                                        ; ENTERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME, AND PAID-IN CAPITAL For the Years Ended December 31, 2004                               2003                             2002 (In Thousands)
RETAINED EARNINGS Retained Earnings - Beginning of period                          $4,502,508                        $3,938,693                        $3,638,448 Add: Earnings applicable to common stock                          909,524      $909,524            926,943         $926,943          599,360       $599,360 Deduct:
Dividends declared on common stock                            427,740                           362,941                           299,031 Capital stock and other expenses                                    (10)                               187                              84 Total                                                      427,730                           363,128                           299,115 Retained Earnings - End of period                                $4,984,302                        $4,502,508                     - $3,938,693 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Net of taxes):
Balance at beginning of period:
Accumulated derivative instrument fair value changes              (325,811)                            $17,313                        ($17,973)
Other accumulated comprehensive income (loss) items                  18,016                           (39,673)                         (70,821)
Total                                                              (7,795)                          (22,360)                         (88,794)
Net derivative instrument fair value changes arising during the period                                         (I115,600)     (I115,600)           (43,124)         (43,124).        35,286         35,286 Foreign currency translation                                            1,882         1,882               4,169           4,169          65,948        (15,487)
Minimum pension liability                                              2,762          2,762                1,153          1,153         (10,489)       (10,489)
Net unrealized investment gains (losses)              .               25,298         25,298             52,367           52,367-     '  (24,311)       (24,311)
Balance at end of period-Accumulated derivative instrument fair value changes              (141,41 1)                          (25,81 1)                          17,313 Other accumulated comprehensive income (loss) items                  47,958                             18,016       $   .   .1  *-    (39,673)
Total                                                           ($93,453)                           ($7,795)                        ($22,360)
Comprehensive Income                                                              $823,866                 x          $941,508                        $584,359 PAID-IN CAPITAL Paid-in Capital - Beginning of period                            S4,767,615                        $4,666,753                        $4,662,704 Add:
Common stock issuances related to stock plans -                                                  100,862                             4,049
                                                                                                   $4,7I ,6.
Paid-in Capital - End of period                                  $4,835,375                        S4,767,615                        S4,666,753 See Notes to Consolidated Financial Statements.
48

ENTERGY CORPORATION AND SUBSIDIARIES 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 subsidiaries. As required by generally accepted accounting principles, all significant intercompany transactions have been eliminated in the consolidated financial statements. The domestic utility companies and System Energy maintain accounts in accordance with FERC and other regulatory guidelines.
Certain previously reported amounts have been reclassified to conform to current classifications, with no effect on net income or shareholders' equity.
Use of Estimates in the Preparation of Financial Statements The preparation of Entergy Corporation's consolidated financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions, that affect the reported amounts of assets and liabilities and disclosure of contingent 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 different from the estimates used.
Revenues and Fuel Costs The domestic utility companies 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 in and around Baton Rouge, Louisiana and Entergy New Orleans distributes gas to retail customers in the City 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 recorded 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 unbilled revenues from one period to the next, and may result in variability in reported revenues from one period to the next as prior estimates are so recorded and reversed.
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 fixed 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 financial statements, the MPSC approved Entergy Mississippi's deferral of the refund of over-recoveries for the third quarter of 2004 that would have been refunded in the first quarter of 2005. The deferred amount plus carrying charges will be 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 as regulatory investments in the cash flow statements 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.
49

Entergy Corporation Notes to Consolidated Financial Statements 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 attributable 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.
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.
Net property, plant, and equipment by business segment and functional category, as of December 31, 2004 and 2003, is shown below:
Energy U.S.         Non-Utility    Commodity. Parent and 2004                      Entergy         Utility         Nuclear       Services-_      Other (In Millions)
Production Nuclear                                     $7,308        $5,987            $1,321 Other                                         1,533         1,228                             305 Transmission                                      2,182          2,182 Distribution                                      4,672          4,672 Other                                              1,123         1,115                                              8 Construction work in progress                      1,198             924            244              2             28 Nuclear fuel (leased and owned)                      583             297            286.
Asset retirement obligation               ;        - 97                 97 6
Pr perty, plant, and equipment - net            $18,696       $16,502            $1,851           $307            $36 I .
Energy U.S.          Non-Utility    Commodity     Parent and 2003                     Entergy         Utility          Nuclear       Services        Other (In Millions)
Production Nuclear                                    $7,056          $6,112             $944 Other                                        1,816.
* 1,359                             457 Transmission                                   , 2,067           2,067 Distribution                                     4,231           4,231 Other                                            i,079           1,069                                             10 Construction work in progress                     1,381              954            398                            29 Nuclear fuel (leased and owned)                     513              298            215 Asset retirement obligation                         156
                                                    $             .6, 2155             7          $
Property, plant, and equipment - net           $18,299 .$16,245            -     $1,557           $458           $39 50

Entergy Corporation Notes to Consolidated Financial Statements 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 2.8% in 2004 and 2003, and 2.9% in 2002. Included in these rates are the depreciation rates on average depreciable utility property of 2.7% in 2004 and 2.8% in 2003 and 2002 and the depreciation rates on average depreciable non-utility property of 3.8% in 2004, 3.3% in 2003, and 4.0% in 2002.
Non-utility property - at cost (less accumulated depreciation) is reported net of accumulated depreciation of
 $152.8 million and $145.2 million as of December 31, 2004 and 2003, 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, 2004, the subsidiaries' investment and accumulated depreciation in each of these generating stations were as follows:
Total Megawatt                                           Accumulated Generating Stations               Fuel-Type       Capability (1)     Ownership         Investment Depreciation (In Millions)
U.S. Utility:
Grand Gulf           Unit 1                  Nuclear              1,270          90.00% (2)         $3,702            $1,780 Independence         Units I and 2             Coal               1,630          47.90%               $462               $249 White Bluff          Units 1 and 2             Coal               1,635          57.00%               $428               $264 Roy S. Nelson        Unit 6                    Coal                 550          60.90%               $403               $241 Big Cajun 2          Unit 3                    Coal                 575          42.00%               $233               $128 Energy Commodity Services:
Harrison County                                 Gas                 550          61.00%               $209                 $7 Warren                                         Gas                  300          75.00%                 $24                $9 (1)    "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.
Nuclear Refueling 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 without having to be taken off line. Except for the River Bend plant, the costs are deferred during the outage and amortized over the period to the next outage. In accordance with the regulatory treatment of the River Bend plant, River Bend's costs are accrued in advance and included in the cost of service used to establish 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 plant balance and earnings, it is realized in cash through depreciation provisions included in rates.
51

Entergy Corporation Notes to Consolidated Financial Statements Income Taxes Entergy Corporation and the majority of its subsidiaries file a United States consolidated federal income tax return. Income taxes are allocated to the subsidiaries in proportion to their contribution to consolidated taxable income. SEC regulations require that no Entergy subsidiary pay more taxes than it would have paid if a separate income tax return had been filed. In accordance with SFAS 109, "Accounting for Income Taxes," deferred income taxes are recorded for all temporary differences 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.
Earnings per Share The following table presents Entergy's basic and diluted earnings per share (EPS) calculation included on the consolidated income statement:
For the Years Ended December 31, 2004                  2003                  2002 (In Millions, Except Per Share Data)
                                                                   $Ishare              $/share                 $/share Income before cumulative effect of accounting change                                 $909.5                $789.9               $599.4 Average number of common shares outstanding - basic                                226.9      $4.01      226.8       $3.48     223.0         $2.69 Average dilutive effect of:
* Stock Options (1)                                   4.3    (0.075)        4.1   (0.062)         3.9      (0.046)
Equity Awards                                        -            -      0.2    (0.004)        0.4      (0.005)
Average number of common shares outstanding - diluted                              231.2      $3.93      231.1       $3.42     227.3         $2.64 Earnings applicable to common stock               $909.5                $926.9               $599.4 Average number of common shares outstanding 7 basic                                226.9      $4.01      226.8       $4.09     223.0    ' i.
                                                                                                                   $2.69 Average dilutive, effect of:                                                        I. I  -. I I' .:         ~i Stock Options (1)                                  4.3    (0.075) .     ~4.1    (0.073).       3.9 (0.046),
Equity Awards                                                          .0.2     (0.004)        0,4 ' (0.005)
Average number of common shares outstanding - diluted                              231.2      $3.93      231.1       $4.01     227.3         $2.64 (1)      Options to purchase approximately 3,319 common stock shares in 2004, 15,231 common stock shares in 2003, and 109,897 common stock shares in 2002 at various prices were outstanding at the end of those years 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 each of the years presented.
52

Entergy Corporation Notes to Consolidated Financial Statements Stock-based Compensation Plans Entergy grants stock options to key. employees of the Entergy subsidiaries, which is described more fully in Note 7 to the consolidated financial statements. Prior to 2003, Entergy applied the recognition and measurement principles of APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for those plans. No stock-based employee compensation expense is reflected in 2002 net income as all options granted under the plans have an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1,2003, Entergy prospectively adopted the fair value based method of accounting for stock options prescribed by SFAS 123, "Accounting for Stock-Based Compensation." Awards under Entergy's plans vest over three years. Therefore, the cost related to stock-based employee compensation included in the determination of net incotne 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 effective date of SFAS 123. The following table illustrates ;the effectr   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.
For the Years Ended December 31, 2004              2003               2002 (InThousands, Except Per Share    Data)
Earnings applicable to common stock                             $909,524          $926,943          $599,360 Add back: Stock-based compensation expense included
 !'     in earnings applicable to common stock, net of related                                     -
tax effects                                                        5jl41             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             28,110 Pro forma earnings applicable to common stock                  $897,997          $905,243          $571,250 Earnings per average common share:                                                                 -       -
Basic                                                            $4.01       .     $4.09             $2.69 Basic -pro forma                                   -             $3.96             $3;99             $2.56 Diluted                                                          $3.93             $4.01             $2.64 Diluted - pro forma                                              $3.88           '$3.92              $2.51 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 otherwise 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 retu'n on investment during' their recovery peri6ds.
SFAS 71 requires that rate-regulated enterprises assess the probability of recovering their regulatory assets at each balance sheet date. When 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 FASB Statement No. 71," specifies how an enterprise that ceases to meet the criteria for application of SFAS 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 53

Entergy Corporation Notes to Consolidated Financial Statements 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.
EITF 974: "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101" specifies that SFAS 71 should be discontinued 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 974 promulgates 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 SFAS 71.
See Note 2 to the consolidated financial statements for discussion of transition to competition activity in the retail regulatory jurisdictions 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 determine 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 temporary investments on the balance sheet.
Investments Entergy applies the provisions of SFAS 115, "Accounting for Investments for Certain Debt and Equity Securities," in accounting for investments in decommissioning trust funds. As a result, Entergy records the decommissioning trust funds at their fair value on the consolidated balance sheet. 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/(losses) on investment securities in other regulatory liabilities/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 shareholders' 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.
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 operations. 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. The equity earnings for Entergy-Koch, LP recorded by Entergy are dictated by the terms of the partnership agreement in accordance with the hypothetical liquidation at book value (HLBV) method. In accordance with the HLBV method, earnings are allocated to members based on what each partner would receive from their 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 or commitments to provide additional financial support.. See Note 12 to the consolidated financial statements for additional information regarding Entergy's equity method investments.                                                I 54

Entergy Corporation Notes to Consolidated Financial Statements Derivative Financial Instruments and Commodity Derivatives
        - SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," requires that all derivatives be recognized in the balance sheet, either as assets or liabilities, at fair value, unless they meet the normal purchase, normal sales criteria. The changes in the fair value of recognized derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction.
Contracts for commodities that will be delivered in quantities expected to be used or sold in.the ordinary course of business, including certain purchases and sales of power and fuel, are not classified as derivatives. These contracts are exempted under the normal purchase,; normal sales criteria of SFAS 133. Revenues and expenses from these contracts are reported on a gross basis in the appropriate revenue and expense categories-as the commodities are received or delivered.'              ' '
For other contracts for commodities in which Entergy is hedging the variability of cash flows related to a variable-rate asset, liability, or forecasted transactions that qualify as cash flow hedges, the changes in the fair value of such derivative instruments are reported in other comprehensive income. To qualify for hedge accounting, the relationship between the hedging instrument and the hedged item must be documented to include the risk management objective ad strategy and, at inception and on an ongoing basis, the effectiveness of the hedge in offsetting the changes in the 'cash flows of! the item being hedged.' Gains or -losses accumulated in 'other comprehensive income are reclassified as earnings in the periods in which earnings are affected by the variability of the cash flows of the hedged item. The ineffective portions of all hedges are recognized in current-period earnings.
Impairment of Long-Lived Assets .                .          "
Entergy periodically reviews long-lived assets held in all of its business segments whenever events or changes in circumstances indicate that recoverability of these assets is uncertain. Generally, the determination'of recoverability is based on the undiscounted net cash flows expected to result from such operations and assets.
Projected net cash flows depend'on the future operating costs associated with the assets, the efficiency and availability of'the assets'and generating units,- and the future market and price for energy over the remaining life of the assets. See Note 11 to the consolidated financial statements for a: discussion of asset impairments recognized by Entergy in 2002 and 2004.
River                                                               '    -'                  '                           :U The River Bend AFUDC gross-up is a regulatory asset that represents the incremental difference imputed by the LPSC between the 'AFUDC actually, recorded by 'Entergy Gulf States on a net-of-tax. basis during the construction of River Bend and what the AFUDC would have been on apre-tax basis. The imputed amount was only calculated on that portion of River Bend that the LPSC allowed in rate base and is being amortized over the estimated remaining economic life of River Bend. ."'           .                       -
Transition to Competition Liabilities In conjunction with electric utility. industry. restructuring activity in Texas, regulatory mechanisms were established to mitigate potential. stranded costs. 'Texas- restructuring legislation: allowed depreciation on transmission and distribution assets to be directed toward.generation assets. The liability recorded as a result of this mechanism is classified as "transition-to competition" deferred credits on the balance sheet,
                                                   ,     .t           i              .  . -                ;           .    , ,
:-     .,     I.  .V Reacquired Debt The premiums and costs associated with reacquired debt of the domestic utility companies and System Energy (except that portion allocable to the deregulated operations of Entergy Gulf States) are being amortized over the life of the related new issuances, in accordance with ratemaking treatment.
                                                              '55

Entergy Corporation Notes to Consolidated Financial Statements Foreign Currency Translation All assets and liabilities of Entergy's foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of the, period. Revenues and expenses are translated at average exchange rates prevailing during the, period. The resulting translation adjustments are reflected in a separate component of shareholders' equity. Current exchange rates are used for U.S. dollar disclosures of future obligations denominated in foreign currencies.
New Accounting Pronouncements During 2004, Entergy adopted the provisions of FSP 106-2, "Accounting and Disclosure Requirements Related to Medicare Prescription Drug, Improvement and Modernization Act of 2003," which is discussed further in Note 10 to the consolidated financial statements. Entergy also adopted FSP 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" and FSP 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision Within the American Jobs. Creation Act of 2004" which are further discussed in Note 3 to the consolidated financial statements.
SFAS 123R, "Share-Based Payment" was issued in December of 2004 and is effective for Entergy at the beginning of the third quarter in 2005; SFAS 123R requires all employers to account for share-based payments at fair value and also provides guidance on determining the assumptions to estimate fair value. SFAS 123R also provides guidance on how to account for differences in the amounts of deferred taxes initially recorded when the options are recorded as expense and the amount of expense deducted on a company's tax return when the options are actually exercised. Entergy began voluntarily expensing its stock options effective JanuaryA.1, 2003 in accordance with SFAS 148, "Stock-Based Compensation - Transition and Disclosure." Entergy is in the process of evaluating the reporting and disclosure issues resulting from the adoption of SFAS 123R but does not expect the effect of the adoption of this standard to be material to Entergy's financial position or results of operations.
SFAS 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4" and SFAS 153, "Exchanges of Nonrmonetary Assets", were also issued during the fourth, quarter of 2004 and are effective for Entergy in 2006 and 2005, respectively. Entergy does not expect the impact of the adoption of these standards to be material.
During 2003, Entergy adopted the provisions of the following accounting standards: SFAS 143, "Accounting for Asset Retirement Obligations," which is discussed further in Note 8 to the consolidated financial statements; FIN 46, Consolidation of Variable Interest Entities," which is discussed further in Note 5 to the consolidated financial statements; and SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." 'tSFAS 150, which became effective July 1, 2003,. requires mandatorily redeemable financial instruments to be classified and treated as liabilities in. the presentation of financial'position and results of operations. The only effect of implementing SFAS 1.50 for Entergy is the inclusion of long-term debt and preferred stock with sinking fund under the liabilities caption in Entergy's balance sheet.
Entergy's results of operations and cash flows were not affected by SFAS 150.
During 2003, Entergy also adopted the provisions of the following accounting standards: EITF 02-3,
!'Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities"; SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" and related interpretations by the Derivatives Implementation Group, and FIN 45, "Guarantor's Accounting and Disclosure, Requirements for; Guarantees Including Indirect Guarantees of Indebtedness of Others". The adoption of these standards did not have a material effect on Entergy's financial statements.
56

Entergy Corporation Notes to Consolidated Financial Statements NOTE 2:              RATE AND REGULATORY MATTERS                                  I E r rty ta         e       t                i Electric Industry Restructuring and the Continued Application of WFAS 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. Entergy believes that significant issues remain to be addressed by regulators, and the enacted law in Texas does not provide sufficient detail to allow Entergy Gulf States to reasonably determine the impact on Entergy Gulf States' regulated operations.'- Entergy therefore continues to apply regulatory accounting principles to the retail operations of all of the domestic utility companies. Following is a summary of the status of retail open access in the domestic utility companies' retail service territories.
        .,                                                                                                        % of Entergy's 2004 Revenues Derived from Retail Electric Utility Operations Jurisdiction                                Status of Retail Open Access                                     in the Jurisdiction Arkansas                Retail open access was repealed in February 2003.                                              11.6%
Texas                   In July 2004, the PUCT effectively rejected Entergy Gulf States' proposal to                   11.8%
implement retail open access in its service territory. In February 2005, bills were submitted in the Texas Legislature that would specify that retail open
 ,     I --             access will not commence in Entergy Gulf States' territory until the PUCT t ;  I.,
certifies a power region.
Louisiana               The LPSC has deferred pursuing retail open access, pending developments at                     34.1%
the federal level and in other states. In response to a study submitted to the LPSC that was funded by a group of large industrial customers, the LPSC recently has soliditedcornments regarding a limited retail access program. It is uncertain what action, if any, the LPSC might take in response to the information it received.
Mississippi             The MPSC has recommended not pursuing open access at this time.                                10.9%
New Orleans             The Council has taken no action on Entergy New Orleans' proposal filed in                       4.5%
1997.
Texas As ordered by the PUCT, in January 2003 Entergy Gulf States filed its proposal for an interim solution (retail open access without a FERC-approved RTO), which among other elements, included:
* the recommendation that retail open access in Entergy Gulf States' Texas service territory, including corporate unbundling, occur by January 1, 2004, or else be delayed until at least January 1, 2007. If retail open access is delayed past January 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.
* the recommendation 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.
* the recommendation that the decision points be identified that would require prior to January 1, 2004, the PUCT's determination, based upon objective criteria, whether to proceed with further efforts toward retail open access in Entergy Gulf States' Texas service territory.
57

Entergy Corporation Notes to Cdnsolidated Financial Statements After considering the proposal, in an April 2003. order the PUCT set forth a sequence of proceedings and activities designed to initiate 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 trainsmission 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, February 2005, bills were submitted in the Texas Legislature that would clarify that Entergy Gulf States is no-longer subject to a rate freeze and specify that retail open access will not commence in Entergy Gulf States' Texas service territory until the PUCT certifies a power region.
                                                           ,  _v.e!
Louisiana In November 2001, the LPSC decided not to move forward with retail open access for any customers at this time. The LPSC instead directed its staff to hold collaborative group meetings concerning open access from time to time, and to have the LPSC staff monitor developments in neighboring states and to report to the LPSC regarding the progress of retail access developments in. those states. In September 2004, in response to a study funded by certain industrial customers that evaluated a'limited industrial-4Only retail choice program, the LPSC asked the LPSC staff to solicit comments and obtain information from utilities, customers, and other interested parties concerning the potential costs and benefits of a limited choice program, the impact of such a program on other customers, as well as issues such as, stranded costs and transmission service, Comments from interested'parties were filed with the LPSC on January 14, 2005, The LPSC has. not established a procedural framework for consideration of the comments. .At this time, it is not certain what further action, if any, the. LPSC might take in response to the information it received, 58

Entergy Corporation Notes to Consolidated Financial Statements Regulatorv Assets Other Regulatory Assets The domestic utility companies and System Energy are subject to the provisions of SFAS 71, "Accounting for the Effects of Certain Types of Regulation." Regulatory assets represent probable future revenues associated with certain costs that are expected to be recovered from customers through the ratemaking process. In addition to the regulatory assets that are specifically disclosed on the face of the balance sheets, the table below provides detail of "Other regulatory assets" that are included on the balance sheets as of December 31, 2004 and 2003:
2004           2003 (In Millions)
Asset Retirement Obligation - recovery dependent upon timing of decommissioning (Note 8)                                                                                           $380.1          $464.9 Deferred fuel - non-current - recovered through rate riders when rates are redetermined annually                                                                                  21.9           28.2 Depreciation re-direct - recovery begins at start of retail open access (Note 1)                        79.1           79.1 DOE Decommissioning and Decontamination Fees - recovered through fuel rates until December 2006 (Note 8)                                                                                 25.3           32.9 Low-level radwaste - recovery timing dependent upon pending lawsuit                                     19.4           19.4 Pension costs (Note 10)                                                                               207.3           134.0 Postretirement benefits -recovered through 2013 (Note 10)                                               19.1           21.5 Provision for storm damages - recovered through cost of service                                        124.5          123.3 Removal costs - recovered through depreciation rates (Note 8)                                           53.2           45.6 Resource planning - recovery timing will be determined by the LPSC in a base rate proceeding (Note 2)                                                                                    25.4            5.8 River Bend AFUDC - recovered through August 2025 (Note 1)                                               37.5           39.4 Sale-leaseback deferral - recovered through June 2014 (Note 9)                                         127.3          131.7 Spindletop gas storage facility - recovered through December 2032                                       42.3           38.0 Unamortized loss on reaquired debt - recovered over term of debt                                       169.9          164.4 Other - various                                                                                         97.0           70.1 Total                                                                                      $1,429.3       $1,398.3 Deferred fuel costs The domestic utility companies are allowed to recover certain fuel and purchased power costs through fuel mechanisms included in electric rates that are recorded as fuel cost recovery revenues. 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, 2004 and 2003 that Entergy expects to recover or (refund) through the fuel mechanisms of the domestic utility companies, subject to subsequent regulatory review.
2004                  2003 (In Millions)
Entergy   Arkansas                    $7.4                $10.6 Entergy   Gulf States               $90.1                $118.4 Entergy   Louisiana                   $8.7                $30.6 Entergy   Mississippi              ($22.8)                $89.i Entergy   New Orleans                 $2.6                ($2.7)
Entergy Arkansas Entergy Arkansas' rate schedules include an energy cost recovery rider to recover fuel and purchased energy costs in monthly bills. The rider utilizes prior calendar year energy costs and projected energy sales for the twelve-month period commencing on April 1 of each year to develop an annual energy cost rate. The energy cost 59

Entergy Corporation Notes to Consolidated Financial Statements rate includes a true-up adjustment reflecting the over-recovery or under-recovery, including carrying charges, of the energy cost for the prior calendar year.
In March 2004, Entergy Arkansas filed with the APSC its energy cost recovery rider for the period April 2004 through March 2005.. The filed energy cost rate, which accounts for 12 percent of a typical residential customer's bill using 1,000 kWh per month, increased 16 percent due primarily to the elimination of a credit contained in the prior year's rate to refund previously over-recovered fuel costs. Also included in the current year's energy cost calculation isz a. decrease in rates- of $3.9 million as a'Tesult of the operation of a revised energy allocation method between the retail and wholesale sectors resulting from, the APSC's approval of a life-of resources power purchase agreement with Entergy New Orleans.
EntergyvGulf States (Texas)
In the Texas jurisdiction, Entergy Gulf States' rate schedules include a fixed fuel factor to recover fuel and purchased power costs, including carrying charges, not recovered in base rates. Under the current niethodology, semi-annual revisions of the fixed fuel factor may be made in March and September based on the market price of natural gas. Entergy Gulf States will likely continue to use this methodology until the start of retail open access, which has been delayed. The amounts collected under Entergy' Gulf States' fixed fuel factor and any interim surcharge implemented until the date retail open access commences. are subject to fuel reconciliation proceedings before the PUCT. In the Texas jurisdiction, Entergy Gulf States' deferred electric fuel costs are $78.6 million as of December 31, 2004, which include the following:
Amount (In Millions)
Under-recovered fuel costs for the period 9/03 - 7/04 to be recovered through an interim fuel surcharge over a six-month period beginning in January 2005                                                                 $27.8' Items to be addressed as part of unbundling                                     $29.0   ' -   '
Imputed capacity charges                                                      '  $9.3       '
Other                                                                           $12.5 The PUCT has ordered that the imputed capacity charges be excluded from fuel rates and therefore recovered through base rates. Entergy Gulf States filed a retail electric rate case and fuel proceeding with the PUCT in August 2004. As discussed below, the PUCT dismissed the rate case and fuel reconciliation proceeding in October 2004 indicating thatE'Entergy Gulf States is still subject to a rate freeze based on the current PUCT-approved settlement agreement 'stipulating that a rat'e freeze would remain in effect'until retail open access commenced 'in Entergy Gulf States' service territory, unless the rate freeze is lifted by the PUCT prior thereto. Without a Texas base rate proceeding,' it is pos'sible that Entergy dulf States will not be allowed to recover imputed capacity charges in Texas retail rates in the future. Entergy Gulf States believes the PUCT has misinterpreted the settlement and has appealed the PUCT order to the Travis County District Court and also intends to'pursue other available remedies as discussed above in "Electric Industry Restructuring and the Continued Application of SFAS 71." The dismissal of the rate case does not preclude Entergy Gulf- States from seeking the reconciliation of fuel and purchased power costs of $288 million incurred from September 2003 through March 2004 when, at the appropriate time, similar costs are reconciled in the future.
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 $583 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 $6.3 million, including interest through July 31, 2002. Approximately $4.7 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 disallowance' of approximately $4.2 million related to imputed capacity costs and its disaliowance related to costs for energy delivered from the 30% non-regulated share of River 60

Entergy Corporation Notes to Consolidated Financial Statements Bend. The casewas argued before the Travis County Texas District Court in August 2003 and the Travis County District Court judge affirmed the PUCT's order. In October 2003, Entergy Gulf States appealed this decision to the Court of Appeals. Oral argument before the appellate court occurred in September 2004 and the matter is still pending.
In September 2003, Entergy Gulf States filed an application with the PUCT to implement an $87.3 million interim fuel surcharge, including interest, to collect under-recovered fuel and purchased power expenses incurred from September 2002 through August 2003. Hearings were held in October 2003 and the PUCT issued an order in December 2003 allowing for the recovery of $87 million. The surcharge was collected over a twelve-month period that began in January 2004.
In March 2004, Entergy Gulf States filed with the PUCT a fuel reconciliation case covering the period September 2000 through August 2003. Entergy Gulf States is reconciling $1.43 billion of fuel and purchased power costs on a Texas retail basis. This amount includes $8.6 million of under-recovered costs that Entergy Gulf States is asking to 'reconcile and roll into its fuel over/under-recovery balance to be addressed in the next appropriate fuel proceeding. This case involves imputed capacity and River Bend payment issues similar to those decided adversely in the January 2001 proceeding, discussed above, which is now on appeal. On January 31, 2005, the ALJs issued a Proposal for Decision that recommends disallowing $10.7 million (excluding interest) related to these two issues. A final PUCT decision is expected in the first quarter of 2005.
In September 2004, Entergy Gulf States filed an application with the PUCT to implement a $27.8 million interim fuel surcharge,-including interest, to collect under-recovered fuel and purchased power expenses incurred from September 2003 through July 2004. Entergy Gulf States proposed to collect the surcharge over a six-month period beginning January 2005. In December 2004, the PUCT approved the surcharge consistent with Entergy Gulf States' tequest. Amounts collected though the interim fuel surcharge, which will be implemented over the six-month period commencing January 2005, are subject to final reconciliation in a future fuel reconciliation proceeding.
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 proceeding to audit the fuel adjustment clause filings of Entergy Louisiana pursuant to a November 1997 LPSC general order. The time period that is the subject of the audit is January 1, 2000 through December 31, 2001. In September 2003, the LPSC staff issued its audit report and recommended a disallowance with regard to one item. The issue relates to the alleged failure to uprate Waterford 3 in a timely manner, a claim that also has been raised in the summer 2001, 2002, and 2003 purchased power proceedings. The LPSC staff has quantified the possible disallowance as between $7.6 and $14 million.
Entergy Louisiana notified the LPSC that it will contest the recommendation. The procedural schedule in the case has been suspended. A status conference for the purpose of establishing a new procedural schedule will be set when the current hearings in the Power Purchase Agreement proceedings at the FERC are concluded. The FERC hearings in that matter concluded in November 2004. If the LPSC approves the proposed settlement discussed below under "Retail Rate Proceedings", the issue of a proposed imprudence disallowance relating to the uprate will be resolved and will no longer be at issue in this proceeding.
In January 2003, the LPSC authorized its staff to initiate a proceeding to audit the fuel adjustment clause filings of Entergy Gulf States and its affiliates pursuant to a November 1997 LPSC general order. The audit will include a review of the reasonableness of charges flowed by Entergy Gulf States through its fuel adjustment clause in Louisiana for the period January 1, 1995 through December 31, 2002. Discovery is underway, but a detailed 61

Entergy Corporation Notes to Consolidated Financial Statements procedural schedule extending beyond the discovery stage has not yet been established, and the LPSC staff has not yet issued its audit report.                 ; . i;                i.lCA      i ,'.             -J'd)('.'     a      .-'&1yo               '.j. ci          t     ,         '                          Ist mA Entergy Mississippi                                                                                                                                                                                 .*
Entergy Mississippi's rate schedules include an energy cost, recovery rider which is adjusted quarterly to reflect accumulated over- or under-recoveries from the second prior quarter. In May 2003, Entergy Mississippi filed and the MPSC approved a change in Entergy Mississippi's energy cost recovery rider. Under the MPSC's order, Entergy Mississippi deferred until 2004. the collection of fuel under-recoveries for the first and second quarters of 2003 that would have been collected in the third and fourth quarters of 2003, respectively. The deferred amount of $77.6 million plus carrying charges was collected through the energy cost recovery rider over a twelve-month period that began in January 2004.                                                                          .       2     I,.J i      r,,j                      4 Jr '-4 -A                -!
In January 2005, the MPSC approved a change in Entergy Mississippi's energy ,cost .recoyery rider.
Entergy Mississippi's fuel over-recoveries for the third quarter of 2004 of $21.3 million will be deferred from the first quarter 2005 energy cost recovery rider adjustment calculation. The deferred amount of $21.3 million plus carrying charges will be refunded through the energy cost recovery rider in the second and third quarters of 2005.
Entergy New Orleans                                                                     ,                                    i    i      '     ''       t 3 :i:;'n.                        -'              i Entergy New .Orleans' electric rate schedules ,include a fuel adjustment tariff designed to reflect no more than targeted fuel and purchased power costsadjusted by a surcharge or credit for deferred fel expense arising from monthly reconciliations, including carrying charges. Entergy New Orleans' gas.,rate schedul~es include estimates for the billing month adjusted by a surcharge or credit for deferred fuel expense arising from monthly reconciliations, including carrying charges. In June and November 2004, the City Council passed resolutions implementing a package of measures developed by Entergy New Orleans and the Council Advisors to protect customers from potential gas price spikes during the 2004 - 2005 winter heating season. These measures incluxde maintaining Entergy New Orleans' financial hedging plan for its purchase of wholesale gas, and deferral of collection of up to $6.2 million of gas costs associated with a cap on the purchased gas adjustment in November and December 2004 and in the event that the average residential customer's gas bill were to exceed a threshold level. The. deferrals resulting from these caps will receive accelerated recovery over a seven-month period beginning in April 2005.                 ii               + S .':1. ' i l '..)                                                  ii ;!                                              ir         ''                 t In November 2004, the City Council directed Entergy New Orleans to confer with the Council Advisors regarding possible modification of the current gas cost collection mechanism in order to address concerns regarding its fluctuations particularly during the winter heating season.
Retail Rate Proceedings                    i            -1l        i:i..                    .    '.i       "'n'                  O C;
O                .{      &#xa2; .'..AI               7t'<:'J          to S-5;5ijtlu
                         ... :R.ve...;    .:  ..i'...[&    tcY''.'           -      s"~   . ixltUX       k,   *.Eff:53t-3(         :5'.;.'fU, to i       ~..i f      a ;f~ifl:         OffibM
                                                                                                                                                                                         ?        JiS; Sill I Filings with the APSC (Entergy Arkansas)                                                                                  wl-;-                                          'q  I;      i''.;, CCII; hut~;t. h.r. a.
No significant retail rate proceedings are pending in Arkansas at this time.                                                                         i     *        . .     .    <:             m'unt' Filings with the PUCT and Texas Cities (Entergy Gulf States)                                                           lt   .         f .,ui'ie
                                                                                                                                              ,i,                                flC:n-s9 [ 1, .C &,
Retail Rates                           0      .                ,I.i.     .t',                                             fIC;                     .)b1,..
                                                                                                                                                  ,i:'i             72 di           3ti? ilfit         g Entergy Gulf States is operating in Texas under the terms of a December 2001 settlement agreement approved by the PUCT. The settlement provided for base rates that have remained in effect during the delay in the implementation of retail open access in Entergy Gulf States' Texas service territory. In View of the PUCT order in July 2004 to further delay retail open acdess in the Texas service territory, Entergy Gulf States filed a retail electric rate case and fuel reconciliation proceeding with the PUCT in August 2004 seeking the following:                                                                                                        ,
* approval of a base rate increase of $42.6 million annually for the Texas retail jurisdiction; 62

Entergy Corporation Notes to Consolidated Financial Statements
* approval to implement a $14.1 million per year rider to recov0r'over a 15-year period, $110.9 million of incurred costs related to its efforts to transition to a competitive retail mairket in accordance with the Texas restructuring law;
* approval to implement a proposed $11.3 million franchise fee rider to recover payments to municipalities charging such fees; and                                                        i       .i .                  .
* a requested return on equity of 11.5%.
In addition, Entergy Gulf States' fuel reconciliati_"on{1        f1 fmiade i'n6conjuncti6n'with the base f Ste cas'e sought to reconcile      approximately   $288   million    in  fuel   and  purchased    'pr6wer costs incurred during the period September 2003 through March 2004. In October              2004,    the PUCT     is'ueiid  a written order in which it dismissed the rate cas'6tand fuel reconciliation prf&ceding indicating that Ent4Frg G&                 9fS'ftes   is still subject to a rate freeze based on a PUCT-approved agreement in 2001 stipulating that a rate freeze would remain in effect until retail open access commenced in Entergy Gulf States' service territory, unless the rate freeze is lifted by the PUCT prior thereto.
Ei'fergy Gulf States believes' the PUCT has misinterpreted the gettleniiii&#xb6;'and has appealed the PUCT order to the Travis County District Court and intends to'piistie'"6ther available ikedR'.,                             ii In Februaty'2005, bills wer esubhmitted'in the Texas' LegisI tethat Would 6c1rify t a naee                                           S is no longer subject to'a rate freeze and specify that' retail open 6e8& -will not commence                            in  Entergy     Gulf    States' Texas'service territory until the PUCTXcertifies a'poWie regioh. ~i                        t'"             i Recovery of River Bend Costs In March 1998, the PUCT disallowed recovery of $1.4 billion of company-wide abeyed River Bend plant costs, which have been held in abeyance since 1988. Entergy Gulf States appealed the PUCT's decision''on this matter to the Travis County District Court in Texas. In April 2002, the Travis County District Court issued an order affirming the PUCT's' order on reaid dis'allowing r ei                        'bf abeyed plant costs. " Entergy Gulf States the appealed this ruling to the    Third'  District  Court  'of  Appeals.      tn  MJuy   2003, 'the Third District Court of Appeals unanimously affirmed the judgineint of the Travis County'District'C6o'rt. After considering the progress 'of the prbie'-ding-in light of the decision of the Cou'rt of Appeals, Etde'rgy Gulf States' accfued for the loss that would be associated with a final, non-appealable'decision disallowing the abyed plat' c6sts. The net carrying value of the abeyed plant costs was $107.7 million at the time of the Court f Aj'5p5als decision. Accrual of the $107.7 million loss was' recdrded in the secofid quarter of 2003 as inisceflan'ib{ o6ther income (deductions) and reduced 'net income by $65.6miillion after-ta*' `n nSept-ember 2004, the Texas S'pi e'Court denied Entergy Gulf States' petition for review, and Enfergy Gulf States filed a motkio foi'r-~ehdeting9" In February 2005, the Texas Supreme Court denied the motion for rehearing, 'and the p''roceeding is nO'wfii1.                  'a-l.,
Filings with the LPSC Proposed Settlement In September 2004, the LPSC consolidated various dockets that were the subject of settlement discussions between thee L4PSC staff and EnfergyGulf States and Entergy Louisiana. The LPSC directed its staff to continue the settlement discussions addubmit'any' ~proposcd settlement                    th                     Ito d fo isInanuary Entergy Gulf     States and Entery   tLouisiana-  filed  testimony     with'the   nPSC      ifi'support      of a propose             ietflemnent 'that rent lyincludes a'n 6r 6grun'd $7'6         million   to    ntergr   Guy-lf't ie',16oisiana             customers,-4       ith no'    imme iate ch-angeim;current base rates an toreund $14 illon               to   Entergy   L'                    smersIf
                                                                                                          "       ""         LPSC     approves       the proposed setlement, Entergy Gulf States will be regulated under. a three-year                       formula    rate     plan  that,  among      other provisions, establishes                                                                    rgy ulf States to recover increment capacity cost's without filing a traditiof ba'se rate proceeding.'' The ftern-eint' resolves all issues in, and wilfl result in the dismrisiial' f, Entergy Gulf Les' fourth, iftsth,'ei                            d eighth 'annual                        rvniiews, ntergy GulfSt         nin post-merger earnings review         and   revenue    requirement      analysis        a  fuel   'review    for  Entergy"Gulf States, cets established io' oisider issues concerning power purchases                   for     b56th Entergy       Gulf   States    anid Entergy Louis'iana for the summers of"20'f, 2002', 2O00,         and  2(104,   and  a docket     concerning         retail'issues'aising           under tha-Entergy System Agreement. The settlement does not include the ystem Agreeme&nt case pedinig                                      at  FERC.        The 63

Entergy Corporation Notes to Consolidated Financial Statements LPSC has solicited comments on the proposed settlement from the parties to the various proceedings at issue in the proposed settlement. The proposed settlement is scheduled to be presented to the LPSC for consideration on March 23, 2005.
Annual Earnings Reviews (Entergy Gulf States)
In May 2002, Entergy Gulf States filed its ninth and last required post-merger analysis with the LPSC. The filing included an earnings review filing for the 2001 test year that resulted in a rate decrease of $11.5 million, which was implemented effective June 2002. In its latest testimony, in December 2003, the LPSC staff recommended a rate refund of $30.6 million and a prospective rate reduction of approximately $50 million.
Hearings concluded in May 2004. Should the LPSC approve the proposed settlement discussed above, the ninth post-merger analysis would be resolved.
In December 2002, the LPSC approved a settlement between Entergy Gulf States and the LPSC staff pursuant to which Entergy Gulf States agreed to make a base rate refund of $16.3 million, including interest, and to implement a $22.1 million prospective base rate reduction effective January 2003. The settlement discharged any potential liability for claims that relate to Entergy Gulf States' fourth, fifth, sixth seventh, and eighth post-merger earnings reviews, with the exception of certain issues related to the calculation of the River Bend Deregulated Asset Plan percentage. Entergy Gulf States made the refund in February 2003. Should the LPSC approve the proposed settlement discussed above, the outstanding issue in these proceedings would be resolved.
Retail Rates (Entergy Louisiana)
In January 2004, Entergy Louisiana made a rate filing with the LPSC requesting a,base rate increase of approximately $167 million. In that filing, Entergy Louisiana noted that approximately $73 million of the base rate increase was attributable to the acquisition of a generating station and certain power purchase agreements that, based on current natural gas prices, would produce fuel and purchased power savings for customers that substantially mitigate the impact of the requested base rate increase. The filing also requested an allowed ROE of 11.4%. Entergy Louisiana's previously authorized ROE mid-point currently in effect is 10.5%0                   Hearings concluded in December 2004. Based on the evidence submitted at the hearing, the LPSC staff is recommending approximately a $7 million base rate increase. The LPSC staff proposed the implementation of a formula rate plan that includes a provision for the recovery of incremental capacity costs, including those related to the proposed Perryville acquisition, without filing a traditional base rate proceeding. A decision by the LPSC is expected in mid-to late-March 2005 on these issues.
Filings with the MPSC (Entergy Mississippi)
Formula Rate Plan Filings Entergy Mississippi is operating under a December 2002 order issued by the MPSC. The order endorsed a new power management rider schedule designed to more efficiently colle& capacity portions of purchased poWer costs. Also, the order provides for improvements in the return on equity formula and more robust performance measures for Entergy Mississippi's formula rate plan. Under the provisions of Entergy Mississippi's formula rate plan, a bandwidth is placed around the benchmark ROE, and if Entergy Mississippi earns outside of the bandwidth (as well as outside of a range-of-no-change at each edge of the bandwidth), then Entergy Mississippi's rates will be adjust&d, though on a prospective basis only. Under Mississippi law and Entergy Mississippi's formula rate plan, h6wever, if Entergy Mississippi's earned ROE is above the top of the range-of-no-change at the top of the formula rate plan bandwidth, then 8ntergy Mississippi's "Allowed ROE" for the 'next twelve-month period is the point halfway between such earned ROE and the top of the bandwidth; and Entergy Mississippi's retail rates are set at that halfway-point ROE level. In the situation where Entergy Mississippi's earned ROE is not above the top of the range-of-no-change at the top of the bandwidth, then Entergy Mississippi's "Allowed ROE" for the next twelve-month period is the top of the range-of-no-change at the top of the bandwidth.
64

Entergy Corporation Notes to Consolidated Financial Statements Entergy Mississippi made its annual formula rate plan filing with the MPSC in March 2004 based on a 2003 test year. In April 2004, 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 return on common equity mid-point of 10.77%, establishing an allowed regulatory earnings range of 9.3% to 12.2%.
Filings with the Council (Entergy New Orleans)
Rate Proceedings In May 2003, the City Council approved a resolution allowing for a total increase of $30.2 million in electric and gas base rates effective June 1, 2003. In April 2004, Entergy New Orleans made filings with the City Council as required by the earnings review process prescribed by the Gas and Electric Formula Rate Plans approved by the City Council in 2003. In August 2004, the City Council approved an unopposed settlement among Entergy New Orleans, the Council Advisors, and the intervenors in connection with the Gas and Electric Formula Rate Plans. In accordance with the resolution approving the settlement agreement, Entergy New Orleans' gas and electric base rates remain unchanged from the levels set in May 2003. The resolution ordered Entergy New Orleans to defer $3.9 million relating to voluntary severance plan costs allocated to its electric operations and $1.0 million allocated to its gas operations, which amounts were accrued on its books in 2003, and to record on its books regulatory assets in those amounts to be amortized over five years effective January 2004. Entergy New Orleans also was ordered to defer $6.0 million of fossil plant maintenance expense incurred in 2003 and to record on its books a regulatory asset in that amount to be amortized over a five-year period effective January 2003.
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 Entergy New 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. Plaintiffs allege that Entergy New Orleans and the other defendant Entergy companies conspired to make these purchases 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 by stipulation of the parties pending a decision by the City Council in the proceeding discussed in the next paragraph.
Plaintiffs also filed this complaint with the City Council in order to initiate a review by the City Council of the plaintiffs' allegations and to force restitution to ratepayers of all costs they allege were improperly and imprudently included in the fuel adjustment filings. Testimony was filed on behalf of the plaintiffs in this proceeding asserting, among other things, that Entergy New Orleans and other defendants 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 $100 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 refund to customers of $11.3 million, including interest, during the months of June through September 2004. The resolution concludes, among other things, that the 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 with this proceeding. The plaintiffs have appealed the City Council resolution to the state court in Orleans Parish. Oral argument on the plaintiffs' appeal was conducted in February 2005.
65

Entergy Corporation Notes to Consolidated Financial Statements NOTE 3.            INCOME TAXES Income tax expenses for 2004, 2003, and 2002 consist of the following:
2004              2003           2002 (In Thousands)
Current:
($731,129 Federal (a)(b)                          $54,380                  )      $510,109 Foreign                                   (2,231)            8,284         (3,295)
State (a)(b)                               38,301           23,396          43,788 Total (a)(b)                              90,450       (699,449)         550,602 Deferred -- net                          296,445         1,307,092      (233,532)
Investment tax credit adjustments -- net                     (20,987)          (27,644)       (23,132)
Recorded income tax expense           $365,908          $579,999       $293,938 (a)       The actual cash taxes paid were $28,241 in 2004, $188,709 in 2003, and $57,856 in 2002. Entergy Louisiana's mark-to-market tax accounting election significantly reduced taxes paid in 2002. In 2001, Entergy Louisiana changed its method of accounting for tax purposes related to its wholesale electric power contracts. The most significant of these is the contract to purchase power from the Vidalia project (the contract is discussed in Note 8 to the consolidated financial statements). The new tax accounting method has provided a cumulative cash flow benefit of approximately $790 million through 2004, which is expected to reverse in the years 2005 through 2031. The election did not reduce book income tax expense.
The timing of the reversal of this benefit depends on several variables, including the price of power.
Approximately half of the consolidated cash flow benefit of the election occurred in 2001 'and the remainder occurred in 2002.
(b)       In 2003, the domestic utility companies and System Energy filed, with the IRS, a change in tax accounting method notification 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 provided under the' IRS capitalization regulations. The cumulative adjustment placing these companies on the new methodology resulted in a $2.95 billion deduction on Entergy's 2003 income tax return. There was no cash benefit from the method change in 2003. On a consolidated basis, a $74 million cash tax benefit was realized in 2004. This tax accounting method change is an issue across the utility industry and will likely be challenged by the IRS on audit.
66

Entergy Corporation Notes to Consolidated Financial Statements
                                                   .        ,, .II      I   .                    I . I          !
II_.
Total income taxes differ from the amounts computed by applying the statutory income tax rate to income before taxes. The reasons for the differences for the years 2004, 2003, and 2002 are:
2004           2003                2002 (In Thousands) ,          -      -
Computed at statutory rate (35%)                    $454,635        $535,663      -,   $320,954 Increases (reductions) in tax resulting from:
State income taxes net of federal income tax effect                         36,185        54,024              44,835 Regulatory differences-utility plant items                                41,240    52,638             29,774 Amortization of investment tax credits                                    (20,596)       (24,364)            (22,294)
EAM capital loss                                   (86,426)
Flow-through/permanent differences                                    (42,902)       (30,221)            (38,197)
US tax on foreign income                              2,014         7,888            (28,416)
Other -- net                                      (18,242)       (15,629)            (12,718)
Total income taxes                              $365,908       $579,999            $293,938.
Effective Income Tax Rate                                28.2%        37.9%              ; 32.1%.
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 $29.75 million. The sale resulted in a capital loss for tax purposes of $370 million, producing a federal and state net tax 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.
       , I  .;
:  . I .
67

Entergy Corporation Notes to Consolidated Financial Statements Significant components of net deferred and noncurrent accrued tax liabilities as of December 31, 2004 and 2003 are as follows:         -
2004                 2003 (In Thousands)
Deferred and Noncurrent Accrued Tax Liabilities:
Net regulatory liabilities                                    ($978,815)       ($1,072,898)
Plant-related basis differences                              (4,699,803)         (3,574,593)
Power purchase agreements                                      (972,348)           -(945,495)
Nuclear decommissioning                                        (545,109)            (519,028)
Other                                                          (346,993)            (379,875)
Total                                                     (7,543,068)         (6,491,889)
I 1.
Deferred Tax Assets:
Accumulated deferred investment tax credit                                                     133,979             141,723 Capital losses                                                    134,688              92,423 Net operating loss carryforwards                               1,201,006              129,122 Sale and leaseback                                                227,155             223,134 Unbilled/deferred revenues                                         28,741              18,983 Pension-related items                                             247,662             204,083 Reserve for regulatory adjustments                                131,112             138,933 Customer deposits                                                 107,652             108,591 Nuclear decommissioning                                           158,796             272,551 Other                                                             225,659             399,080 Valuation allowance                                              (43,864)            (39,210)
Total                                                       2,552,586            1,689,413j Net deferred and noncurrent accrued tax liability   A    ($4,990,482)       ($4,802,476)
At December 31, 2004, Entergy had $342.4 million in net realized federal capital los 'carryforw'ards that will expire as follows: $103.8 million in 2007, $10.6 million in 2008, and $228.0 million in 2009.
At December 31, 2004, Entergy had federal net operating loss carryforwards of $2.9 billion. If the federal net operating loss carryforwards are not utilized, they will expire in the years 2023 through 2024.
At December 31, 2004, Entergy had state net operating loss carryforwards of $3.5 billion, primarily resulting from Entergy Louisiana's mark-to-market tax election and the change in method of accounting for tax purposes related to cost of goods sold, as discussed above. If the state net operating loss carryforwards are not utilized, they will expire in the years 2008 through 2019.
The 2004 and 2003 valuation allowances are provided against UK capital loss and UK net operating loss carryforwards, and certain state net operating loss carryforwards. 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 foreign earnings, subject to certain limitations, by providing an 85% dividends received deduction for certain repatriated earnings and also providing a tax deduction of up to 9% of qualifying 68

Entergy Corporation Notes to Consolidated Financial Statements production activities. In 2004, Entergy repatriated $64 million of accumulated foreign earnings, which resulted in approximately $16.1 million of tax benefit. At December 31, 2004, Entergy has approximately $7.4 million of undistributed earnings from subsidiary companies outside the United States that are being considered for repatriation. If these earnings are repatriated in accordance with the Act, the repatriation would result in approximately $1.5 million of income tax expense. In accordance with FSP 109-1, which was issued by the FASB to address the accounting 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 isthe 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.
NOTE 4.            LINES OF CREDIT AND SHORT-TERM BORROWINGS Entergy Corporation has in place two separate revolving credit facilities, a 5-year credit facility and a 3-year credit facility. The 5-year credit facility, which expires in December 2009, has a borrowing capacity of $500 million, none of which was outstanding at December 31, 2004. The 3-year credit facility, which expires in May 2007, has a borrowing capacity of $965 million, of which $50 million was outstanding at December 31, 2004.
Entergy also has the ability to issue letters of credit against the total borrowing capacity of both credit facilities, and
$50 million had been issued against the 3-year facility at December 31, 2004. The commitment fee for these facilities is currently 0.13% of the line amount. Commitment fees and interest rates on loans under the credit facility can fluctuate depending on the senior debt ratings of the domestic utility companies.
Entergy Corporation's facilities require it to maintain a consolidated debt ratio of 65% or less of its total capitalization, and maintain an interest coverage ratio of 2 to 1. If Entergy fails to meet these limits, or if Entergy or the domestic utility companies default on other indebtedness or are in bankruptcy or insolvency proceedings, an acceleration of the facility's maturity date may occur.
Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans each have 364-day credit facilities available as follows:
Amount of         Amount Drawn as Company              Expiration Date             Facility         of Dec. 31, 2004 Entergy Arkansas                April 2005            $85 million Entergy Louisiana               April 2005           $15 million(a)               -
Entergy Mississippi             May 2005              $25 million Entergy New Orleans             April 2005           $14 million(a)               -
(a) The combined amount borrowed by Entergy Louisiana and Entergy New Orleans under these facilities at any one time cannot exceed $15 million.
The 364-day credit facilities have variable interest rates and the average commitment fee is 0.13%. The Entergy Arkansas facility requires it to maintain total shareholder's equity of at least 25% of its total assets.
The short-term borrowings of Entergy's subsidiaries are limited to amounts authorized by the SEC. The current limits authorized are effective through November 30, 2007. In addition to borrowing from commercial banks, Entergy's subsidiaries are authorized under the SEC order to borrow from Entergy's money pool. The money pool is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries' dependence on external short-term borrowings. Borrowings from the money pool and external borrowings combined may not exceed the SEC authorized limits. As of December 31, 2004, Entergy's subsidiaries' aggregate authorized limit was
 $1.6 billion and the aggregate outstanding borrowing from the money pool was $151.6 million. There were no borrowings outstanding from external sources. Under the SEC order and without further SEC authorization, the domestic utility companies and System Energy cannot issue new short-term indebtedness unless (a) Entergy and the 69

Entergy Corporation Notes to Consolidated Financial Statements borrower each maintain common equity of at least 30% of its capital and, (b) with the exception of money pool borrowings, the debt security to be issued (if rated) arnd all outstanding securities of the issuer and Entergy Corporation that are rated must be rated investment grade. There is further discussion of commitments for long-term financing arrangements in Note 5 to the consolidated financial statements.
The short-term securities issuances of Entergy Corporation also are limited to amounts authorized by the SEC. Under its current SEC order and without further SEC authorization, Entergy Corporation cannot incur additiorial indebtedness or issue other securities unless (a) it and each of its public utility subsidiaries maintain a common equity ratio of at least 30% and (b) the security to be issued (if rated) and all outstanding securities of Entergy Corporation that are rated are rated investment grade.
                                                                                                     'II
                                                                                           ;       7 I I R,   II  .. '
70

Entergy Corporation Notes to Consolidated Financial Statements NOTE 5.        LONG - TERM DEBT Long-term debt as of December 31, 2004 and 2003 consisted of:
2004                2003 (In Thousands)
Mortgage Bonds:
8.25% Series due April 2004 - Entergy Gulf States                                          $292,000 6.2% Series due May 2004 - Entergy Mississippi                                                75,000 6.125% Series due July 2005 - Entergy Arkansas                           100,000            100,000 8.125% Series due July 2005 - Entergy New Orleans                         30,000              30,000
   '6.77% Series due August 2005 - Entergy Gulf States                        98,000              98,000 Libor + 0.90% Series due June 2007 - Entergy Gulf States                                    275,000 4.875% Series due October 2007 - System Energy                            70,000              70,000 5.2% Series due December 2007 - Entergy Gulf States                                        200,000 6.5% Series due March 2008 - Entergy Louisiana                                              115,000 4.35% Series due April 2008 - Entergy Mississippi                        100,000             100,000 6.45% Series due April 2008 - Entergy Mississippi                                            80,000 3.6% Series due June 2008 - Entergy Gulf States                          325,000            325,000 3.875% Series due August 2008 - Entergy New Orleans                       30,000             30,000 Libor + 0.40% Series due December 2009 - Entergy Gulf States             225,000 4.65% Series due May 2011 - Entergy Mississippi                            80,000 4.875% Series due November 2011 - Entergy Gulf States                    200,000 6.0% Series due December 2012 - Entergy Gulf States                     140,000             140,000 5.15% Series due February 2013 - Entergy Mississippi                    100,000             100,000 5.25% Series due August 2013 - Entergy New Orleans                        70,000             70,000 5.09% Series due November 2014 - Entergy Louisiana                      115,000
    '5.6% Series due December 2014 - Entergy Gulf States                       50,000 5.25% Series due August 2015 - Entergy Gulf States                      200,000             200,000 6.75% Series due October 2017 - Entergy New Orleans                       25,000             25,000 5.4% Series due May 2018 - Entergy Arkansas                             150,000             150,000 4.95% Series due June 2018 - Entergy Mississippi                          95,000             95,000 5.0% Series due July 2018 - Entergy Arkansas                            115,000             115,000 5.5% Series due April 2019 - Entergy Louisiana                          100,000 8.0% Series due March 2023 - Entergy New Orleans                                             45,000 7.7% Series due July 2023 - Entergy Mississippi                                              60,000 7.55% Series due September 2023 - Entergy New Orleans                                         30,000 7.0% Series due October 2023 - Entergy Arkansas                          175,000            175,000 5.6% Series due September 2024 - Entergy New Orleans                      35,000 5.65% Series due September 2029 - Entergy New Orleans                     40,000 6.7% Series due April 2032 - Entergy Arkansas                            100,000            100,000 7.6% Series due April 2032 - Entergy Louisiana                           150,000            150,000 6.0% Series due November 2032 - Entergy Arkansas                         100,000            100,000 6.0% Series due November 2032 - Entergy Mississippi                       75,000              75,000 7.25% Series due December 2032 - Entergy Mississippi                     100,000            100,000 5.9% Series due June 2033 - Entergy Arkansas                             100,000            100,000 6.20% Series due July 2033 - Entergy Gulf States                        240,000             240,000 6.25% Series due April 2034 - Entergy Mississippi                        100,000 6.4% Series due October 2034 - Entergy Louisiana                          70,000 6.38% Series due November 2034 - Entergy Arkansas                         60,000 Total mortgage bonds                                                $3,763,000           $3,860,000 71

Entergy Corporation Notes to Consolidated Financial Statements 2004                2003 (In Thousands)
Governmental Bonds (a):
5.45% Series due 2010, Calcasieu Parish - Louisiana                              $22,095            $22,095 6.75% Series due 2012, Calcasieu Parish - Louisiana                               48,285              48,285 6.7% Series due 2013, Pointe Coupee Parish - Louisiana                            17,450              17,450 5.7% Series due 2014, Iberville Parish - Louisiana                                21,600              21,600 7.7% Series due 2014, West Feliciana Parish - Louisiana                           94,000              94,000 5.8% Series due 2015, West Feliciana Parish - Louisiana                           28,400              28,400 7.0% Series due 2015, West Feliciana Parish - Louisiana                           39,000              39,000 7.5% Series due 2015, West Feliciana Parish - Louisiana                           41,600              41,600 9.0% Series due 2015, West Feliciana Parish - Louisiana                           45,000              45,000 5.8% Series due 2016, West Feliciana Parish - Louisiana                           20,000              20,000 6.3% Series due 2016, Pope County - Arkansas (h)                                  19,500              19,500 5.6% Series due 2017, Jefferson County - Arkansas                                 45,500              45,500 6.3% Series due 2018, Jefferson County - Arkansas (h)                               9,200              9,200 6.3% Series due 2020,, Pope County - Arkansas                                    120,000            120,000 6.25% Series due 2021, Independence County - Arkansas (h)                         45,000              45,000 7.5% Series due 2021, St. Charles Parish - Louisiana (h)                         50,000              50,000 5.875% Series due 2022, Mississippi Business Finance Corp.                      216,000            216,000 5.9% Series due 2022, Mississippi Business Finance Corp.                        102,975            102,975 7.0% Series due 2022, Warren County - Mississippi                                                     8,095 7.0% Series due 2022, Washington County - Mississippi                                                 7,935 7.0% Series due 2022, St. Charles Parish - Louisiana (h)                         24,000              24,00 7.05% Series due 2022, St. Charles Parish - Louisiana (h)                        20,000,             20,000 Auction Rate due 2022, Independence County - Mississippi (h)                      30,000,            K30,000 4.6% Series due 2022, Mississippi Business Finance Corp.;                         16,030.,
5.95% Series due 2023, St. Charles Parish - Louisiana (h)                        25,000              25,000 6.2% Series due 2023, St. Charles Parish - Louisiana (h)                         33,000            -33,000 6.875% Series due 2024, St. Charles Parish - Louisiana (h)                       20,400,             20,400 6.375% Series due 2025, St. Charles Parish - Louisiana                            16,770             16,770 7.3% Series due 2025, Claiborne County - Mississippi                                         ,,-      7,625 6.2% Series due 2026, Claiborne County - Mississippi                             90,000       I, ,90,900pO 5.05% Series due 2028, Pope County - Arkansas (b)                                47,000,         -   47,000 5.65% Series due 2028, West Feliciana Parish - Louisiana (c)                                         62,000 6.6% Series due 2028, West Feliciana Parish - Louisiana                          40,000       . 40,000 5.35% Series due 2029, St. Charles Parish - Louisiana (i)
Auction Rate due 2030, St. Charles Parish - Louisiana (h)                        60,000              60,000 4.9% Series due 2030, St. Charles Parish - Louisiana (d) (e)                      55,000 1            55,000 Total governmental bonds                                                      1,462,805         1,532,430 Other Long-Term Debt:
Note Payable to NYPA, non-interest bearing, 4.8%,implicit rate                 $445,605          $514,708 3 year Bank Credit Facility (Entergy Corporation and Subsidiaries, Note 4) i .50,000 Bank term loan, Entergy Corporation, avg rate 2.98%, due 2005                    60,000              60,000 Bank term loan, Entergy Corporation, avg rate 3.08%j due 2008,                   35,000              35,000 6.17% Notes due March 2008, Entergy Corporation                                  ,72,000             72,000 6.23% Notes due March 2008, Entergy Corporation                                   15,000             15,000 6.13% Notes due September 2008, Entergy Corporation                             150,000            150,000 72

Entergy Corporation Notes to Consolidated Financial Statements 2004                2003 (In Thousands)
Other Long-Term Debt (continued):
7.75% Notes due December 2009, Entergy Corporation                                267,000            267,000 6.58% Notes due May 2010, Entergy Corporation                                       75,000             75,000 6.9% Notes due November 2010, Entergy Corporation                                  140,000            140,000 7.06% Notes due March 2011, Entergy Corporation                                     86,000             86,000 Long-term DOE Obligation (f)                                                       156,332            154,409 Waterford 3 Lease Obligation 7.45% (Entergy Corporation and Subsidiaries, Note 9)                            247,725            262,534 Grand Gulf Lease Obligation 5.01% (Entergy Corporation and Subsidiaries, Note 9)                            397,119            403,468 Unamortized Premium and Discount - Net                                             (10,277)           (11,853) 8.5% Junior Subordinated Deferrable Interest Debentures Due 2045 - Entergy Arkansas                                                                          61,856 8.75% Junior Subordinated Deferrable Interest Debentures Due 2046 - Entergy Gulf States                                                   87,629              87,629 9.0% Junior Subordinated Deferrable Interest Debentures Due 2045 - Entergy Louisiana                                                                         72,165 Other                                                                                 9,457              9,966 Total Long-Term Debt                                                               7,509,395          7,847,312 Less Amount Due Within One Year                                                 t . 492,564            -524,372 Long-Term Debt Excluding Amount Due Within One Year                              $7,016,831         $7,322,940 Fair Value of Long-Term Debt (g)                                                 $6,614,211 ,       $7,123,706 (a)    Consists of pollution control revenue bonds and environmental revenue bonds.
(b)    The bonds are subject to mandatory tender for purchase from the holders at 100% of the principal amount outstanding on September 1, 2005 and can then be remarketed.
(c)    The bonds had a mandatory tender date of September 1, 2004. Entergy Gulf States purchased the bonds from the holders, pursuant to the mandatory tender provision, and has not remarketed the bonds at this time.
(d)    On June 1, 2002, Entergy Louisiana remarketed $55 million St. Charles Parish Pollution Control Revenue Refunding Bonds due 2030, resetting the interest rate to 4.9% through May 2005.
(e)    The bonds are subject to mandatory tender for purchase from the holders at 100% of the principal amount outstanding on June 1, 2005 and can then be remarketed.          '
(f)    Pursuant to the Nuclear Waste Policy Act of 1982, Entergy's nuclear owner/licensee subsidiaries have contracts with the DOE for spent nuclear fuel disposal service. The contracts include a one-time fee for generation prior to April 7, 1983. Entergy Arkansas is the only Entergy company that generated electric power with nuclear fuel prior to that date and includes' the one-time fee, plus accrued interest, in long-term debt.
(g)   The fair value excludes lease obligations and long-term DOE obligations, and includes debt due within one year. It is determined using bid prices reported by dealer markets and by nationally recognized investment banking firms.
(h)   The bonds are secured by a series of collateral first mortgage bonds.
(i)   The bonds in the principal amount of $110.95 million had a mandatory tender date of October 1, 2003.
Entergy Louisiana purchased the bonds from the' holders, pursuant to the mandatory tender provision, and has not remarketed the bonds at this time.
73

Entergy Corporation Notes to Consolidated Financial Statements The annual long-term debt maturities (excluding lease obligations) for debt outstanding as of December 31, 2004, for the next five years are as follows:
(In Thousands) 2005                $467,298 2006                  $75,896 2007                $199,539 2008                $747,246 2009                $512,584 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 NYPA 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 interest 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 NYPA 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 NYPA. 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.
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. Corporation, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and System Energy also are limited to amounts authorized by the SEC,., Under its current SEC order, and without further authorization, Entergy Corporation cannot incur additional indebtedness or issue other securities unless (a) it and each of its public utility subsidiaries maintain a common equity ratio of at least 30% and (b) the security to be issued (if rated) and all outstanding securities of Entergy Corporation that are rated,, are rated investment grade by at least one nationally recognized statistical rating agency. Under their current SEC orders, and without further authorization, Entergy Gulf States, Entergy Louisiana, and Entergy Mississippi cannot incur additional indebtedness or issue other securities unless (a) the issuer and Entergy Corporation maintains a common equity ratio of at least 30% and (b) the security to be issued (if rated) and all outstanding securities of the, issuer (other than preferred stock of Entergy Gulf States), as well as all outstanding securities of Entergy Corporation, that are rated, are rated investment grade.
Junior Subordinated Deferrable Interest Debentures and Implementation of FIN 46 Entergy implemented FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" effective December 31, 2003. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among their investors. Variable interest entities (VIEs), generally, are entities that do not have sufficient equity to permit the entity to finance its operations without additional financial support from its equity interest holders and/or the group of equity interest holders are collectively not able to exercise control over the entity, The primary beneficiary is the party that absorbs a majority of the entity's expected losses, receives a majority of its expected residual returns, or both as a result of holding the variable interest. A company may have an interest in a VIE through ownership or other contractual rights or obligations.
Entergy Louisiana Capital I, Entergy Arkansas Capital I, and Entergy Gulf States Capital I (Trusts) were established as financing subsidiaries of Entergy Louisiana, Entergy Arkansas, and Entergy Gulf States, 74

Entergy Corporation Notes to Consolidated Financial Statements respectively, (the parent company or companies, collectively) for the purposes of issuing common and preferred securities. The Trusts issued Cumulative Quarterly Income Preferred Securities (Preferred Securities) to the public and issued common securities to their parent companies. Proceeds from such issues were used to purchase junior subordinated deferrable interest debentures (Debentures) from the parent company. The Debentures held by each Trust are its only assets. Each Trust uses interest payments received on the Debentures owned by it to make cash distributions on the Preferred Securities and common securities. The parent companies fully and unconditionally guaranteed payment of distributions on the Preferred Securities issued by the respective Trusts. Prior to the application of FIN 46, each parent company consolidated its interest in its Trust. Because each parent company's share of expected losses of its Trust is limited to its investment in its Trust, the parent companies are not considered the primary beneficiaries and therefore de-consolidated their interest in the Trusts upon application of FIN 46 with no significant impacts to the financial statements. The parent companies' investment in the Trusts and the-Debentures issued by each parent company are included in Other Property and Investments and Long-Term Debt, respectively.
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 1;
* 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.
75

Entergy Corporation Notes to Consolidated Financial Statements NOTE 6.            PREFERRED STOCK The number of shares authorized and outstanding and dollar value of preferred stock and minority interest for Entergy Corporation subsidiaries as of December 31, 2004 and 2003 are presented below. Only the Entergy Gulf States series "with sinking fund" contain mandatory redemption requirements. All other series of the U.S.
Utility are redeemable at Entergy's option.    ;
Shares                     Shares Authorized               Outstanding 2004          2003'       2004 - `:2003            2004         2003 Enterov Corporation                                                                                      (Dollars in Thousands)
U.S. Utility:
Preferred Stock without sinking fund:
Entergy Arkansas, 4.32%-7.88% Series              1,613,500 1,613,500     1,613,500     1,613,500 $116,350 $116,350 Entergy Gulf States, 4.20%-7.56% Series            473,268     473,268     473,268       473,268      47,327       47,327 Entergy Louisiana, 4.16%-8.00% Series             2,115,000 2,115,000     2,115,000     2,115,000     100,500 100,500 Entergy Mississippi, 4.36%-8.36% Series             503,807 503,807         503,807       503,807      50,381       50,381 Entergy New Orleans, 4.36%-5.56% Series             197,798     197,798     197,798       197,798      19,780       19,780 Total U. S. Utility Preferred Stock without sinking fund                                           4,903,373 4,903,373     4,903,373     4,903,373     334,337      334,337 Energy Commodity Services:
Preferred Stock without sinking fund:
Entergy Asset Management, 11.50% rate          I 1,000,000            -    297,376              -     29,738 Other                                                                                           -       1,281 Total Preferred Stock without sinking fund             5,903,373 4,903,373     5,200,749     4,903,373    $365,356 $334,337 U.S. Utility:
Preferred Stock with sinking fund:
Entergy Gulf States, Adjustable Rate 7.0% (a)                                     174,000     208,520     174,000       208,520     $17,400      $20,852 Total Preferred Stock with sinking fund                  174,000     208,520     174,000       208,520     $17,400      $20,852 Fair Value of Preferred Stock with sinking fund (b)                                                                                        $15,286      $15,354 (a) Represents weighted-average annualized rate for 2004 and 2003.
(b) Fair values were determined using bid prices reported by dealer markets and by nationally recognized investment banking firms. There is additional disclosure of fair value of financial instruments in Note 14 to the consolidated financial statements.
All outstanding preferred stock is cumulative.
Entergy Gulf States' preferred stock with sinking fund retirements were 34,500 shares in 2004 and 2003, and 18,579 shares in 2002. Entergy Gulf States has annual sinking fund requirements of $3.45 million through 2009 for its preferred stock outstanding.
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 Entergy Asset 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, 2007 or each subsequent December 31 thereafter, either Entergy Asset Management or the preferred shareholders may request that the preferred dividend rate be reset. If Entergy Asset Management and the preferred shareholders 76

Entergy Corporation Notes to Consolidated Financial Statements 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 directors for the purpose of liquidating the assets of Entergy Asset Management in order to repay the preferred shares and any accrued dividends.
NOTE 7.           COMMON EQUITY Common Stock Treasury Stock Treasury stock activity for Entergy for 2004 and 2003 is as follows:
2004                                 2003 Treasury Shares             Cost     Treasury Shares              Cost (InThousands)                         (InThousands)
Beginning Balance, January I                     19,276,445           $561,152       25,752,410               $747,331 Repurchases                                   16,631,800           1,017,996          155,000                  8,135 Issuances:
Employee 'Stock-Based Compensation Plans                        (4,555,897)           (146,877)     (6,622,095)              (194,057)
Directors' Plan                                  (7,320)              (252)           (8,870)                 (257)
Ending Balance, December 31                     31,345,028          $1,432,019      19,276,445               $561,152 Entergy Corporation reissues treasury shares to meet the requirements of the Stock Plan for Outside Directors (Directors' Plan), the Equity Ownership Plan of Entergy Corporation and Subsidiaries (Equity Ownership Plan), the Equity Awards Plan of Entergy Corporation and Subsidiaries, and certain other stock benefit plans. The Directors' Plan awards to non-employee directors a portion of their compensation in the form of a fixed number of shares of Entergy Corporation common stock.
Equity Compensation Plan Information Entergy grants stock options, equity awards, and incentive awards to key employees of the Entergy subsidiaries under the Equity Ownership Plan which is a shareholder-approved stock-based compensation plan.
Stock options are granted at exercise prices not less than market'value on the date of grant. The majority of options granted in 2004, 2003, and 2002 will become exercisable in equal amounts on each of the first three anniversaries of the date of grant. Unless they are forfeited previously under the terms of the grant, options expire ten years after the date of the grant if they are not exercised.
Entergy grants most of the equity awards and incentive awards earned under its stock benefit plans in the form of performance units, which are equal to the cash value of shares of Entergy Corporation common stock at the time of payment. In addition to the potential for equivalent share appreciation or depreciation, performance units will earn the cash equivalent of the dividends paid during the performance period applicable to each plan. The costs of equity and incentive awards, given either as company stock or performance units, are charged to income over the period of the grant or restricted period, as appropriate. In 2004, 2003, and 2002, $47 million, $45 million, and $28 million, respectively, was charged to compensation expense.
Entergy was assisted by external valuation firms to determine the fair value of the stock option grants made in 2004 and 2003. The fair value applied to these grants was an average of two firms' option valuations, which included, adjustments for factors such as lack of marketability, stock retention requirements, and regulatory restrictions on exercisability. In 2002, the fair value of each option grant was estimated on the date of grant using 77

Entergy Corporation Notes to Consolidated Financial Statements the Black-Scholes option-pricing model, without any such adjustments.                      The stock option weighted-average assumptions used in determining the fair values were as follows:
2004                 2003                   2002 Stock price volatility               23.1%                26.3%                  27.2%
Expected term in years                      6.3               6.2                   5.0 Risk-free interest rate                 3.2%                3.3%                  4.2%
Dividend yield                          3.3%                3.3%                  3.2%
Dividend payment                       $1.80               $1.40                  $1.32 Stock option transactions are summarized as follows:
2004                              2003                                2002 Average                         Average                              Average Number         Exercise        Number          Exercise           Number            Exercise of Options         Price       of Options        Price           of Options              Price Beginning-of-year balance                   15,429,383          $38.64    19,943,114         $35.85          17,316,816              $31.06 Options granted                              1,898,098          $58.63      2,936,236        $44.98           , 8,168,025            $41.72 Options exercised                           (4,541,053)         $38.07    (6,927,000)        $33.12          (4,877,688)             $28.62 Options forfeited/expired                     (476,351)         $39.94       (522,967)       $40.98              (664,039) , $36.36 End-of-year balance                         12,310,077          $41.88     15,429,383        $38.64          19,943,114              $35.85 7,1     8 $2                    3      $3 4 . 8 2               '    .
Options exercisable at year-end              7,162,884          $37.25      6,153,043;       $34.82 -          4,837,51 1            $31.39 1 .         ,
Weighted-average fair value of options at time of grant                         $7.76                            $6.86                              $9.22 The following table summarizes information about stock options outstanding as of December 31, 2004:
Options Outstanding                                      Options Exercisable             "'
Weighted-Avg.                                                                     .        .i.
Remaining              Weighted-               Number                'Weighted-Range of                As of            Contractual            Avg. Exercise         Exercisable'           Avg. Exercise i Exercise Prices           12/31/2004            Life-Yrs.                 Price- ''       at 12/31/2604              ' Price
        $23 - $33.99            1,674,430                 5.0                 $26.28                1,674,430                  $26.28 .
                                                                                                           , .; .       I f        , -
        $34 - $44.99            8,547,519                 7.1                 $41.09                5,195,493                  $39.95
        $45 - $55.99              230,445                 5.6                 $49.61                  222,378"'                $49.68 7, 8      .               9. 67 I
        $56 - $67.99            1,857,683                 9.1                 $58.64     ,,             70,583,.               $59.67
                                                                               $ 1.
        $23 - $67.99          12,310,077                  7.1                 $41.88     I         7,162,884                 '$37.25 78

Entergy Corporation Notes to Consolidated Financial Statements Retained Earnings and Dividend Restrictions Provisions within the Articles of Incorporation or pertinent indentures and various other agreements relating to the long-term debt and preferred stock of certain of Entergy Corporation's subsidiaries restrict the payment of cash dividends or other distributions on their common and preferred stock. As of December 31, 2004, Entergy Arkansas and Entergy Mississippi had restricted retained earnings unavailable for distribution to Entergy Corporation of $394.9 million and $68.5 million, respectively. Additionally, PUHCA prohibits Entergy Corporation's subsidiaries from making loans or advances to Entergy Corporation. In 2004, Entergy Corporation received dividend payments totaling $825 million from subsidiaries.
Investments in affiliates that are not controlled by Entergy Corporation, but over which it has-significant influence, are accounted for using the equity method. Entergy's retained earnings for 2003 included $472 million of undistributed earnings of equity method investees. Due to the receipt of dividends from Entergy-Koch, 1LP after the sale of its energy trading and pipeline businesses in 2004, there were no undistributed earnings in Ertergy's retained earnings at December 31, 2004. Equity method investments are discussed in Note 12 to the consolidated financial statements.
NOTE 8.          ;,COMMITMENTS AND CONTINGENCIES Entergy is involved in a number of legal, tax, and regulatory proceedings before various courts, regulatory commissions, and governmental agencies in the ordinary course of its business. While management is'unable to predict the outcome of such proceedings, management does not believe that the ultimate resolution of these matters will have a material adverse effect on Entergy's results of operations, cash flows, or financial condition.
Vidalia Purchased Power Agreement Entergy Louisiana has an agreement extending through the year 2031 to purchase energy generated by a hydroelectric facility known as the Vidalia project. Entergy Louisiana made payments under the contract of approximately $147.7 million in 2004, $112.6 million in 2003, and $104.2 million in 2002. If the maximum percentage (94%) of the energy is made available to Entergy Louisiana, current production projections would require estimated payments of approximately $125.3 million in 2005, and a total of $3.5 billion for the years 2006 through 2031. Entergy Louisiana currently recovers the costs of the purchased energy through its fuel adjustment clause. In an LPSC-approved settlement related to tax benefits from the tax treatment of the Vidalia contract, Entergy Louisiana agreed to credit rates by $11 million 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. Therefore, to the extent' Entergy Louisiana's use of the proceeds would ordinarily have reduced its rate base, no change in rate base shall be reflected for ratemaking purposes.
Nuclear Insurance                                           '    ;
Third Party Liability Insurance' The Price-Anderson Act provides insurance for the public in the event of a nuclear power plantfaccident.
The costs of this insurance are borne by the nuclear power industry. Originally passed by Congress in 1957 and most recently amended in 1988, the Price-Anderson Act requires nuclear power plants to show evidence of financial protection in the event of a nuclear accident. This protection must consist of two levels:
: 1. The primary level is private insurance underwritten by American Nuclear Insurers and provides liability insurance coverage of $300 million. If this amount is not sufficient to cover claims arising from the accident, the second level, Secondary Financial Protection, applies. An industry-wide aggregate limitation of $300 million exists for domestically-sponsored terrorist acts. There is-no limitation for foreign-sponsored terrorist acts.             ,
79

Entergy Cbrporation Notes to Consolidated Financial Statements
: 2. Within the Secondary Financial Protection level, each nuclear plant must pay a retrospective premium,
       - equal'to its proportionate share of the loss in excess of the jrimary level, up to a maximum of $100.6 million per reactor per incident. This consists of a $95.8 million maximum retrospective'premium plus a five percent surcharge thatfmay'be applied, if needed, at a rate that is presently set at $10 million per year per nuclear power reactor. 'There are nd domestically- or foreign-sponsored terrorism limitations.
Currently, 104 nuclear reactors are participating in the SecoindarylFinancial Protection program - 103' operating reactors and one closed reactor that still 'stores used nuclear fuel on site. 'The product of the maximum retrospective premium assessment to the nuclear power industry and the number of nuclear power reactors provides over $10 billion in insurance coverage to'compensate the public in the event of a nuclear power reactor accident.
         - Entergy owns and operates ten of the nuclear power reactors, and owns the shutdown Indian Point 1 reactor (10% 'of Grand Gulf is owned by a non-affiliated company which would share on a pro-rata basis in any retrospective premium assessment under the Pride-Anderson Act).
An additional but temporary contingent liability exists for all nuclear power reactor owners because of a previous Nuclear Worker Tort (long-term bodily injury caused by exposure to nuclear radiation while employed at a nuclear power plant) insurance program that was in place from 1988 to 1998. The maximum premium assessment exposure to each reactor is $3 million and will only be applied if such claims exceed the program's accumulated reserve funds. This contingent premium assessment feature will expire with the Nuclear Worker Tort program's expiration, which is scheduled for 2008.
Property Insurance Entergy's nuclear owner/licensee subsidiaries are members of certain mutual insurance companies that provide property damage coverage,including decontamination and premature decommissioning expense, to the members' nuclear generating plants. These 'programs are underwritten by Nuclear Electric Insurance Limited (NEIL). As of December 31; 2004, Entergy was insured against such losses per the following structures U.S. Utility Plants (ANO I and 2 Grand Gulf. River Bend, and Waterford 3)
Primnary L'ayer (per plant) - $500 million per occirrence
* Exc~ess Layer (per plant) $100 million per'occurrence
* Blanket Layer (shared among all plants) - $1.0 billion per occurrence
* Total limit - $1.6,billion per occurrence ,
* Deductibles'           ;-               '            -                         ,
           *   $5.0 million per occurrence - Turbine/generator damage              .
           *   $5.0 million per occurrence - Other than turbine/generator damage Note: ANO I and 2 share in the Primary Layer with one policy in common.
Non-Utility Nuclear Plants (Indian Point 2 and 3, FitzPatrick. Pilgrim. and Vermont Yankee!
* Primary Layer (per plant) - $500 million per occurrence
     *; Blanket Layer (shared among all plants) - $615 million per occurrence
* Total limit - $1.115 billion per occurrence
* Deductibles:
           * $1.0 million'per occurrence - 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 iddition, 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 80

Entergy Corporation Notes to Consolidated Financial Statements covered NEIL property damage loss, subject to a deductible. The following summarizes this coverage as of December 31, 2004:
Indian Point 2 and 3
     * $4.5 million weekly indemnity
     * $490 million maximum indemnity
* Deductible: 12 week waiting period, FitzPatrick and Pilgrim (each plant has an individual policy with the noted parameters)
     * $4.0 million weekly indemnity                                                            *    ,
     ' $490 million maximum indemnity
* Deductible: 12 week waiting period Vermont Yankee
     * $3.5 million weekly indemnity
     * $435 million maximum indemnity
* Deductible: 12 week waiting period Entergy's U.S. Utility nuclear plants have significantly less or no accidental outage coverage. Under the property damage and accidental outage insurance programs, Entergy nuclear plants could be subject to assessments should losses exceed the accumulated funds available from NEIL. As of December 31, 2004, the maximum amounts of such possible assessments per occurrence were $50.8 million for the U.S. Utility plants and $68.9 million for the Non-Utility Nuclear plants.
Entergy maintains property insurance for its nuclear units in excess of the NRC's minimum requirement of
$1.06 billion per site for nuclear power plant licensees. NRC regulations provide that the proceeds of this insurance must be used, first, to render the reactor safe and stable, and second, to complete decontamination operations. -Only after proceeds are dedicated for such use and regulatory approval is secured would any remaining proceeds be made available for the benefit of plant owners or their creditors.
In the event that one or more acts of domestically-sponsored terrorism causes property damage under one or more or all nuclear insurance policies issued by NEIL (including, but not limited to, those described above) within 12 months from the date the first property damage occurs, the maximum recovery under all such' nuclear insurance policies shall be an aggregate of $3.2i billion plus the additional amounts recovered for such losses from reinsurance, indemnity, and any other sources applicable to such losses. There is no aggregate limit involving one or more acts of foreign-sponsored terrorism.
Nuclear Decommissionine and Other 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 deconimissioning its nuclear power plants.
These liabilities are recorded at their fair values (which is the present values of the estimated future cash outflows) in the period in which they are incurred, with an accompanying addition to the recorded cost of the long-lived asset. The asset retirement obligation is accreted each year through a charge to expense, to reflect the time value of money for this present value obligation. The amounts added to the carrying amounts of the long-lived assets will be depreciated over the useful lives of the assets. The net effect of implementing SFAS 143 for the rate-regulated business of the domestic utility companies and System Energy was recorded as a regulatory asset, with no resulting impact on Entergy's net income. Entergy recorded these regulatory assets because existing rate mechanisms in each jurisdiction are based on the principle that Entergy will recover all ultimate costs 'of decommissioning from customers.
81

Entergy Corporation Notes to Consolidated Financial Statements Upon implementation of SFAS 143 in 2003, assets and liabilities increased $1.1 billion for the U.S. Utility segment as a result of recording the asset retirement obligations at their fair values of $1.1 billion as determined under SFAS 143, increasing utility plant by $287 million, reducing accumulated depreciation by $361 million, and recording the related regulatory assets of $422 million. The implementation of SFAS 143 for the portion of River Bend not subject to cost-based ratemaking decreased earnings by $21 million net-of-tax as a result of a one-time cumulative effect of accounting change. In accordance with ratemaking treatment and as required by SFAS 71, the depreciation provisions for the domestic utility companies and System Energy include a component for removal costs that are not asset retirement obligations under SFAS 143. In accordance with regulatory accounting principles, Entergy has recorded a regulatory asset for certain of its domestic utility companies and System Energy of $86.9 million as of December 31, 2004 and $72.4 million as of December 31, 2003 to reflect an estimate of incurred but uncollected removal costs previously recorded as a component of accumulated depreciation. The decommissioning and retirement cost liability for certain of the domestic utility companies and System Energy includes a regulatory liability of $34.6 million as of December 31, 2004 and $26.8 million as of December 31, 2003 representing an estimate of collected but not yet incurred removal costs. For the Non-Utility Nuclear business, the implementation of SFAS 143 resulted in a decrease in liabilities of $595. million due to reductions in decommissioning liabilities, a decrease in assets of $340 million, including a decrease in electric plant in service of
$315 million, and an increase in earnings in 2003 of $155 million net-of-tax as a result of a one-time cumulative effect of accounting change.
The cumulative decommissioning liabilities and expenses recorded in 2004 by Entergy were as follows.
                                                                  -Change in Liabilities as of                   Cash Flow                        Liabilities as of December 31, 2003       Accretion      Estimate      Spending        December'31, 2004 (In Millions)
U.S. Utility                       $1,504.1         $98.0        ,($274.1)            -;          .   $1,328.0 Non-Utility Nuclear              .$710.4,       ,;; $57.6,;.          ($20.3)     ($9.4)      ,         $738.3 In addition, an insignificant amount of removal costs associated with non-nuclear power plants are also included in the decommissioning line item on thebalance sheet., Entergy1 periodically. reviews and updates estimated decommissioning costs. The actual decommissioning costs- may vary from the estimatep because of regulatory requirements, changes in technology, and increased costs of labor, materials, and equipment During 2004, Entergy updated decommissioning cost studies for ANO 1 and 2 and River Bend.
In the first quarter of 2004, Entergy Arkansas recorded 'a revision to its estimated decommissioning cost liability in accordance with a new decommissioning cost study for ANO 1 and 2 as a result of revised decommissioning costs and changes in assumptions regarding the timing of when th1e decommissionirg of the plants will begin. The revised estimate resulted in a $107.7nmi1ion' reduction in its- decommissioninj liability; along with a $19.5 million reduction in utility plant and an $88.2 million reduction in the related regulatory, asset.
In,the third quarter of 2004, Entergy Gulf States recorded a revision to its estimated decommissioning cost liability in accordance with a new decommissioning cost study for River Bend that reflected an expected life extension for the plant. The revised estimate resulted in a $166.41million reduction in decommissioning liability, along with a $31.3 million reduction in utility plant, a $49.6 million reduction in non-utility property, a $40.1 million reduction in the related regulatory asset, and a regulatory liabilityof $17.7 million. For the portio of RAver Bend not subject to cost-based rateznaking, thp revised estimate resulted in the elimination of the a, cost that had been recorded at the time of adoption of SFAS 143 with, the remainder recorded as miscellaneous other income of $27.7 million.                                       l P.  . l In the third quarter of 2004, Entergy's Non-Utility Nuclear business recorded a reduction of $20.3 niilli, in decommissioning liability to 'reflect changes Jin assumptions regarding the timing of when decommissioning of a plant will begin. Entergy considered the assumptions as part of recent studies evaluating the economic effect olthe plant in its region. The revised estimate resulted in miscellaneous other income of $20.3 million, reflecting ithe g2

Entergy Corporation Notes to Consolidated Financial Statements excess of the reduction in the liability over the amount of undepreciated asset retirement cost recorded at the time of adoption of SFAS 143.
If Entergy had applied SFAS 143 during prior periods, the following impacts would have resulted:
Year Ended December 31, 2002 Earnings applicable to common stock - as reported                     $599,360 Pro forma effect of SFAS 143                                            $14,119 Earnings applicable to common stock - pro forma                       $613,479 Basic earnings per average common share - as reported                     $2.69 Pro forma effect of SFAS 143                                              $0.06 Basic earnings per average common share - pro forma                       $2.75 Diluted earnings per average common share - as reported                   $2.64 Pro forma effect of SFAS 143                                              $0.06 Diluted earnings per average common share - pro forma                     $2.70 For the Indian Point 3 and FitzPatrick plants purchased in 2000, NYPA retained the decommissioning trusts and the decommissioning liability. NYPA 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 NYPA, 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 contributions to the trusts.
Entergy maintains decommissioning trust funds that are committed 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, 2004 are as follows:
Decommissioning          Regulatory Trust                Asset (In Millions)
U.S. Utility                   $1,052.0              $380.1 Non-Utility Nuclear            $1,401.6 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 2004 were $4.4 million for Entergy Arkansas, $1.1 million for Entergy Gulf States, $1.6 million for Entergy Louisiana, and $1.8 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, 2004, two years of assessments were remaining.
D&D fees are included in other current liabilities and other non-current liabilities and, as of December 31, 2004, recorded liabilities were $8.8 million for Entergy Arkansas, $1.9 million for Entergy Gulf States, $3.3 million for Entergy Louisiana, and $3.3 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 assessments are recovered through rates in the same manner as fuel costs.
83

Entergy Corporation Notes to Consolidated Financial Statements Income Taxes Entergy is currently under audit by the IRS with respect to tax returns for tax periods subsequent to 1995 and through 2001, and is subject to audit by the IRS and other taxing authorities for subsequent 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 risk associated with tax matters. Certain material audit matters as to which management believes there is a reasonable possibility of a future tax assessment are discussed below. See Note 3 to the consolidated financial statements for additional discussion of income taxes.
Foreign Tax Credits In July 1997, the UK government enacted the Windfall Tax, which was a one-time tax imposed on formerly government-owned companies in regulated industries. The Windfall Tax applied to companies that the government had previously privatized in the telecommunication, airport operation, gas, water, electricity, and railway industries.
London Electricity, the UK public limited company purchased and subsequently sold by Entergy, was subject to the UK Windfall Tax. Entergy fulfilled its obligation with respect to the tax in 1997 and 1998. In subsequent tax years, Entergy reported a foreign tax credit for the UK Windfall Tax that London Electricity paid. Entergy has claimed a net tax benefit of $152 million related to this foreign tax credit.
During 2004, the IRS proposed to disallow this foreign tax credit. Entergy disagreed with the position of the IRS and protested the disallowance of the credit to the Office of IRS Appeals. Entergy expects to receive a Notice of Deficiency in 2005 for this item, and plans to vigorously contest this matter. The. amount at issue including tax and interest as of December 31, 2004 is $195 million. Entergy believes that the contingency provision established in its financial statements will sufficiently cover the risk associated with this dispute.
                                                                                             , . .'  1  I  :
Depreciable Property Lives                                         -
During the years 1997 through 2004, Entergy subsidiaries, Entergy Services, Entergy Arkansas; Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy Resources reflected changes in tax depreciation methods with respect to certain types of depreciable property. (e.g. street; lighting, billing meters, and various generation plant equipment). The cumulative effect of these changes results in additional depreciation deductions generating a cash flow benefit of approximately $152 milliof as of December 31, 2004. The related IRS interest exposure if the deduction is ultimately disallowed is $44 million at December 31, 2004. This benefit reverses over time and will also fluctuate with each year's addition to those types of assets.
Due to the temporary nature of the tax benefit, the potential interest charge represents the total net earnings exposure of Entergy.
For the years under audit, 1996-2001, the IRS challenged Entergy's classification of these assets and proposed adjustments to the depreciation deductions taken. Entergy disagrees with the position of the IRS and has protested the disallowance of these deductions to the Office of IRS Appeals. Entergy expects to receive a Notice of Deficiency in 2005 for this item, and plans to vigorously contest this matter. Entergy believes that the contingency provision established in its financial statements sufficiently covers the risk associated with this item.
Mark to Narket of Certain Power Contracts In 2001, Entergy Louisiana changed its method of accounting for tax purposes related to its wholesale electric power contracts. The most significant of these is, the, contract to purchase power from the Vidalia hydroelectric project. The new tax accounting method. has provided a cumulative cash flow benefit; of approximately $790 million as of December 31, 2004. The related IRS interest exposure is $93! million at December 31, 2004. This benefit is expected to reverse in the years 200$ through 2031. The election, did not reduce book income tax expense. The timing of the reversal of this benefit depends on several variables, including the price of power. Due to the temporary nature of the tax benefit, the potential interest charge represents Entergy's net earnings exposure. Entergy Louisiana's 2001 tax return is currently under examination by the IRS, though no 84

Entergy Corporation Notes to Consolidated Financial Statements adjustments have yet been proposed with respect to the mark to market election. Entergy believes that the contingency provision established in its financial statements will sufficiently cover the, risk associated with this issue.
CashPoint 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 varidus 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.
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 defending these suits and deny any liability to the plaintiffs. Nevertheless, no assurance can be given as to the outcome of these cases.
NOTE 9.          LEASES General As of December 31, 2004, Entergy had capital leases and non-cancelable operating leases for equipment, buildings, vehicles; and fuel storage facilities (excluding nuclear fuel leases and the Grand Gulf and Waterford 3 sale and leaseback transactions) with minimum lease payments as follows:                  ,
Operating          Capital Year                             Leases            Leases (In Thousands) 2005                                                    $99,246-           $9,660 2006                                                     85,769             5,724 2007                                                     68,557             3,438 2008                                                     55,155             1,754 2009                                                     45,240                237 Years thereafter                                        210,474             2,606 Minimum lease payments                                  564,441            23,419 Less: Amount representing interest                              -           3,388 Present value of net minimum lease payments            $564,441           $20,031 85

Entergy Corporation Notes to Consolidated Financial Statements Total rental expenses for all leases (excluding nuclear fuel leases and the Grand Gulf and Waterford 3 sale and leaseback transactions) amounted to $81.3 million in 2004, $84.3 million in 2003, and $92.2 million in 2002.
Nuclear Fuel Leases As of December 31, 2004, arrangements to lease nuclear fuel existed in an aggregate amount up to $150 million for Entergy Arkansas, $105 million for Entergy Gulf States, $80 million for Entergy Louisiana, and $110 million for System Energy. As of December 31, 2004, the unrecovered cost base of nuclear fuel leases amounted to approximately $93.9 million for Entergy Arkansas, $71.2 million for Entergy Gulf States, $31.7 million for Entergy Louisiana, and $65.6 million for System Energy. The lessors finance the acquisition and ownership of nuclear fuel through loans made under revolving credit agreements, the issuance of commercial paper, and the issuance of intermediate-term notes. The credit agreements for Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy each have a termination date of October 30, 2006. The termination dates may be 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 arranged 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 based on nuclear fuel use. The total nuclear fuel lease payments (principal and interest) as well as the separate interest component charged to operations by the domestic utility companies and System Energy were $146.6 million (including interest of $12.8 million) in 2004, $142.0 million (including interest of $11.8 million) in 2003, and $137.8 million (including interest of $11.3 million) in 2002.
Sale and Leaseback Transactions Waterford 3 Lease Obligations In 1989, Entergy Louisiana sold and leased back 9.3% of its 'interest in Waterford 3 for the aggregate sum of $353.6 million. The lease has an approximate term of 28 years. The lessors financed the sale-leaseback through the issuance of Waterford 3 Secured Lease Obligation Bonds. The lease payments made by Entergy Louisiana are sufficient to service the debt.
In 1994, Entergy Louisiana did not exercise its option to repurchase the 9.3% interest in Waterford 3. As a result, Entergy Louisiana issued $208.2 million of non-interest bearing first mortgage bonds as collateral for the equity portion of certain amounts payable under the lease.
In 1997, the lessors refinanced the outstanding bonds used to finance the purchase of Waterford 3 at lower interest rates, which reduced the annual lease payments.
Upon the occurrence of certain events, Entergy Louisiana may be obligated to assume the outstanding bonds used to finance the purchase of the unit and to pay an amount' sufficient to withdraw from the lease transaction. Such events include lease events of default, events of loss, deemed loss events, or certain adverse "Financial Events." "Financial Events" include, among other things, failure by Entergy Louisiana, following the expiration of any applicable grace or cure period, to maintain (i) total equity capital (including preferred stock) at least equal to 30% of adjusted capitalization, or (ii) a fixed charge coverage ratio of at least 1.50 computed on a rolling 12 month basis.
As of December 31, 2004, Entergy Louisiana's total equity capital (including preferred stock) was 51.33%
of adjusted capitalization and its fixed charge coverage ratio for 2004 was 3.76.
86

Entergy Corporation Notes to Consolidated Financial Statements As of December 31, 2004 Entergy Louisiana had future minimum lease payments (reflecting an overall implicit rate of 7.45%) in connection with the Waterford 3 sale and leaseback transactions, which are recorded as long-term debt, as follows:
(In Thousands) 2005                                                          $14,554 2006                                                            18,261 2007                                                            18,754 2008-                                                           22,606 2009                                                            32,452 Years thereafter                                              334,062 Total                                                         440,689 Less: Amount representing interest                             192,964 Present value of net minimum lease payments                  $247,725 Grand Gulf Lease Obligations In December 1988, System Energy sold 11.5% of its undivided ownership interest in Grand Gulf for the aggregate sum of $500 million. Subsequently, System Energy leased back its interest in the unit for a term of 26-1/2 years. System Energy has the option of terminating the lease and repurchasing the 11.5% interest in the unit at certain intervals during the lease. Furthermore, at the end of the lease term, System Energy has the option of renewing the lease or repurchasing the 11.5% interest in Grand Gulf.
In May' 2004 System Energy caused the Grand Gulf lessors to refinance the outstanding bonds that they had issued to finance the purchase of their undivided interest in Grand Gulf. The refinancing is at a lower interest rate, and System Energy's lease payments have been reduced to reflect the lower interest costs..
System Energy is required to report the sale-leaseback as a financing transaction in its financial statements.
For financial reporting purposes, System Energy expenses the interest portion of the lease obligation and the plant depreciation. However, operating revenues include the recovery of the lease payments because the transactions are accounted for as a sale and leaseback for ratemaking purposes. Consistent with a recommendation contained in a FERC audit report, System Energy recorded as a net regulatory asset the difference between the recovery of the lease payments and the amounts expensed for interest and depreciation and is recording this difference as a regulatory asset or liability on an ongoing basis, resulting in a zero net balance at the end of the lease term. The amount of this net regulatory asset was $75.4 million and $83.2 million as of December 31, 2004 and 2003, respectively.
As of December 31, 2004 System Energy had future minimum lease payments (reflecting an implicit rate of 5.01%), which are recorded as long-term debt as follows:
(In Thousands) 2005                                                          $45,423 2006                                                            46,019 2007                                                            46,552 2008                '                                           47,128 2009                                                            47,760 Years thereafter                                               302,402 Total                                                          535,284 Less: Amount representing interest                             138,165 Present value of net minimum lease payments                  $397,119 87

Entergy Corporation Notes to Consolidated Financial Statements NOTE 10.                 RETIREMENT,                              OTHER                    POSTRETIREMENTi-- BENEFITS,,.-                                                                         AND                         DEFINED CONTRIBUTION PLANS -                                                              LL          .       CJti&,.          f          Qwrit dIWUr* 9, _ffl                              ,i: t3        .                       J J          ,'Aifumr
                                                                                                                                                                                                                                          -4(
Pension Plans Entergy has seven pension plans covering substantially all of its employees: "Entergy Corporation Retirement Plan for Non-Bargaining Employees," "Entergy Corporation Retirement Plan for Bargaining Employees," "Entergy Corpoiation 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 IV for Bargaining Employees." Except for the Entergy Corporation Retirement Plan III, the pension plans ate noncontributory and provide pension benefits that are based on employees' credited service and compensation during the final years before retirement. The Enterg& 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, 2004 and 2003, Entergy recognized an additional rminimium pension liability for the excess of the accumulated benefit, obligation Qyer 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 remaining offset to the liability recorded as ,a.regulatory asset reflective. of the recovery mnechanism.for pension cosits in Entergy's jurisdictions or to other comprehensive income for Entergy's ,npn-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 3 l me~asurement diate for its pension plans. ;
        ... ''ht:     :.J;   ,,.fJli.                 at wil         t'  i           r*'i.}ii *.I_'.Xt ''.3b~tiV fLou ~ To~ ' "'' r94'jtt '9j1 J. 72[UI QO ~f?32. 1 '''
Components of Net Pension                         Cost            s       i3;vL                     jip5,-i             Y          c.Sii 4frie', - c                                           't R                  t x Z.sisS Total   2004, 2003, and 2002 pension costs of Entergy Corporation and its subsidiaries, including amounts c v                               s unii          ,z c           cqc !                                       i-r                    'lI-capitalized, included the following components:                                                 **                                                                                                        .                            t
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    .              .   . i GII          J 'lar          A. t''i
              -          i        ;er'v'ice cost - benefit's 4e'adrA'ed Dll''                                     $76'94"               '             70,337 3                  $56,947d                         'Ji2D iIt               .&1it; dInj         the period "1,                                                     xh         1LC\                                                          -u Interest cost on projected                                                       148,092                           134,403                     128,387 benefit obligation                       ___-                     LL     (5,                          d                      ;460)
I(1                                               t' 'A pected return on assets                                      `584        ''l                                c-        ,46)             (I,                                                         9.
                                                                                                        .K'ri  9.    -,lo.t~.1   lA.i_'.'                     :-i''(
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                                                                                                                                      ..............         i          94. t....,*...      X               ....
b D                      .........................
Amortization of transition asset                                                         (763)                            (763)                         (763)
Amortization of prior service cost                                                     5,143                           5,886                          5,993 Recognized net loss                                                                 21,687                             6,399                          5,504 Curtailment loss                                                                                 -                  14,864                              stat Special termination benefits                                                                     -                  32,006 Net pension costs                                                               $97,521                        $107,672                       $37,866 I)
                                                                                                                                                                    ,       ,j>
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Entergy Corporation Notes to Consolidated Financial Statements Pension Obligations, Plan Assets, Funded Status, Amounts Not Yet Recognized and Recognized in the Balance Sheet as of December 31, 2004 and 2003:
fis';.X:-j~. c 'JY 01KW f j7.f~if ; t 4'itt               w'SO,
                                                               *)f  rtl7l               at's ovS9i   ; nt Ssci.-il2ZX{i~t ;q           i         'A:.W-i' AlA ij~f~sAn :j21     N '.i      WWThsaWl fl~sI                if aUr>J11/2i          sc'litm
                                                                                             -            3Idr1t!E         December 31,                   t     n ill) 5A j                               '*1'
: 1. -.                           P      2004          --          2003Y           -  .Y;i (In Thousands)
WrIti       jj ,L,, I       Wl:fC-t lA        anfltQ            fTtm               ~ff~        ~t~~t'lhl~U                   1f~i(j2             iJG2f            smr Changein Projected Benefit Obligation,(PBO) ,                                                     mc-  ivfttYi14             avtcT:JJDQ Ircninrxccrob Balance atbeginningofyear. ,                    ;                    ,;.          .         j   y$ 2,349,565                 $1,992,207 ,.               fflit:3 Servicecost.A, Iflt                  9cnThw-.          b  J          i&1f-it     \l<iOttsY&#x17d;         . 76,946            't
* 70,337 Interest cost      .              .        ruJA;) C         ;;            n         -;(;<c             148,092             ;     134,403     ft    c- f Amendments                               !                                                 13  W $2       3M79         `107    if      227 Actuarial loss                                                                                         171,146                  205,949 Benefits paid                                                                            '          (I 1` 2 3 4 )'flh (i                           ( 9 4 5 1 4fIIj2iflSU; Em ployee ckontibuttions,                                                                                  1,212                      1,5*
Curtailment loss                                                                                                                    f951 0-Special termination benefits                                                                                     -                 32,006 Balance afend of year''ti.                                                                       $2,633,436                  $2,349,565 6Jb"fLf i i L At fril Change in Plan Assets Fair value of assets at beginning of year                                                           -$1744975                $$1,451,802 Actual return-'on plana'ets''t'                                                                       170,964          .        355,043 Employer contributiohs'f                       1S                                                -S&-72,825             ^ic7 1734,645 Employee contributiofi&sect;              -         & Jt      )l                                  . 2;         1,212                    f 1,059 Benefits paid             i ..J    I         Yi!p,). t                     ?o fIT       i fo ao         (117,234)                    (97,574)
Fair value of assets afend of year"                                            t   oo1 ,)tH"$    1,872,742                  $1,744,975 Funded status .. ,              .\           -                                                    ($760,694)            hill ($604,590)
Amounts not yefircognized in the balance sheet Unrecognized transition asset                                                                              (662)                    (1,426)
Unrecognized prior service cost                                                                         29,053                     30,467 Unrecognized net loss                                                                                 542,391                   410,321 Accrued pension cost recognized in the balance sheet                                              ($189,912)                 ($165,228)
Amounts recognized in the balance sheet Accrued pension cost                                                                              ($189,912)                 ($165,228)
Additional minimum pension liability                                                                 (244,280)                 (180,212)
Intangible asset                                                                                          26,167                     30,832 Accumulated other comprehensive income                                                                    10,781                     15,359 Regulatory asset                                                                                       207,332                     134,021 Net amount recognized                                                                             ($189,912)                 ($165,228) 89

Entergy Corporation Notes to Consolidated Financial Statements Other Postretirement Benefits Entergy also currently provides health care and life insurance benefits for retired employees. 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 postretirement benefit plans.
Effective January 1, 1993, Entergy adopted SFAS 106, which required a change from a cash method to an accrual method of accounting for postretirement benefits other than pensions. At January 1, 1993, the actuarially determined accumulated postretirement benefit obligation (APBO) earned by retirees and active employees was estimated to be approximately $241.4 million for Entergy (other than Entergy Gulf States) and $128 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 utilities 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 Postretirement Benefit Cost Total 2004, 2003, and 2002 other postretirement benefit costs of Entergy Corporation and its subsidiaries, including amounts capitalized and deferred, included the following components:
2004           2003       2002 (In Thousands)
Service cost - benefits earned during the period                          $30,947        $37,799     $29,199 Interest cost on APBO                          53,801         52,746. 44,819 Expected return on assets                    (18,825)       (15,810)    (14,066)
Amortization of transition obligation           9,429         15,193     17,874.
Amortization of prior service cost            (5,222)     ,     (925)         992.
Recognized net (gain)/loss                     15,546         12,369        1,874 Curtailment loss                                     -        57,958 Special termination benefits                                   5,444             -
Net other postretirement benefit cost        $85,676       $164,774     $80,692 90

Entergy Corporation Notes to Consolidated Financial Statements Other Postretirement Benefit Obligations. Plan Assets. Funded Status, and Amounts Not Yet Recognized and Recognized in the Balance Sheet as of December 31,2004 and 2003:
December 31, 2004                 2003
                                                    ,. 1s (In Thousands)
Change in APBO Balance at beginning of year                                            $941,,03        ,$799,506 Service cost                                                               30,947                37,799 Interest cost                                                              53,801                52,746 Actuarial loss                                                             73,890-            115,966 Benefits paid                                                             (66,456)            (48,379)
Plan Amendments (a)                                                       (60,231)            (84,722)
Plan participant contributions                                               9,312                  7,074 Curtailments.                                                                                    56,369 Special termination benefits                                                      -                 5,444 Balance at end of year                                                  $983,066             $941,803 Change in Plan Assets Fair value of assets at beginning of year                               $227,446             $182,692 Actual return on plan assets                                                15,550              "22,794 Employer contributions                                                     63,399                63,265 Plan participant contributions                                               9,312                  7,074 Benefits paid                                                             (66,455)             (48,379)
Fair value of assets at end of year                                     $249,252           ' $227,446 Funded status                                                          ($733,814) - ($714,357)
Amounts inot yet recognized in the balance sheet                                    i d  I Unrecognized transition obligation                                           5,594 :: ;         ,44,815 Unrecognized prior service cost                                         ; (39,560)-            (20,746)
Unrecognized net loss                                           ... i     391,940           ' 336,005 Accrued other postretirement benefit cost recognized in the balance'sheet       '                                              ($375,840) '         ($354,283)
(a)   Reflects plan design changes, includinga change in the participation assumption for the majority of non-bargaining employees effective August 1, 2003 and certain bargaining employees and additional non-bargaining employees effective January 1, 2004.
91

Entergy Corporation Notes to Consolidated Financial Statements Pension and Other Postretirement Plans' Assets Entergy's pension and postretirement plans weighted-average asset allocations by asset category at December 31, 2004 and 2003 are as follows:
Pension           Postrefirement 2004        2003       2004       2003 Domestic Equity Securities               46%         56%        38%        37%
International Equity Securities          21%          14%        14%        0%
Fixed-Income Securities                  31%         28%        47%        60%
Other                                      2%          2%         1%        3%
Entergy's trust asset investment strategy is to invest the assets in a manner whereby long-term earnings on the assets (plus cash contributions) 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.
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 expectation 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 Oblieation The accumulated benefit obligation for Entergy's pension plans was $2.3 billion and $2.1 billion at December 31, 2004 and 2003, respectively.
92

Entergy Corporation Notes to Consolidated Financial Statements Estimated Future Benefit Payments Based upon the assumptions used to measure the company's pension and postretirement benefit obligation at December 31, 2004, 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:
Estimated Future Benefits Payments Pension             Postretirement (In Thousands)
Year(s)       '-'i 2005                              $115,203               $60,932 2006                              $116,894               $59,761 2007                              $119,092               $62,392 2008                              $122,728               $64,381 2009                              $127,877               $66,444 2010 -2014                        $780,295              $360,191 Contributions Entergy expects to contribute $185.9 million (excluding about $1.2 million in employee contributions) to its pension plans and $63.3 million to other postretirement plans in 2005.
Additional Information The change in the minimum pension liability included in other comprehensive income and regulatory assets was as follows for 2004 and 2003:
2004                 2003 (In Thousands)
Increase/(decrease) in the minimum pension liability included in:
Other comprehensive income                                               ($4,578)            ($1,639)
Regulatory assets                                                       $73,311            ($23,768)
Actuarial Assumptions The assumed health care cost trend rate used in measuring the APBO of Entergy was 10% for 2005, graduallydecreasing each successive year until it reaches 4.5% in 2011 and beyond. The assumed health care cost trend rate used in measuring the Net Other Postretirement Benefit Cost of Entergy was 10% for 2004, gradually decreasing each successive year until it reaches 4.5% in 2010 and beyond. A one percentage point change in the assumed health care cost tread rate for 2004 would have the following effects:
1 Percentage Point Increase                 1 Percentage Point Decrease Impact on the                                  Impact on the sum of service                                  sum of service Impact on the             costs and          Impact on the               costs and 2004                      APBO               interest  cost            APBO                 interest  cost Increase (Decrease)
(In Thousands)
Entergy Corporation                    $99,271               $11,587             ($89,801)                 ($10,061) 93

Entergy Corporation Notes to Consolidated Financial Statements The significant actuarial assumptions used in determining the pension PBO and the SFAS 106 APBO for 2004, 2003, and 2002 were as follows:
:2004          2003              2002 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%
The significant actuarial assumptions used in determining the net periodic, pension and other postretirement benefit costs for 2004, 2003, and 2002 were as follows:
2004         2003              2002 Weighted-average discount rate, Pension                                 6.25%        6.75%             7.50%
Other postretirement                    6.71%        6.75%             7.50%
Weighted-average rate of increase i;  in future compensation levels              3.25%  i   - 3.25%             4.60%
Expected long-term rate of return on plan assets:
Taxable assets                         5.50%        5.50%             5.50%
Non-taxable' assets                    8.75%        8.75%             9.00%
Entergys. remaining pension transition assets are being amortized over the greater of the remaining service period of active participants ot 15 years ending in 2005, and its SFAS 106 transition obligations are being amortized over 20 years ending in 2012.
Voluntary Severance Program As part of an initiative to achieve productivity improvements with a goal of reducing costs, primarily in the Non-Utility Nuclear and U.S. Utility businesses,;in the second half of 2003 Entergy offered a voluntary severance prdgram- to; employees in various departments. - Approximately 1,100 employees, including 650 employees in nuclear operations from the Non-Utility Nuclear and U.S.' Utility businesses, accepted the offers. As a result of this program, in the fourth quarter 2003 Entergy recorded additional pension and postretirement costs (including amounts capitalized) of $110.3 million for special tepiination benefits and plan curtailment charges. These amounts are included in the net pension cost and net postretirement benefit cost for the year ended December 31, 2003.;
Medicare Prescription Dru2. Improvement and Modernization Act of 2003 In December 2003, the President signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 into law. The Act introduces a prescription drug benefit cost under Medicare (Part D), starting in 2006, as well as federal subsidy to employers who provide a retiree prescription drug benefit that is at least actuarially equivalent to Medicare Part D.
At December 2003, specific authoritative guidance on the accounting for the federal subsidy was pending.
As allowed by Financial Accounting Standards Board Staff Position No. FAS 106-1, Entergy elected to record an 94,

Entergy Corporation Notes to Consolidated Financial Statements estimate of the effects of the Act in accounting for its postretirement benefit plans at December 31, 2003, under SFAS 106 and in providing disclosures required by SFAS No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits. At December 31, 2003, based on actuarial analysis of prescription drug benefits, estimated future Medicare subsidies were expected to reduce the December 31, 2003 Accumulated Postretirement Benefit Obligation by $56 million. For the year ended December 31, 2003, the impact of the Act on net postretirement benefit cost was immaterial, as it reflected only one month's impact of the Act.
In 2004, Entergy continued to record an estimate of the effects the Act in accounting for its postretirement benefit plans. In mid-2004, the Financial Accounting Standards Board issued Staff Position No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which was effective for Entergy's June 30, 2004 interim reporting.
In August 2004, the Centers for Medicare and Medicaid Services issued proposed regulations to implement the new Medicare law. A ruling from the Centers for Medicare and Medicaid Services was issued in late January 2005 with final guidance expected later this year.
The actuarially estimated effect of future Medicare subsidies reduced the December 31, 2003 and 2004 Accumulated Postretirement Benefit Obligation by $128 million and $161 million, respectively, and reduced the 2004 other postretirement benefit cost by $23.3 million.
Defined Contribution Plans Entergy sponsors the Savings Plan of Entergy Corporation and Subsidiaries (System Savings Plan). The System Savings Plan is a defined contribution plan covering eligible employees of Entergy and its subsidiaries.
Through January 31, 2004, the System Savings Plan provided that the employing Entergy subsidiary:
* make matching contributions to the System Savings Plan in an amount equal to 75% of the participants' basic contributions, up to 6% of their eligible earnings, in shares of Entergy Corporation common stock if the employees direct their company-matching contribution to the purchase of Entergy Corporation's common stock; or
* make matching contributions in the amount of 50% of the participants' basic contributions, up to 6% of their eligible earnings, if the employees direct their company-matching contribution to other investment funds.
Effective February 1, 2004, the employing Entergy subsidiary began making matching contributions for non-bargaining employees to the System Savings Plan in an amount equal to 70% of the participants' basic contributions, up to 6% of their eligible earnings. The 70% match is allocated to investments as' directed by the employee.
Entergy also sponsors the Savings Plan of Entergy Corporation and Subsidiaries II (established in 2001),
the Savings Plan of Entergy Corporation and Subsidiaries III (established in 2002), and the Savings Plan of Entergy Corporation and Subsidiaries V (established in 2002). The plans are defined contribution plans that cover eligible employees, as defined by each plan, of Entergy and its subsidiaries. The employing Entergy subsidiary makes matching contributions equal to 50% of the participants' participating contributions for each of these plans.
Effective September 30, 2004, employees participating in the Savings Plan of Entergy Corporation and Subsidiaries III (Savings Plan III) were transferred into the System Savings Plan and Savings Plan III was terminated.
Entergy's subsidiaries' contributions to defined contribution plans collectively were $32.9 million in 2004,
 $31.5 million in 2003, and $29.6 million in 2002. The majority of the contributions were to the System Savings Plan.
95

Entergy Corporation Notes to ConsolidatedFinancial Statements NOTE 11.V          BUSINESS SEGMENT INFOR1VLATION Entergy's reportable segments as of December 31, 2004 are U.S. Utility, Non-Utility Nuclear, and Energy Commodity Services. U.S. Utility generates; transmits, distributes, and sells electric power in portions of Arkansas, Louisiana, Mississippi, and Texas, and provides natural gas utility service in portions of Louisiana. Non-Utility Nuclear owns and operates five nuclear power plants and is primarily focused on selling electric power produced by those plants to wholesale customers. Energy Commodity Services includes Entergy-Koch, LP and Entergy's non-nuclear wholesale assets business. Entergy-Koch engaged in two major businesses: energy commodity marketing and trading through Entergy-Koch Trading, and gas transportation 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. The non-nuclear wholesale assets business sells to wholesale customers the electric power produced by power plants that it owns while it focuses on improving performance and exploring sales or restructuring opportunities for its power plants. Such opportunities are evaluated consistent with Entergy's market-based point-of-view. Results from Entergy-Koch are reported as equity in earnings of unconsolidated equity affiliates in the financial statements. Entergy's operating segments areo strategic business units managed separately due to their different operating and regulatory environments. Entergy's chief operating decision maker is its Office of the Chief Executive, which consists of its highest-ranking. officers.
           "All Other" includes the parent company, Entergy Corporation, other business activity, including the Competitive Retail Services business, which has higher revenues in 2004 as its number of customers has increased, and earnings on the proceeds of sales of previously-owned businesses.
Entergy's segment financial information is as follows:
i Energy                         k Non-Utility  Commodity 2004                   U. S. Utility Nuclear*      Services
* All Other* Eliminations Consolidated (In Thousands)
Operating revenues                      $8,142,808    $1,341,852     $216,450     $486,804          ($64,190)  $10,123,724 Deprec:, amort. & decom.                  '$915,667     $106,408      $16,311       $6,736                 $-   $1,045,122 Interest income                             $40,831      $63,569      $17,875      $42,729          ($55,195)     $109,809 Equity in loss of unconsolidated equity affiliates                 $-           $-    ($78,727)            $-               $- -   ($78,727)
Interest charges                           $383,032      $53,657      $15,560.     $81,916          ($55,142)     $479,023 Income taxes (credits)                     $406,864     $142,620    ($155,840)    ($27,736)       j        $-     $365,908 Net income                                 $666,691     $245,029       $3,778      $17,606              ($55)     $933,049 Total assets                           $22,937,237    $4,531,604   $2,223,961     $199,233      ($1,581,258)   $28,310,777 Investment in affiliates -at equity            $207            $-    $512,571             $-      ($280,999)      $231,779 Cash paid for long-lived asset additions                              $1,152,167     $242,822        $2,022      $13,604               ($5)   $1,410,610 96

Entergy Corporation Notes to Consolidated Financial Statements Energy Non-Utility    Commodity 2003                U. S. Utility Nuclear*         Services
* AU Other* Eliminations Consolidated (In Thousands)
Operating revenues                    $7,584,857    $1,274,983        $184,888      $188,228         ($38,036)        $9,194,920 Deprec., amort. & decomm.               $890,092       $87,825          $13,681        $5,005                           $996,603 Interest income                          $43,035       $36,874          $18,128      $27,575         ($38,226)           $87,386 Equity in earnings (loss) of unconsolidated equity affiliates             ($3)                    $271,650              $-                          $271,647 Interest charges                        $419,1i1       $34,460          $15,193      $75,787         ($38,225)          $506,326 Income taxes (credits)                  $341,044       $88,619        $105,903      ($45,492)                           $490,074 Cumulative effect of accounting change                                 ($21,333)    $154,512     ;      $3,895             $-          ,.   $-         $137,074 Net income (loss)                       $492,574      $300,799        $180,454      ($23,360)                $          $950,467 Total assets                         $22,402,314    $4,171,777      $2,076,921 . $1,495,903      ($1,619,527)        $28,527,388 Investment 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          $44,284      $10,074                  $-      $1,568,943 Energy Non-Utility    Commodity
               ' 2002                U. S. Utility  Nuclear*        Services
* All Other* Eliminations Consolidated (In Thousands)
Operating revenues                    $6,773,509     $1,200,238        $294,670        $40,729          ($4,1 11)     $8,305,035 Deprec., amort. & decomm.               $800,257        $88,733          $21,465        $5,143                          $915,598 Interest income                          $23,231        $71,262          $26,140       $35,433        ($37,7 41)        $118,325 Equity in earnings (loss) of unconsolidated equity affiliates             ($2)             $-      $183,880                                $-       $183,878 Interest charges                        $465,703        $47,291          $61,632       $35,579        ($37,7 41)        $572,464 Income taxes (credits)                  $313,752       $132,726       ($141,288)      ($11,252)                $-       $293,938 Net income (loss)                       $606,963       $200,505       ($145,830)      ($38,566)                $-       $623,072 Total assets                         $21,630,523     $4,482,308      $2,167,472    $1,327,354 ($2,103,2 91)          $27,504,366 Investment in affiliates - at equity        $214               $-      $823,995              $-                $-       $824,209 Cash paid for long-lived asset additions                            $1,131,734       $169,756        $210,297        $18,514                 $-     $1,530,301 Businesses marked with
* are referred to as the "competitive businesses,!' with the exception of the parent company, Entergy Corporation, which is included in "All Other." Eliminations are primarily intersegment activity.
Substantially all of Entergy's recorded asset for goodwill is in its U.S. Utility segment.
In the fourth quarter 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 concluded 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 sale of preferred stock in a subsidiary in the non-nuclear wholesale assets business.
Energy Commodity Services' net loss for the year ended December 31, 2002 includes net charges of $428.5 million to operating expenses ($238.3 million net-of-tax). These charges reflect the effect of Entergy's decision to discontinue additional greenfield power plant development and the asset impairments resulting from the 97

Entergy Corporation Notes to Consolidated Financial Statements deteriorating economics of wholesale power markets in the United States and the United Kingdom. The net charges consist of the following:
* The power development business obtained contracts in October 1999 to acquire 36 turbines from General Electric. Entergy's rights and obligations under the contracts for 22 of the turbines were sold to an independent special-purpose entity in May 2001. $178.0 million of the charges, including an offsetting benefit of $28.5 million ($18.5 million net-of-tax) related to the sale of four turbines to a third party, is a provision for the net costs resulting from cancellation or sale of the turbines subject to purchase commitments with the special-purpose'-erntity.                                                                                                                                                                                        t
     * $204.4 million 'of the charges resulf fromrthe write-offtof 1nter5y Ph''er Development Corpora'ion"s equity investment in the Damhead Creek project and the impairment of the values of the Warred Power power plant, the Crete project, and the RS"Cogen projectf This portiotf o the charges reflects' Sntergy's 'estimate' of the effects of reduced 4sark spre'ads in the United States and thie United Kingdom. These estimate's are based on various sourcik 6f inforrmibion, including distcounted cash'flow projections and current Mharket prices.                                                                                                                                                                                            ? Cxj ... , 6
     * $39.1 million of the charges relate to the restructuring                                                                of   the      notnfuclear                 wholesale                    assets            business, l including impairments tof ad&ninistrai'vVfix'ed ass t,'sestimated                                                                         sublease             losses,             and       employee-i6Iated                              costs''
for approximately 135 affddted employees. These restrudturing costs,                                                                                    which             are       included                in     the    "Provision for turbine commitments, asset impairments, and restructuring charges" in the accompanying consolidated, statement of income, were comprised of the following:                                                                                                                                                                      ,,                    .
Paid in
                                                                                               -                                     Cash                                                                    Remaining a through                                                                        Accrual as ti;,.-.:.Sft            '"tU.                        .-         Restructuring December                                                        Non-Cash                                 of December Costs                                 2004                            Portion                                    31, 2004 (In Millions)
Fixed asset impairments                                                                $22.5                                      $-                                 $22.5                                            $-
            'Sublease' losses                                                          't5                                                                                                                                     5.1 Severance and related costs                                                                    59-                              5..          .,                                                                   5.1 Total                                                         i                 '        3'                     '     $1                  i                     $22.5                                       $5.1.              ,,A a
                                                                                                                                                   &,4iil                                                                 MI            4    J'-
                                                                                   'A     i      1H.
      *     $32.7 million of the charges result from the write-off of capitalized project devf6pfmient'costs for projects that will not he completed.''                                                                           -f                             fA'.              .
* The net charges include a'gain of $25.7 million ($15.9 -millionn&t-6f-iax) on the sale of projects utnide&#x17d;r' development in Spain in August 2002 and the after-tax gain of $3'1.4 million realized on the sale of'
:.::                                t<             &c~y..;.:Z                                                                                       -
Damhead Creek in December 2002.
                                                                                                                                    ,                     <.                              ...      .      ;       .;     .       , ..               m I-  ;I
                                                                                                                                                                                                         .                            A , i'"
Geographic Areas
                                             !.          fj<                    \     *,i},      t0t*                                                 ta                 C
: f.                                                                    G: !~~-~Udjii Ir i; For the years ended December 31, 2004 and 2003, Entergy derived less than 1% of its revenue from outside the of the United States. For the year ended December 31, 2002 Entergy derived 3% of its revenue from outside of i','          rrr  Poht43ni              '   :,    ssi                                  10      1 VasI').           .E United States,                     .1          ..               CttiIti                                         Ip
                                                   ..      e   - tI iit-                      Il .0)           2        1       .I1.          t       fontrat            2               ) fl <           f J        N W            IL;      iit             f+J As of December 31, 2004 and 2003 Entergy had almost no long-lived assets located outside of the United
                                                                                                          .uY. it ifiU-,I                                    1.10                11',,J       V      j.           'it              .        (I States.                         ;                    -           \XzIsfl                         ii)                           a   o'U';1     f00f                                                               AI t    is ij1U&V (Un          h';              .lrI       qld a!.twV-'     i'.sA       &#xa3;7f,     52U     'P. .2                   .         .1!4!.        ti4'iif(slip di'- 10i                   Wtfllk. LFd 4_
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                                                                         ,j)Si..'V 3i         ,.              .i.              .1-A'a.-0 fi                f    liaf!i       C          . .                                                                     ,:zt+/-Xi2 98

Entergy Corporation Entergy Corporation Notes to Consolidated Financial Statements NOTE 12.                  EQUITY METHOD INVESTMENTS                                                              r                                   !.
As of Decemnber 31, 2004, Entergy owns investments in the following companies that it accounts for under the equity method~ facco                              nting: ,                             li   fit                 .              t;2                    i               ."                                        :. _'-!
             - if            H1im'P9             I r                 i , F1 0. %           ! ;                    m u           2         1 :}'
f';/;                            i           ''
Company                                    .,.,              Ownership                                        .                       ,,,
                                                                                                                                                 ,,                    ,Description
: fii.                            ipric 1/2 mkjv..f            '            i^      'j,,    .otsrj                              0.d            to Ri; 3 bi Enqtergy-Koch,LP                                                                                                                                                                                             r                                    ii
                                                   ,:                   j   50>.  %partnership                     Engagd iin two major businesses: energy commodity
                                                                                                                                                                                          ;       )
Jinterest,,,                            ,                                .marke~ting aind trading through Entergy-Koch Trading, and gas transportation and storage through Gulf South Pipeline.
Entergy-Koch sold both of these businesses in the fourth
         .. t  Ji ,,           ]  1            *     .           .~ni<,>i             3 :itjoi.. fP ;quarter of ?2994, and Entergy-Koch is no longer an
                   ;i   .r'                                       GI      2     !Mi                   ,andI_'2JdC)(sifli-                                                      b          K0;cit.1i'.v .               '          '
RS Cogen LLC                             ,             -                ,50%            ,~ecnbjer         *,,
1Co-generation                    project'that produces power and steam on an i    'Jii         '                            .         interest                     industrial and merchant basis in the Lake Charles, Louisiana area,.                 ,t           ,Ji_*     ,).flQ rr          f- ~li9i ,,o                           las      'j      /'!Ite''
Top Deer, ,0                                                          ,,,5O% memb~erL Wind-powered electric generation joint venture.
                 - .':'...                   H .jt       2-141)?,-,             -,,"interest , ,, :> .                              - r .-                                                                                              [      .
Following is a reconciliation of Entergy's investments in equity affiliates:
2004                                        2003                                        2002 Ut;70 i  pi            (In Thousands)                             .
Beginning of year                                                                       $1,053,328                                     $824,209                                      $766,103 Additional investments                                                                          157,020                                           4,668                                      36,3712 Income (loss) from the investments                                                              (78,727)                                   271,647                                       183,878 Other income                                                                                       6,232                                      45,583                                       21,462 Distributions received                                                                       (888,260)                                   (105,142)
                                                                                                                                          .                                                              (73,902)
                ;Dispositionsand other adJustrneints                                                ''         '           '(iX4         )           K'T2,363                                           109,704)
:                     " ei.ItUW'L                                                                      $231,'79'                            $fO03,328                          '     "'
C                        , f ifH              . i             -(),I-
        * . .l- It,2i ;S<'a a't; . -;A.iu.i          :                fIc. 9 V: fJJIj(.>7. ')jJ . .
           ,The following is aesu$m ary of combined financial inform4
                                                                                                                       '..-It~iJ        J.' t.I ,H   JO >          a.       ,Ifti(l(                            z;S    ')J( .,- 29>ei 9l ion.reported 9                                 by Entergy's equity method investees:                              :.lt''.              fai$1               '-r; t() &#xa3; ;i3S 1f'              .b'&                       & ri:.4d.w
                                           .l Ii rn,                                               4ifit ntQ          :ij  V(j             I tn I.:;       61r 81 w        iff         '   iillq                 b     '" ~ orjl   t   '            !>, .      -    r OJrjq
                                        *.l.' "',clW1'        1       4I -'h                                                              __.j7f._-,200____3                       _                2002io ;
(In Thousands)
Operatingreventues ass                                                              $540,386                                   $,576,04                                    $551 Operating income                                                              ($111,535)                                    $207,301 Balance Shaement                       Items                                                                                                                                  $159 3,42>,>i^                           ^       8 Net income                                                                     $739,858 (1)                                 $172,595                                      $68,095 Balance Sheet Items Current assets                                                                   $540,386                               $2,576,630 .. ,;^~ T ...                            $;:      ~...
Noncurrent assets                                                               $418,038                               $1,675,334 Current liabilitie5s),                   (     v            l4;J5r,'.           $180                                   $$1,757,          663ui 0 09                                                                                         r Noncurrent liabilities                                    ;                      $463,899                                                                   _
                                                                                                             -       [63                                                                     i t, i               5                .
1:66,540.,
(1)     Includes gains recorded by Entergy-Koch on the sales of its energy trading and pipeline businesses.
                                .J    V bS-:                                               ,ii    8f1A      J       .-. 2 ..-
99

Entergy Corporation Notes to Consolidated Financial Statements Related-party transactions and guarantees                                                  !ITi'f, i21       a v >.i  'ii   ' t,   i  X   f,:.i          .    *@'.dy' During 2004, 2003, and 2002, Enteri y procured various~ sNvices from Entergy-Koch consisting primarily of pipeline transportation services for natural gas and risk management services for electricity and natural gas: The total cost of such services in 2004, 2003, and 2002 was approximately $9.5 million, $15.9 million, and $11.2 million, respectively. Ii id03,''Energy Louisiana and Entergy fewM!leaiis entered purchase pow'er agreements with RS Cogen, and purchased a total of $26.0 million of capacity and energy from RS Cogen in 2003. In 2004, Entbfgy Louisiana and Entegy' N6W-Orleans purchased a total' of'$43:6 'million of capacity and enerig' 'from R'S' Cogen. Entergy s operatih ftraiisactio'is'twith its othff'ififity meth6d'fin-vestees were not material in 2004, 2003, or 20 2      iffl     1'     tf'T   elrli::'toAu, Prft           o.,.l~r 'Eil.l;-,ly,-,o -v-
          -Inthe purchase agr'1eft-&iis fo6r its efnrgy t rading' and the pipeline business sales, Entergy-Koch has agreed to indemnify the respective purchasers for 'cdertain 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 Efitegy-koch's 'indeinnification obligatio'n-ito the' purchasers. Entergy does                                              e'xpect anYithiterial claihmd'un.dtrthese ii-Ai                      fiuionioblliati6fis, but to fh e extent that any           are   asserted     and    paid,  the gain that Entergy expects to record in 2006 may be reduced.
During the fourth 4d~aff&'of 2004,'an' Eft'6?gy''s'ubidiaq ptr6iidks'd 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 will be amortized over the remaining life of the debt.                                                 'it, i 'tui(,    1 c3J'Xi.l-3lDVW P1flJ' _'         ) f      i~~         7 2'         L.', i NOTE 13.              ACQUISITIONS AND DtSPOSITIONS
                  't.1I^(.fO ~        ~ ~ ,;.<:gzXfj&#xa2;dtl                                                                   i '}a'xisy~
Asset AcqFuisitions                                                        .'                                                 ..         .. J.
Vermont Yankee In Jul'i2002, Entergy's Non-Uiiity Nuclear busifiess purchased the 510 TW Ver'Mont'Waiike nuclear power plant 1ocated in Vernon, Vermont, from Vermo'nt Xankee Nucleair F'owier C-oroio~n or $180 million.
Entergy received teplant, nuclear fuel, inventories, and related real estate. The liability to' de&o6tihiission the plant, as well as related decommissioning trust funds of approximately $310 million, was also transferred to Entergy. Thie'acqui'sition included a-10-yeSf powe' purchae' agr&effieint (PPA) under 'which the f6ronier owners will buy the power produced by the plant, which is through the expiration of the current operating license for the plant.
The PPA includes an adjustment clause which provides that the prices specified in the PPA will be adjusted downward annually, beginning in Dec'iiiber 2005, if power M'arket prices drop below the PPA prices.
                                           ! .`1)fi ,e rJits   J 1. i I The acquisition was accounted for using the purchase method. The results of operations of Vermont Yankee subsequent to the purchase date have been included in Entergy's consolidated irsu'uof o per'aitions. The purchase price has been allocated to the hasets acquired and liabilities assumed based on their estimated fair values on the purchase 'dat"'>                       IJ>. ' .                       c.t 1-)                           '       .
Asset Dispositions Entergy-Koch Businesses                                    !                    ,Z 2'i                                  J.        tLs.)
In the fourth quarter of 2M04, Entergy-Koch sold its energy trading and pipelin-ei bu-ses's`ssto third parties.
The sales came after a review of st rfgic alternativie' for' enhancing the value of' ntergy'Ko'ch, LP. Entergy received $862 million of cash distributions in 2004 from Entergy-Koch after the business sales, and Entergy ultimately e          ts'      ciotalneash diibutin exceeing$1"billion, 'comprised ofthe after-tax 'ash from the distributions of the sales proceeds and the eventual liquidation of Entergy-Koch. Entergy currently expects the 100

Entergy Corporation Notes to Consolidated Financial Statements 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                                                                                                                                                                                       ,,;uc'sat-        '0.iC'.tti In January 2004, Entergy sold its 50% interest in the Crete project, which is a 320MW power plant located in Illinois, and realized an insignificant gain on the sale.                                                                                                                 ifl jvit             ut< <i In the fourth quarter of 2004, Entergy sold undivided interests in the Warren Power and the Harrison County plants at a price that approximated book value.
In the first quarter of.2002, Entergy sold its interests in projects in Argentina, Chile, and Peru for net proceeds of $135.5 million. After impairment provisions recorded for these Latin American interests in 2001, the net loss realized on the sale in 2002 was insignificant.
                 ,.''n U ,       'tJ;iJatW5j~f .m./.l'i~i iced ylwU.'"xn.ZnucS:j ; .'?t?4><>ol3 lnsnEn'rrr f lu "Nr &sb<<'fl urIGt f~tL8 U
     -- ,, In August 2002, Entergy s~old,,its interest in projects under developmept in Spain for a realized gain on the salqe of, $25.7 mrillion. In, December 2002, Entergy sold its 800 MW. Damhead Creek power plant in the UK resulting in an increase in, net income, of $31.4 million. The Damihead Creek buyer assumed all market and regulatory risks associated with the facility._ ,,15> ,                                                           u +/-.            Yi.:5W0-    '..-'O'! A I;                           knii          10 M3/4L:9 UT'i' a)t         Wai      ':_'      -.        mtjitllsi:i  ~asl-xlV1 tQull ,;fv'itJ.t-.                        -';.J   :)fJ.ITt (MA!tbi nm.I              <t0 .t   2.Z:%fm... {           jl'Wj    43I. iOtIsfliXf
                         . <:         .Sh'f Jl   ytZ;8j8l,+i:~
5 tatJit~
                                                             .J     S        1V,              i; iVs xm:iit,&#x17d; li- A *\:fjS    '1f1        sl              F I.54119i            'i     iIX~iTwIh               7 !U4U'll.)1S--jb hti iV;i NOTE 14.                        , RISK MANAGEMENT AND FAIR VALUES                                                                   is                '1I           .          1!;ui Vbvi;ji' i'1/2. C 4'),
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:                                                                                              {              -
::. ^^ \<;:...&il.a vtU             0 J       -'EIIt ia.wtt' .;rT t              :-'ir'             ti    oaq~'iT'hJ i-ro0/:f j         'i . L~v  \ 1 f;-l4 t1     .     ; $1,itt'fi--       (d 0;is          )~l1cv
          -v      tits'.               4 :m. -        R 4j oi'Type of Risk
                                                     >f0                                     ff                                        Primary Affected Segments                                             'Vi".bI     '-I' i;  .'.:&   Power price risk                   iiC)
J      -            . _..... tis' ZAIt      iu          All reportable segments                                       -,      -'.'o      ichuut Fuel price risk                     1.. u...           ! '                j       -z'  a       All reportable segments                                    .:-I                        -
Foreign currency exchange rate risk                                                                All reportable segments Equity price and interest rate risk - investments _.                                               U.S. Utility, Non-Utility Nuclear
     ..it       iJi:i' J i )      f..      tV.1 'Ai              P10) 'iR       jay fi brl-I         jJ .         .            'j     .S   f  ji      '-  "-            . 550i4..'20ti             s '2P(1uS          Lh(14;j{
 -.                  Entergy manages these risks through both contractual arrangements and derivatives. Contractual risk management tools include long-term power and fuel purchase agreements, capacity contracts, and tolling agreements. Entergy also uses a variety of commodity and financial derivatives, including natural gas and electricity futures, forwards, swaps, and options; foreign currency forwards; and interest rate swaps as a part of its overall risk management strategy. Except for the energy trading activities conducted through December 2004 by Entergy-Koch, Entergy enters into derivatives only to manage natural risks inherent in its physical or financial assets or liabilities.
Entergy's exposure to market risk is determined by a number of factors, including the size, term, composition, and diversification of positions held, as well as market volatility and liquidity. For instruments such as options, the time period during which the option may be exercised and the relationship between the current market price of the underlying instrument and the option's contractual strike or exercise price also affects the level of market risk. A significant factor influencing the overall level of market risk to which Entergy 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 management policies limit the amount of total net exposure and rolling net exposure during the stated
                                                                                                            '101

Entergy Corporation Notes to Consolidated Financial Statements periods. These policies, including related risk limits, are regularly assessed to ensure their appropriateness given Entergy's objectives.
Hedging Derivatives Entergy classifies substantially all of the following types of derivative instruments held by its consolidated businesses as cash flow hedges:
                            'Instrument                                        Business Segment Natural gas and electricity futures and forwards        Non-Utility Nuclear, Energy Commodity Services, Competitive Retail Services Foreign currency forwards                               U.S. Utility, Non-Utility Nuclear Cash flow hedges with net unrealized losses of approximately $99 million at December 31, 2004 are scheduled to mature during 2005. Net losses totaling approximately $13 million were realized during 2004 on the maturity of cash flow hedges. Unrealized gains or losses result from hedging power output at the Non-Utility Nuclear power stations and foreign currency hedges related to Euro-denominated nuclear fuel acquisitions. The related gains or losses from hedging power are included in revenues when realized. The realized gains or losses from foreign currency transactions are included in the cost of capitalized fuel. The maximum length of time over which Entergy is currently hedging the variability in future cash flows for forecasted transactions at December 31, 2004 is approximately four years. The ineffective portion of the change in the value of Entergy's cash flow hedges during 2004 was insignificant.
Fair Values Financial Instruments The estimated fair value of Entergy's financial instruments is determined using bid prices reported by dealer markets and by nationally recognized investment banking firms. The estimated fair value of derivative financial instruments is based on market quotes. Considerable judgment is required in developing some of the estimates of fair value. Therefore, estimates are not necessarily indicative of the amounts that Entergy could realize in a current market exchange. In addition, gains or losses realized on financial instruments held by regulated businesses may be reflected in future rates and therefore do not necessarily accrue to the benefit or detriment of stockholders.
Entergy considers the carrying amounts of most of its financial instruments classified as current assets and liabilities to be a reasonable estimate of their fair value because of the short maturity of these instruments.
Additional information regarding financial instruments and their fair values is included in Notes 5 and 6 to the consolidated financial statements.
102

Entergy Corporation Notes to Consolidated Financial Statements
                 'DECOMMISSIONING TRUST FUNDS                                                           I NOTE 15.
Entergy holds debt and equity securities, classified as available-for-sale, in nuclear decommissioning trust accounts. The securities held at December 31, 2004 and 2003 are summarized as follows:
Total              Total
                                           '       Fair            Unrealized          Unrealized 2004            i    Value               Gains-             Losses i (In Millions)
Equity                           $995                   $166               $17 Debt Securities                  1,457
* 33                   6 Total                        $2,452                    $199               $23 2003:
Equity                           $896                  l $81               $11 Debt Securities                  1,383                    27                 3 Total                        $2,279               , $108                  $14 The fair value and gross unrealized losses of available-for-sale equity and debt securities, summarized by investment type and length of time that the securities have been in a continuous loss position, are as follows at December 31, 2004:                             -                'l Equity Securities                       Debt Securities Gross                                    Gross Fair             , Unrealized              Fair             Unrealized Value                  Losses              Value                Losses (In Millions)
Less than 12 months                       $29                   $2               $334                    $5 More than 12 months                       115                    15                  37                    I Total                                   $144                  $17               $371-                   $6 Entergy evaluates these unrealized gains and losses at the end of each'period to determine whether an other than temporary impairment has 'occurred. This' analysis considers the length of time that a security has been in a loss position, the current performance pf that security, and whether decommissioning costs are recovered in rates. Due to the regulatory treatment of decommissioning collections and trust fund earnings, Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, 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 2004 and 2003 as a result of these evaluations.
I   A 103

Entergy Corporation Notes to Consolidated Financial Statements The fair value of debt securities, summarized by contractual maturities, at December 31, 2004 is as follows:
Fair-Value-(In Millions) less than I year                 $134 I year- 5 years                   592 5 years - 10 years                425 10 years - 15 years               158 15 years - 20 years                60 20 years+                          88 Total                         $1,457 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.           QUARTERLY FINANCIAL DATA (UNAUDITED)
Operating results for the four quarters of 2004 and 2003 were:
Operating           Operating                Net Revenues             Income           Income (Loss)
(In Thousands) 2004:
                 - First Quarter                       $2,251,549          $378,834           $213,016
                  - Second Quarter                     $2,485,097          $494,312           $271,011 Third Quarter                      $2,963,581          $571,472           $288,047 Fourth Quarter                     $2,423,497          $208,946           $160,975 2003:
First Quarter                      $2,037,723          $363,403           $400,923(a)
SecondQuarter                      $2,353,909          $461,576           $211,517 Third Quarter                      $2,700,125          $619,005           $371,650 -;
Fourth Quarter                     $2,103,163           $40,571           ($33,623)
(a)   Net income before the cumulative effect of accounting changes for the first quarter 2003 was
               $258,001.
Earnings Per Average Common Share 2004                            2003 Basic         Diluted          Basic          Diluted First Quarter                        $0.90         $0.88          $1.77(b)         $1.73(b)
Second Quarter                      $1.16          $1.14           $0.91            $0.89 Third Quarter                        $1.24         $1.22           $1.60            $1.57 Fourth Quarter                       $0.71         $0.69          ($0.19)          ($0.18)
(b)    Basic and diluted earnings per average common share before the cumulative effect of accounting changes for the first quarter of 2003 were $1.13 and $1.10, respectively.
104

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy ENTERGY'S BUSINESS (continued)
U.S. Utility The U.S. Utility is Entergy's largest business segment, with five wholly-owned domestic retail electric utility subsidiaries: Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans. These companies generate, transmit, distribute and sell electric power to retail and wholesale customers in Arkansas, Louisiana, Mississippi, and Texas. Entergy Gulf States and Entergy New Orleans also provide natural gas utility services to customers in and around Baton Rouge, Louisiana, and New Orleans, Louisiana, respectively. Also included in the U.S. Utility is System Energy, a wholly-owned subsidiary of Entergy Corporation that owns or leases 90 percent of Grand Gulf 1. System Energy sells its power and capacity from Grand Gulf 1 at wholesale to Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans.
These utility subsidiaries are each regulated by state utility commissions, and in the case of Entergy New Orleans, the City Council. System Energy is regulated by FERC as all of its transactions are at the wholesale level.
The U.S. Utility continues to operate as a monopoly as efforts toward deregulation have been delayed, abandoned, or not initiated in its service territories. The overall generation portfolio of the U.S. Utility, which relies heavily on natural gas and nuclear generation, is consistent with Entergy's strong support for the environment.
The U.S. Utility is focused on providing highly reliable and cost effective electricity and gas service while working in an environment that provides the highest level of safety for its employees. Since 1998, the U.S. Utility has significantly improved key customer service, reliability, and safety metrics and continues to actively pursue additional improvements.
Customers As of December 31, 2004, Entergy's domestic utility companies provided retail electric and gas service to customers in Arkansas, Louisiana, Mississippi, and Texas, as follows:
Electric Customers                     Gas Customers Area Served            (In Thousands)          (%)        (In Thousands)             %)M Entergy Arkansas          Portions of Arkansas                  667               25%
Entergy Gulf States       Portions of Texas and Louisiana                            724               27%                 91                39%
Entergy Louisiana         Portions of Louisiana                 662               25%
Entergy Mississippi       Portions of Mississippi               420               16%
Entergy New Orleans City of New Orleans*                        189                7%                145                61%
Total customers                                           2,662              100%                236              100%
* Excludes the Algiers area of the city, where Entergy Louisiana provides electric service.
Electric Energy Sales The electric energy sales of Entergy's domestic utility companies are subject to seasonal fluctuations, with the peak sales period normally occurring during the third quarter of each year. On July 15, Entergy reached a 2004 peak demand of 21,174 MW, compared to the 2003 peak of 20,162 MW recorded on August 19 of that year.
Selected electric energy sales data is shown in the table below:
105

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Selected 2004 Electric Energy Sales Data.                 ;
Entergy        Entergy       Entergy               Entergy        Entergy     System    Entergy Arkansas Gulf States Louisiana Mississippi New Orleans                        Energy      (a)
I ;                            I      (In GWh)
I.. I       .     .                       .I .         1 I --
Sales to retailI'e customers                         19,735 -      35,275           28,183            -12,978          6,055           -  102,226 Sales foi resa lle:                                         II     e ..
Affiliates                        7,43   t    1,528             1,129                   305      1,514      9,212 Others                           4,911        3,172                 122                 393         25           -    8,623 Total                       32,083        39,975           29,434              13,676         7,594      9,212   110,849 Average use per residential custo mer (kWh)-                                 12,485;       15,620           15,359              i4,475        12,618               14,384 (a)     Includes the effect of intercompany eliminations.
The following table illustrates the domestic utility companies' 2004 combined electric sales voiume as a percentage of total electric sales volume, and 2004 combined electrki revenues as a percentage of total 2004 eiectric revenue, each by customer class.
Customer Class                         % of Sales Volume                % of Revenue Residential     '                                                                       35.2 Commercial                                                   23.9                       25.3 Industrial (a)                                               36.3                       28.6
                -   Wholesale        -                                            7.8                        8.3 Governmental:                                                 2.3        '.              2.6 (a)     Major industrial customers are in the chemical, petroleum refining, and paper industries.
See "Selected Financial Data" for each of the domestic utility companies for the detail of their sales by customer class for 2002, 2003, and 2004.
Selected 2004 Natural Gas Sales Data                                                      -
q r Efntergy New Orleans and ,Entergy Gulf States provide both electric power and natural gas to retail customers. Entergy New Orleans and Entergy Gulf States sold 14,803,852 and 6,868,935 Mcf, respectively, of natural gas to retail customers in 2004. In 2004, 98% of Entergy Gulf States' operating revenue was derived from the electric utility business, and only 2% from the natural gas distribution business. For Entergy New Orleans, 80%
of operating revenue was derived from the electric utility business and 20% from the natural gas distribution business in 2004. Following is data concerning Entergy New Orleans' 2004 retail operating revenue sources.
      -  .     .. . i        .,,        i:
                                                             - Electric Operating j
Natural Gas Ente        New Orleans            --           Revenue                   -Revenue i.
Residential                                          40%'i                       50%
Commercial                                           37%                         22%
Industrial                                            8%                         13%
Governmental/Municipal                               15%                         15%
106

Part I Item 1 Entergy Corporation, Domestic utility companies, and System Energy Retail Rate Regulation General (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans)
The retail regulatory philosophy has shifted in some jurisdictions from traditional, cost-of-service regulation to include performance-based rate elements. Performance-based rate plans are designed to encourage efficiencies and productivity while permitting utilities and their customers to share in the benefits. Entergy Mississippi, Entergy Louisiana, and Entergy New Orleans have implemented performance-based formula rate plans, but Entergy Louisiana's performance-based formula rate plan expired in 2001. As explained below, performance-based formula rate plans currently are under consideration for Entergy Louisiana and for the Louisiana jurisdiction of Entergy Gulf States. Following is a summary of the status of retail open access in the domestic utility companies' retail service territories.
                                                                                                                  % of Entergy's 2004 Revenues Derived from Retail Electric Utility Operations Jurisdiction     . .
Status of Retail Open Access                                        in the Jurisdiction Arkansas             Retail open access was repealed in February 2003.                                                 11.6%
Texas                In July 2004, the PUCT effectively rejected Entergy Gulf States' proposal to                      11.8%
implement retail open access in its service territory. In February 2005, bills were submitted in the Texas Legislature that specify that retail open access will not commence in Entergy Gulf States' territory until the PUCT certifies a power region.
Louisiana           The LPSC has deferred pursuing retail open access, pending developments at                        34.1%
the federal level and in other states. In response to a study submitted to the LPSC that was funded by a group of large industrial customers, the LPSC recently has solicited comments regarding a limited retail access program. It is uncertain what action, if any, the LPSC might take in response to the infonnation it received.
Mississippi         The MPSC has recommended not pursuing open access at this time.                                   10.9%
New Orleans         The Council has taken no action on Entergy New Orleans' proposal filed in                          4.5%
1997.
Retail Rate Proceedings Each domestic utility operating subsidiary participates in retail rate proceedings on a consistent basis. The status of material retail rate proceedings is described below and in Note 2 to the domestic utility companies and System Energy financial statements.
Authorized Company                 ROE                                      Pending Proceedings/Events Entergy Arkansas ......        11. 0 %     No base rate cases are pending. Transition cost recovery rider approved to collect $8.5 million effective October 2004 with recovery expected over subsequent 16 months. It is likely that a rate filing will be made in 2005 in connection with the ANO I steam generator and reactor vessel head replacement.
107

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Entergy Gulf States-         10.95%         Base rates are currently set at rates approved by the PUCT in June 1999.
Texas .........                            Entergy Gulf States filed a retail electric rate case with the PUCT in August 2004. In October 2004, the PUCT issued a written order in which it dismissed the rate case indicating that Entergy Gulf States is still subject to a rate freeze based on an agreementsapproved by PUCT, order in 2001, stipulating that a rate freeze would., remain in:effect until retail open access commenced in Entergy Gulf States' service territory, unless lifted by the PUCT prior thereto.
Entergy Gulf States has appealed this decision and intends to pursue other available remedies, including legislation that would clarify that it is no longer operating under a rate freeze,: In February 2005, bills were filed in the Texas legislature that would clarify that Entergy.Gulf States is no longer operating under a rate freeze and specify. that retail open access will not commence in Entergy Gulf States' territory until the PUCT certifies a power region.
Entergy Gulf States-          11.1%         In December 2003, the LPSC staff recommended a $30.6 million rate refund Louisiana ....:..                          and a prospective rate reduction of approximately $50 million as a result of the ninth post-merger earnings analysis (2002). Hearings concluded in May 2004.
In January 2005, Entergy Gulf States and Entergy Louisiana filed testimony with the LPSC in support of a proposed settlement that would resolve, among other dockets, Entergy Gulf States' ninth post-merger review, and dockets established to consider issues concerning the comnpaniesl power purchases* for the summers of 2001, 2002, 2003, and 2004. The -proposed settlement currently includes an offer to refund $76 million to Entergy Gulf States' Louisiana customers through a credit on bills rendered in March 2005, with no immediate change in the current base rates. The settlement also proposes a formula rate plan with an ROE mid-point of.10.65%. The LPSC has solicited comments on the proposed settlement from the, parties to the various proceedings at issue in the settlement. The proposed settlement is scheduled to be presented to the LPSC for consideration on March 23, 2005.
                                             ,     **          .   . 1  _.
Entergy Louisiana.....        9.7%-         In January 2004, Entergy Louisiana filed with the LPSC an application for a 11.3%(1)        $167 million base rate increase and an ROE of 11.4%. The currently authorized ROE midpoint is 10.5%. Hearings in thisn          matter concluded in December 2004. Based        on  the evidence submitted  at the hearing, the LPSC staff is recommending approximately a $7 million base rate increase. The LPSC staff proposed the implementation of a formula rate plan that includes a provision for the recovery of incremental capacity costs, including those related to the proposed Perryville acquisition. A decision by the LPSC-iS expected in mid- to late-March 2005 on these issues..
In January 2005, Entergy Gulf States and Entergy Louisiana filed testimony with the LPSC in support of a proposed settlement with the LPSC that would resolve, among other dockets, dockets established to consider issues concerning the companies' power purchases for the- summers of 2001, 2002,
                                           -2003, and 2004. The proposed settlement currently includes an offer to refund
                                             $14 million to Entergy Louisiana's customers. The LPSC has solicited comments. on thei proposed -settlement from the parties to the various
                                          - proceedings at issue in the proposed settlement. The proposed settlement is scheduled to be presented to the LPSC for consideration on March 23, 2005.
108

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Entergy Mississippi...        9.3%-   An annual formula rate plan is in place. Entergy Mississippi made its annual 12.2%(2)  formula rate plan filing in March 2004 based on a 2003 test year. There was no change in rates based on an adjusted ROE midpoint of 10.77%.
Entergy New Orleans         10.25%-   The midpoint ROE of the electric and gas plans is 11.25%, with a target equity 12.25%(3)  component of the capital structure of 42%. Entergy New Orleans made a formula rate plan filing in April 2004. The City Council ordered that electric and gas rates remain unchanged from levels set in 2003. Entergy New Orleans will file its formula rate plan for the year ended December 31, 2004 by May 1, 2005 and also intends to file for an extension of the formula rate plan by September 1, 2005. If the formula rate plan is not extended by the City Council, the rate adjustments in effect based on the December 31, 2004 test year shall continue.
System Energy ...........-   10.94%   ROE approved by July 2001 FERC order. No cases pending before FERC.
(1) Entergy Louisiana's formula rate plan expired with the 2001 test year. Under the expired formula, if Entergy Louisiana earned outside of the bandwidth range, rates would be adjusted on a prospective basis. If earnings were above the bandwidth range, rates would be reduced by 60 percent of the amount necessary to bring earnings down to the top of the bandwidth, and if earnings were below the bandwidth range, rates would be increased by 60 percent of the corresponding shortfall.
(2) ~Under Mississippi law and Entergy Mississippi's formula rate plan, if Entergy Mississippi's earned ROE is above the top of the range-of-no-change at the top of the bandwidth, then Entergy Mississippi's rates are reduced by 50 percent of the difference between the earned ROE and the top of the bandwidth. In such circumstance, Entergy Mississippi's "Allowed ROE" for the next twelve-month period is the point halfway between such earned ROE and the top of the bandwidth.- Entergy Mississippi's retail rates are set at that halfway-point ,ROE level. (Before the comparison is made of the earned ROE to the bandwidth, the bandwidth can be adjusted for performance measures by as much as 1%. Rates are adjusted pursuant to Entergy Mississippi's formula rate plan on a prospective basis only.) In the situation where Entergy Mississippi's earned ROE is not above the top of the range-of-no-change at the top of the bandwidth, then Entergy Mississippi's "Allowed ROE" for the next twelve-month period is the top of the range-of-no-change at the top of the bandwidth. If earnings are below the bandwidth range, rates are increased by 50 percent of the difference between the earned ROE and the bottom of the bandwidth. Under the provisions of Entergy Mississippi's formula rate plan, each annual formula rate plan filing incorporates a revised calculation of the benchmark ROE.
(3) If Entergy New Orleans earns outside the bandwidth range, rates will be adjusted on a prospective basis.
Under the gas formula rate plan, if earnings are above the bandwidth range, rates are reduced by 100 percent of the overage, and if below, increased by 100 percent of the shortfall.. In addition, if the ROE falls between 11.5% and 12.25%, rates are reduced by 60 percent of the difference (between 11.5% and 12.25%), and if the ROE falls between 10.25% and 11%, rates are increased by 40 percent of the difference (between 10.25% and 11%). Under the electric formula rate plan, rates are adjusted accordingly by 100 percent of the amount of any overage or shortfall. Entergy New Orleans may earn up to 13.25% under the electric formula rate plan provided that the increase is caused by its share of energy cost savings under the generation performance-based recovery plan discussed below.
Entergy Arkansas Fuel Recovery Entergy Arkansas' rate schedules include .an energy cost recovery rider to recover fuel and purchased energy costs in monthly bills. The rider utilizes prior calendar year energy costs and projected energy sales for the twelve month period commencing on April I of each year to develop an energy cost rate, which is redetermined annually and includes a true-up adjustment reflecting the over-recovery or under-recovery, including carrying 109

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy charges, of the energy cost for the prior calendar year. Entergy Arkansas' 2004 filing is discussed in Note 2 to the domestic utility companies and System Energy financial statements.
Entergy Gulf States Louisiana Jurisdiction - Formula Rate Plan In January 2005, Entergy Gulf States and Entergy Louisiana filed testimony with the LPSC in support of a proposed settlement with the LPSC. Included in the settlement is a proposal of a three-year formula rate plan for Entergy Gulf States' Louisiana operations that included a provision for the recovery of incremental capacity costs.
The proposed settlement is scheduled to be presented to the LPSC for consideration on March 23, 2005.
Fuel Recovery Entergy Gulf States' Texas rate schedules include a fixed fuel factor to recover fuel and purchased power costs, including carrying charges, not recovered' in base rates. Under the current methodology, semi-annual revisions of the fixed fuel factor may be made in March and September based on the market price of natural gas.
Entergy Gulf States will likely continue to use this methodology until retail open access begins in Texas. To the extent actual costs vary from the fixed fuel factor, refunds or surcharges are required or permitted. The amounts collected under the fixed fuel factor through the start of retail open access are subject to fuel reconciliation proceedings before the PUCT. At the start of retail open access for Entergy Gulf States in Texas, which is currently delayed, fuel and purchased power cost recovery will be subject to the fuel component of the price-to-beat rates approved by the PUCT. The PUCT fuel cost reviews that were resolved during the past year or are currently pending are discussed in Note 2 to the domestic utility companies and System Energy financial statements.
Entergy Gulf States' Louisiana electric rates include a fuel adjustment designed to recover the cost of fuel and purchased power costs. The fuel adjustment'contains a surcharge or credit for deferred fuel expense and related carrying charges arising from the monthly reconciliation of actual fuel costs incurred with fuel cost revenues billed to customers.
Entergy Gulf States' Louisiana gas rates include a purchased gas adjustment based on estimated gas costs for the billing month adjusted by a surcharge or credit'for deferred fuel expense arising fronm the monthly reconciliation of actual fuel costs incurred with fuel cost revenues billed to customers.    '
Entergy Louisiana Formula Rate Plan The LPSC staff has proposed the implementation of a formula rate plan for Entergy Louisiana that includes a provision for the recovery of incremental capacity costs. A decision from the LPSC is expected in mid- to late-March 2005''
Fuel Recovery Entergy Louisiana's rate schedules include a fuel adjustment clause designed to recover the cost of fuel and purchased power costs. The fuel adjustment contains a surcharge or credit for deferred fuel expense and related carrying charges arising from the monthly reconciliation of actual fuel costs incurred with fuel cost revenues billed to customers.
In September 2002, Entergy Louisiana settled a proceeding that concerned a contract entered into by Entergy Louisiana to purchase, through 2031, energy generated by a hydroelectric facility known as the Vidalia project. In the settlement, the LPSC approved Entergy Louisiana's proposed treatment of the regulatory impact of a tax accounting election related to that project. In general, the settlement permits Entergy Louisiana to keep a portion of the tax benefit in exchange for bearing the risk associated with sustaining the tax treatment. The LPSC settlement divided the term of the Vidalia contract into two segments: 2002-2012 and 2013-2031. During the first 110

Part I Item 1 Entergy Corporation, Domestic utility companies, and System Energy eight years of the 2002-2012 segment, Entergy Louisiana agreed to credit rates by flowing through its fuel adjustment calculation $11 million each year, beginning monthly in October 2002. Entergy Louisiana must credit rates -in this way and by this- amount even if Entergy Louisiana is unable to sustain the tax deduction. Entergy Louisiana also must' credit rates by $11 million each year for an additional two years unless either the tax accounting method elected is retroactively' repealed or the Internal Revenue Service denies the entire deduction related to the tax accounting method. Entergy Louisiana agreed to credit ratepayers additional amounts unless the tax accounting election is not sustained, if it is challenged. During the years 2013-203 1, Entergy Louisiana and its ratepayers would share* the remaining benefits of this tax accounting election.- Note '8 to the domestic utility companies and System Energy financial statements contains further discussion of the obligations related to 'the Vidalia project.
Entergy Louisiana has reduced its indebtedness and preferred stock with a portion of the cash generated by the tax election. In accordance with the terins of the September 2002 settlement, Entergy Louitiana'requested SEC approval to return up to $350 million of common equity capital to Entergy Corporation in order to maintain Entergy Louisiana's current capital structure. In December 2002, Entergy Louisiana repurchased $120 million of common stock from Entergy Corporation and paid a dividend of $122.6 million pursuant to the SEC approval. The provisions of the settlement provide that the LPSC shall not recognize or use Entergy Louisiana's use of this cash in setting any of Entergy Louisiana's rates. Therefore, to the extent Entergy Louisiana's use of the proceeds would ordinarily' have reduced its rate base, no change in rate base shall be reflected for ratemaking purposes., The SEC approval for additional return of equity capital is now expired.
lEntergy Mississippi Performance-Based Formula Rate Plan Entergy Mississippi files a performnance-based formula rate plan every 12 months that compares the annual earned rate of return to, and adjusts it against, a benchmark rate of return. ' The benchmark is calculated under a separate formula within the formula rate plan. The formula rate plan'allows for periodic small adjustments in rates, up to an amount that would produce a change in 'Entergy Mississippi's overall revenue of almost 2%, based on a comparison of actual earned returns to benchmark returns and upon certain performance factors. Entergy Mississippi filed a formula rate plan in March 2004 for the 2003 test year, and filings are due to continue annually thereafter., The March 2004 formula rate plan filing is discussed in Note 2 to the domestic utility companies and System Energy financial statements.
Fuel Recovery                                         I Entergy Mississippi's rate schedules include energy cost recovery riders to recobver fuel and purchased energy costs. The rider utilizes projected energy costs filed quarterly by Entergy Mississippi to develop an energy cost rate. The energy cost rate is redetermined each calendar quarter and includes a true-up adjustment reflecting the over-recovery or under-recovery of the energy cost as of the second quarter preceding the redetermination.
In January 2005, theMPSC approved a change in Entergy;Mississippi's energy cost recovery rider.
Entergy Mississippi's fuel over-tecoveries: for the third quarter of 2004 will be deferred from the first quarter 2005 energy cost recovery rider adjustment calculation. The deferred amount of $21.3 million plus carrying charges will be refunded through the energy cost recovery rider in the second and third quarters of 2005 at a rate of 45% and 55%, respectively.
Entergy New Orleans Formula Rate Plans In May 2003, the City Council approved the implementation of formnula rate plans for electric and gas service that will be evaluated annually until 2005. Entergy New Orleans made a filing with the City Council in April 2004 based upon a 2003 test year, which after review, resulted in a City Council resolution approving no change in gas and electric rates. Entergy New Orleans will make a filing in accordance with the formula rate III

Part I Item I EAtergy Corporation, Domestic utility companies, and System Energy plans by May 1, 2005 based on a 2004 test year. Under the formula rate plans, the midpoint ROE of both plans is 11.25%, with.a target equity component of Entergy New Orleans' capital structure of 42%. Any change in rates would be prospective, with, the first billing cycle effective after September 1, 2005. Entergy New Orleans' can earn between 10.25% and 12.25% under the electric plan, and betw een 11% and 11.5% under the gas plan, with earnings within those ranges not resulting in a change in rates. Entergy New Orleans' formula rate plan, filings are discussed in Note 2 to the domestic utility companies and System.Energy financial statements.
      -a   .. uiti.,,i~s OJ '/-l9?isiti . Iu ..U  - t. (           tV!' wit-, Q.fvfiLi              .AYt, i-~ijiri       al by)  I>,       -        -'.;     ' } "'  it}<>; zjn'.
2        x,t;Ji{iJOtf, XLAt
 .iii-pu         In May 2003, the City Council approved implementation of a generation performance-based rate calculation in the electric fuel adjustment clause under which Entergy New Orleans receives 10% of calculated, fuel and purchased power cost savings in excess of $20 million, based on a defined benchmark, subject to a 13.25%
return on equity limitation for electric operations as provided for in the electric formula rate plan. Entergy New Qrleans bears 1.0% of any "negative" fuel and purchased power cost savings. In October 2004, Entergy New Orleans' annual evaluation report was submitted for the period June 2003 through May 2004.. Additional savings associated with the first year generation performance-based rate calculation were $71 million of which Entergy New Orleans' share was $5.1 million. i t'b .,. JU.i 't it. ICI                                                  t i.> ftl2SuU             :U ' I it-I; 3lJ                                   .'sj T.A                     :-.
oPi           Usnxitayw )ai          orb oJ wms;o                                g {),\ <
rro:!r.i'.oft,              ] 1   . uj~i'ttvrt, btc              I'> '': "r n. I;''I vtmmlt:- uitt. ty.ie i.;;) Fuel Recovery :} i.                   .n.i :-               we J              0, o;      : :              ";H ictj;jI       CttV,/tiitifli~tC22 tr to StIO':f,
* Entergy New Orleans' electric rate schedules include a fuel adjustment tariff designed to reflect no more than targeted fuel and purchased power costs, adjusted by a surcharge or credit for deferred fuel expense arising from the monthly reconciliation of actual fuel and purchased power costs incurred with fuel cost revenues billed to customers, including carrying charges. The adjustment also includes the difference between non-ftel Grand Gulf costs paid by Entergy New Orleans and the estimate of such costs, which are included in base rates, as provided in Entergy New Orleans' Grand Gulf rate settlements. Entergy New Orleans' gas rate schedules include an adjustment to reflect estimated gas costs for the billing month, adjusted by a surcharge or credit similar to that included in the electric fuel adjustment clause, including carrying charges. In June and.November 2004,. the City Council passed resolutions implementing a package of measures developed by Entergy New Orleans and the Council Advisors to protect customers from potential gas price spikes during the 2004 - 2005 winter heating season. These measures include: maintaining Entergy New.Orleans' financial hedging plan for its.purchase of wholesale gas, and deferral of collection of up to $6.2 million of gas.costs associated with a cap on the purchased gas adjustment in November and December 2004 in the, event that the average residential customer's gas bill were to exceed a threshold level.'
The deferrals resulting from, these caps will receive accelerated recovery over a seven-month period beginning in April 2005.                                                                                                                                                  o... it.;woo'k "o u                    .
In November 2004, the City Council directed Entergy New Orleans to confer with the Council Advisors regarding possible modification of the current gas cost collection mechanism in order to address concerns regarding its fluctuations particularly during the winter heating season. .J'woxxt tuln'.?                                                            ' 181          :'i                    'i2.i        1 Franchises,, -, l            ijpj   '.'v,                              iv l      iitts.            wilt    i:, .'Et     !:fittqA&#xb6;Wt f           t     t      >,         'T1O                   38   e .T }hs        I*&sect; iief}sin.itlniloi flub 5tad?  '1il 2W      1S 5 't.i:''12flii         ii' .O3<38 @ i ".          is   'i~K)  7-'3t' i9951Th i    ,..    .   '?'iso-       2P8         Gfl'fi    !YYTelf  -i         At-,
Entergy Arkansas holds exclusive franchises to provide electric service in approximately 307 incorporated cities and towns in Arkansas. These franchises are unlimited in duration and continue unless the municipalities purchase the utility property.. h Arkansas, franchises are considered to be contracts and, therefore, are.terminable uponbreachofthetenrms ofthefranchise.,, ,,. 4,,.                                                        ., ,Iio4fl1ftJ                         i..2'       Dl-            l ,          0n' !.-. "i! 'Ltjr DC A 10                   iJ o :        Ul;u.to a tr~1tmifD t:- t tl  '           ,        .,m ., ' If r,?:Ii'  t K Xt                                  v' i                        a In Louisiana, Entergy Gulf States holds non-exclusive franchises, permits, or certificates of convenience and necessity to provide electric service in approximately 55 incorporated municipalities and the unincorporated areas of approximately 19 parishes, and to provide gas service in the City of Baton Rouge and the unincorporated areas of two parishes. In Texas, Entergy Gulf States holds a certificate of convenience and necessity from the PUCT to provide electric service to areas within approximately 24 counties in eastern Texas, and holds non-exclusive franchises to provide electric service in approximately 65 incorporated municipalities. Entergy Gulf States typically is granted 50-year franchises in Texas. Most of Entergy Gulf States' Louisiana franchises have a term of 60 years., Entergy Gulf StakIestcuent elect c franchises will expire during 2007 - 2045 in Texas and during 2015-2046 in Louisiana., .. j &#xa3; K                                                   I :;fit          -1'fi''            alO ; .2%.                           fc                      It r-i?           '.,
112

Part I Item 1 Entergy Corporation,         Domestic   utility companies,    and   System    Energy Entergy Louisiana holds non-exclusive franchises to- proVide electric service in approximately 116 these incorporated Louisiana municipalities. Most of these franchises have 25-year terms, although six of municipalities have granted 60-year franchises. Entergy Louisiana also supplies electric                                                  service   in approximately 353 unincorporated communities, all of which are located in Louisiana parishes in which it holds non-exclusive franchises.          ....-        ;-t,      }i6.8-9'fy-i!~fe.,iv                 "o.>        i.30iti                 -lif,W?;':                ~~       -l.     .si..
Entergy Mississippi has received from the MPSC certificates of public convenience a'nd necessity to provide electric service to areas within 45 counties, including a number of municipalities, in western Mississippi.
such Under Mississippi statutory law, such certificates are exclusive. Entergy Mfisissippi may continue to serve in-municipal       franchise         is municipalities upon payment of a statutory franchise fee, regardless of whether an original still in existence.
city Entergy New Orleans provides electric and gas service ir; the City'of New'Orleans pursuant to by     Entergy    Louisiana).      These    ordinances        contain ordinances (except electric service in Algiers, which is provided utility a continuing option for the City of New Orleans to purchase Entergy New Orleans' electric and gas properties.               *-'. '       "''t 5-.1             '_             _....        .
The buisin'ess of Sysiem Energy is limited to wholesale power sales. It has no distribution franchises.
Propertkaiad Oilrier Generation                     e'irite,,
X     ,    : t'  -.        .
j,'   ':
Generating Stations and The total capability of the generating stations owned and leased by the domestic utility companies System Energy as of December 31, 2004, is indicated below:
Owned and Leased Capability MW(1)
Company                           t,           Total               Gas/Oil                   Nu-Iear            Coal           Hydro Enterg~'Arkansas                 -'             4,709                 1,613'                    1,837           1,189                 70"'
              --  llig           Gulf State's"''}                 6,4                  4;z              - !. ";968              -"627           w        ;i                   i, Enwg    Loisan               &#xa3;363                              4,276          -*-ti1a087                        -                 -
g        EntergyAMississippi                                                   2,490                                        4089 12,898 v         Entergy New Orleans                  .              915                 915
             ; System Energy '                    :               1 ,143         _           .'i"''"_            1,143                            :                    '""*r Cl- J'_'.
Ttl                                           2i si53               i4184               i        0;35     !      2,224                70 (1)'' "i'Qfwld and ]'dased 68pability' is'the dependable load caryng capability as demonst'rajed uridei actual on the primary fuel (assuming no curtai ients) that each station was' de'sign-&d'fo En"tergys              d and capacity projectilons are reviewed                                               to assess ting                ain m                  for additional generating' caacity and iiirconnections. These reviews consider existing and rojected demand, the availablilty and pri6e Ol power, the lcti                           of new loads, and economy. Peak load in ie U.S.' Utility service lerritory is typically" arounhd '21,000'W,                       wth minimu'foa 'typii1y' around 9,000 MW. Atlliing f6r ani adequate reserve margin, Entergy has been short approximately 3,000 MW during the summer pe f.oa perio. 'In addition to its net short position at summer peak, Entergy considers its generation in three categories: (1) baseload (e.g. coal and nuclear); (2) load-following (e.g. combined cycle gas-fired); and (3) peaking. The relative supply and demand for these categories of generation vary by region of the Entergy System. For example, the north end of its system has more baseload coal and nuclear generation than regional demand requires, but is short load-following or intermediate generation. In the south end of the Entergy system, load would be more effectively served if gas-fired intermediate resources already in place were supplemented with additional solid fuel baseload generation.
113

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Until recently, Entergy covered its short position at summer peak almost entirely with purchases from the spot market. In the fall of 2002, Entergy began a process of issuing requests for proposal to procure supply-side resources from sources other than the spot market to meet the unique regional needs of the domestic utility companies. The first request for proposal sought resources to provide summer 2003 and longer-term resources through a broad range of wholesale power products, including short-term (less than one year), limited-term (1 to 3 years) and long-term contractual products and asset acquisitions. A detailed process which included the involvement of an independent monitor was developed to evaluate submitted bids. The following table illustrates the results of the request for proposal process for limited and short-term products. All of the contracts which were awarded and signed were with non-affiliates, with the exception of the contract covering 185 MW to 206 MW from RS Cogen.                                                                                                              A Selected for          Contracts Negotiation            Signed                                 Notes Fall 2002               550 MW              425 MW       Limited-term resources contracted. Entergy Services also pursued discussions with several bidders for life-of-unit purchased power agreements or the acquisition of an ownership interest in existing generating facilities.
These negotiations resulted in the Perryville acquisition agreement, discussed below.
Supplemental            500 MW              220 MW        Short-term purchase for the summer 2003.
2002 Spring 2003             380 MW              380 MW        Limited-term resources contracted.
Fall 2003               390 MW              390 MW        Two separate resources contracted for a term of three years with deliveries beginning in the summer of 2004.
In January 2004, Entergy Louisiana signed a definitive agreement to acquire the 718 MW Perryville power plant for $170 million. The agreement has subsequently been amended to allow the current plant owner to retain the interconnection facilities associated with the plant, resulting in a decrease in the acquisition price to $162 million. As a result of the amended terms, the FERC issued an order in October 2004 disclaiming jurisdiction over the acquisition. This order currently is subject to rehearing by the FERC. The plant is owned by a subsidiary of Cleco Corporation, which subsidiary submitted a bid in response to Entergy's Fall 2002 request for proposals for supply-side resources. The signing of the agreement followed a voluntary Chapter 11 bankruptcy filing by the plant's owner. Entergy expects that Entergy Louisiana will own 100 percent of the Perryville plant, and that Entergy Louisiana will sell 75 percent of the output to Entergy Gulf States under a long-term cost-of-service power purchase agreement. In addition, Entergy Louisiana and Entergy Gulf States executed an interim power purchase agreement with the plant's owner through the date of the acquisition's closing (as long as that occurs by December 2005) for 100 percent of the output of the Perryville power plant. In April 2004, the bankruptcy court approved Entergy Louisiana's agreement to acquire the plant. In March 2004, Entergy Gulf States and Entergy Louisiana filed with the LPSC for its approval of the acquisition and long-term cost-of-service power purchase agreement.
Entergy is seeking approval from the LPSC of cost recovery for the acquisition, giving consideration to the need for the power and the prudence of Entergy Louisiana and Entergy Gulf States in engaging in the transaction. Hearings are scheduled for March 2005. Assuming regulatory approval by the LPSC, Entergy Louisiana expects the Perryville acquisition to close in mid-2005.
114

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy In addition to the purchases from non-affiliates shown above, Entergy Louisiana, Entergy New Orleans, and Entergy Arkansas made filings with their respective retail regulators seeking approval to enter into transactions with affiliates as shown in the following table:
Status of Approval in Company                                Proposed Transactions                                      Retail Jurisdiction Entergy             1), Purchased a 140 to 156 MW capacity purchase call option               The LPSC found contracts Louisiana               from RS Cogen for June 2003 through April 2006.                        1) and 2) to be prudent and
: 2) Entered a life-of-unit purchase power agreement (PPA) to               authorized Entergy purchase approximately 5 1MW (increasing to 61 MW in                  Louisiana to execute these 2010) of output from Entergy Power's share of                         contracts. The LPSC has Independence 2.                                                       not yet approved the life-
: 3) Enter a life-of-unit PPA with Entergy Gulf States to                   of-unit PPAs for proposals purchase two-thirds of the output of the 30% of River                 3) and 4); a bridge contract Bend formerly owned by'Cajun (approximately 200 MW).                  however, is currently in
: 4) Enteri a life-of-resources PPA with Entergy Arkansas to                place for contract 3) purchase approximately 110 MW of capacity not included                effective through in Entergy Arkansas' retail rate base, consisting of a                 December 31, 2005. The portion of the output from ANO, White Bluff,                           outcome of the life-of-Independence, and Entergy Arkansas' share of Grand                    resources PPAs is still Gulf.                                                                  pending FERC approval.
Entergy New         1) Purchased a 45 to 50AMW capacity purchase call option                  In May 2003, in Orleans                from RS Cogen for June 2003 through April 2006.                        connection with a
: 2) Entered a life-of-unit PPA to purchase approximately                    settlement relating to 50 MW (increasing to 60 MW in 2010) of output from                     Entergy New Orleans' Entergy Power's share of Independence 2.                               cost-of-service study and
: 3) Entered a life-of-unit PPA with Entergy Gulf States to                  revenue requirement, the purchase one-third of the output of the 30% of River Bend              City Council authorized formerly owned by Cajun (approximately 100 MW).                        Entergy New Orleans to
: 4) Entered a life-of-resources PPA with Entergy Arkansas to                enter into contracts for the purchase approximately 110 MW of capacity not included                 proposed transactions.
in Entergy Arkansas' retail rate base, consisting of a portion of the output from ANO, White Bluff, Independence, and Entergy Arkansas' share' of Grand Gulf.
Entergy             i) Enter into the life-of-resources PPAs to sell power as                 In May 2003, the APSC Arkansas                discussed in both Entergy Louisiana's and Entergy New                 found the PPAs involving Orleans' proposal 4) above.                                           Entergy Arkansas in the public interest.
Entergy also filed with the FERC the affiliate agreements described above. In May 2003, the FERC accepted the agreements for filing, subject to refund, with the contracts becoming effective on June 1, 2003. The FERC also established a hearing process to review the justness and reasonableness of the agreements. Several parties have intervened or filed protests regarding the request-for-proposals process and the agreements filed with the FERC, and the hearings in the proceeding ended in December 2004. An initial decision by the AU is still pending and is scheduled for July 2005.
Interconnections Entergy's generating units are interconnected by a transmission system operating at various voltages up to 500 kV. These generating units consist primarily of steam-electric production facilities and are centrally dispatched and operated. Entergy's domestic utility companies are intercotnected with many neighboring utilities. In addition, the domestic utility companies are members of the Southeastern Electric Reliability Council (SERC). The primary 115

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy purpose of SERC is to ensure the reliability and adequacy of the electric bulk power supply in the southeast region of the- United States. SERC is a member of the North American Electric Reliability Council.
Gas Property As of December 31, 2004, Entergy New Orleans distributed and transported natural gas for distribution solely within New Orleans, Louisiana, through a total of 33 miles of gas transmission pipeline, 1,495 miles of gas distribution pipeline, and 1,029 miles of gas service pipeline from the distribution mains to the customers. As of December 31, 2004, the gas properties of Entergy Gulf States, which are located in and around Baton Rouge, Louisiana, were not material to Entergy Gulf States' financial position.
Titles Entergy's generating stations and major transmission substations are generally located on properties owned in fee simple. Most of the transmission and distribution lines are constructed over private property or public rights-of-way pursuant to easements or appropriate franchises. The domestic utility companies generally have the right of eminent domain, whereby they may perfect title to, or secure easements or servitudes on, private property for their utility operations.
Substantially all of the physical properties and assets owned by Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy are subject to the liens of mortgages securing the mortgage bonds of such company. The Lewis Creek generating station is owned by GSG&T, Inc., a subsidiary of Entergy Gulf States, and is not subject to the lien of the Entergy Gulf States mortgage securing its first mortgage bonds. Lewis Creek is leased to and operated by Entergy Gulf States.
Fuel Supply The generation portfolio of the U.S. Utility contains a high percentage of natural gas and nuclear generation. The sources of generation and average fuel cost per kWh for the domestic utility companies and System Energy for the years 2002-2004 were:
Natural Gas                     Fuel Oil           Nuclear Fuel              Coal
                             %           Cents            %           Cents      %       Cents        %         Cents of           Per            of            Per      of        Per         of        Per Year            Gen           kWh           Gen           kWh       Gen       kWh         Gen       kWh 2004                     23          7.31               6         5.02      52        .49         19       1.39 2003                     26          6.53              4          5.04      52        .48.        18       1.26 2002                     39          3.88               -       15.78       46        .47         15       1.37 Actual 2004 and projected 2005 sources of generation for the domestic utility companies and System Energy, including proposed power purchases from affiliates under power purchase agreements in 2005, are:
Natural Gas                      Fuel Oil             Nuclear                   Coal 2004          2005          2004          .2005     2004 ,      2005        2004        2005 Entergy Arkansas (a)              1%              -                                 65%          64%       34%         35%
Entergy Gulf States            41%            36%               1%            -     36%          36%       22%         28%
Entergy Louisiana               38%           40%              8%          8%       52%          50%        2%          2%
Entergy Mississippi               9%           3%          46%            62%          -            -      45%         35%
Entergy New Orleans             55%           55%                 -           -     32%          31%       13%         14%
System Energy                        -            -        .                  - 100%(b)     100%(b)           -  -         -
U.S. Utility (a)                23%           22%            -6%-          8%       52%          50%       19%         20%.
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Part I Item I Entergy Corporation, Domestic utility companies, and System Energy (a)   Hydroelectric power provided less than 1% of Entergy Arkansas' generation in 2004 and is expected to provide approximately 1% of its generation in 2005.
(b)   Capacity and energy from System Energy's interest in Grand Gulf I was historically allocated as follows:
Entergy Arkansas - 36%; Entergy Louisiana - 14%; Entergy Mississippi - 33%; and Entergy New Orleans
         - 17%. Pursuant to purchased power agreements that are the subject of a pending proceeding at the FERC, Entergy Arkansas is selling a portion of its owned capacity and energy from Grand Gulf I to Entergy Louisiana and Entergy New Orleans.
Natural Gas The domestic utility companies have long-term firm and short-term interruptible gas contracts. Long-term firm contracts for power plants comprise less than 15% of the domestic utility companies' total requirements but can be called upon, if necessary, to satisfy a significant percentage of the utility companies' needs. Short-term contracts and spot-market purchases satisfy additional gas requirements. As of January 1, 2005, Entergy Gulf States owns a gas storage facility that provides reliable and flexible natural gas service to certain generating stations.
Entergy Louisiana has a long-term natural gas supply contract, which expires in 2012, in which Entergy Louisiana agreed to purchase natural gas in annual amounts equal to approximately one-third of its projected annual fuel requirements for certain generating units. Annual demand charges associated with this contract are estimated to be $7.2 million. Such charges aggregate $58 million for the years 2005 through 2012.
Many factors, including wellhead deliverability, storage and pipeline capacity, and demand requirements of end users, influence the availability and price of natural gas supplies for power plants. Demand is tied to weather conditions as well as to the prices of other energy sources. Entergy's supplies of natural gas are expected to be adequate in 2005. However, pursuant to federal and state regulations, gas supplies to power plants may be interrupted during periods of shortage. To the extent natural gas supplies are disrupted or natural gas prices significantly increase, the domestic utility companies will use alternate fuels, such as oil, or rely to a larger extent on coal, nuclear generation, and purchased power.
Coal Entergy Arkansas has a long-term contract for low-sulfur Wyoming coal for Independence. This contract, which expires in 2011, provides for approximately 90% of Independence's expected coal requirements for 2005.
Entergy Arkansas has entered into three medium term (three-year) contracts for approximately 67% of White Bluffs coal supply needs. These contracts are staggered in term so that one is renewed every year. Entergy Arkansas has an additional 16% of its 2005 coal requirement committed in a one-year contract.' Additional coal requirements for both Independence and White Bluff are satisfied by spot market or over the counter purchases.
Entergy Arkansas has a long-term railroad transportation contract for the delivery of coal to both White' Bluff and Independence that expires in 2011. A second carrier now delivers a portion of White Bluffs coal requirements under a long-term transportation agreement that expires on December 31, 2006.
Entergy Gulf States has a long-term contract, which contains periodic price re-openers, for the supply of low-sulfur Wyoming coal for Nelson Unit 6. Entergy Gulf States has entered discussions with the supplier regarding the first price re-opener. If a new price is negotiated, the agreement would extend to April 2007. Entergy Gulf States has executed two transportation requirements contractsgwith railroads to deliver coal to Nelson Unit 6 through 2007. The operator of Big Cajun 2,'Unit 3, Louisiana Generating, LLC, has advised Entergy Gulf States that it has coal supply and transportation contracts that should provide an adequate supply of coal for the operation of Big Cajun 2, Unit 3 for the foreseeable future.'
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Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Nuclear Fuel The inuclear fuel cycle consists of the following:
* mining and milling of uranium ore to produce a concentrate;
* conversion of the concentrate to uranium hexafluoride gas; -
* enrichment of the hexafluoride gas;
* fabrication of nuclear fuel assemblies for use in fueling nuclear reactors; and
* disposal of spent fuel.
System Fuels, a company owned by Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans, is responsible for contracts to acquire nuclear material to be used in fueling Entergy's utility nuclear units, except for River Bend. System Fuels also maintains inventories of such materials during the various stages of processing. The domestic utility companies purchase enriched uranium hexafluoride from System Fuels, but contract separately for the fabrication of their own nucear' fuel. The requirements for River Bend are met pursuant to contracts made by Entergy Gulf States.
Based upon currently planned fuel cycles, Entergy's nuclear units have contracts and inventory that provide adequate materials and services. Existing contracts for uranium concentrate, conversion of the concentrate to uranium hexafluoride, and enrichment of the uranium hexafluoride will provide a significant percentage of these materials and services over the next several years. Uranium market supply became much tighter in 2003 and early 2004 than in previous years. Costs and risks of obtaining supplies have increased for nuclear fuel users. It will be necessary for Entergy to enter into additional arrangements to acquire nuclear fuel in the future. It is not possible to predict the ultimate cost or availability of such arrangements.
Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy each have made arrangements to lease nuclear fuel and related equipment and services. The lessors finance the acquisition and ownership of nuclear fuel through credit agreements and the issuance of notes. These arrangements are subject to periodic renewal. See Note 9 to the domestic utility companies and System Energy financial statements for a discussion of nuclear fuel leases.
Natural Gas Purchased for Resale Entcrgy New Orleans has several suppliers of natural gas. Its system is interconnected with,three interstate and three intrastate pipelines. Entergy New Orleans' primary suppliers currently are Atmos Energy and Louisiana Gas Services. Entergy New Orleans has a "no-notice" service gas purchase contract with Atmos Energy which guarantees Entergy New Orleans gas delivery at specific delivery points and at any volume within the minimum and maximum set forth in the contract amounts. The Atmos, Energy gas supply is transported to Entergy New Orleans pursuant to a transportation service agreement with Gulf South Pipeline Co. This, service is subject to FERC-approved rates. Entergy New. Orleans has firm contracts with its two intrastate suppliers and also makes interruptible spot market purchases. In recent years, natural gas deliveries to Entergy New Orleans have been subject. primarily to weather-related curtailments. However, Entergy New Orleans> experienced no such curtailments in 2004.;
          ,As a result of the implementation of FERC-mandated interstate pipeline restructuring in 1993, curtailments of interstate gas supply could occur if Entergy New Orleans' suppliers failed to perform their obligations to deliver gas under their supply agreements. Gulf South Pipeline could curtail transportation capacity only in the event of pipeline system constraints. Based on the current supply of natural gas, and absent extreme weather-related curtailments, Entergy New Orleans does not anticipate any interruptions in natural gas deliveries to its customers.
Entergy Gulf States purchases natural gas for resale under a firm contract from Enbridge Marketing (U.S.)
Inc. (formerly Mid Louisiana Gas Company) entered into September 2002 for a five-year period. The contract will continue annually at the end of the term unless prior notice is given by Entergy Gulf States.
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Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Federal Regulation State or local regulatory authorities, as described above, regulate the retail rates of Entergy's domestic utility companies. FERC regulates wholesale rates (including intrasystem sales pursuant to the System Agreement) and interstate transmission of electricity, as well as rates for System Energy's sales of capacity and energy from Grand Gulf to Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans pursuant to the Unit Power Sales Agreement.
System Agreement (Entergy Corporation, Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)
The domestic utility companies historically have engaged in the coordinated planning, construction, and operation of generation and transmission facilities pursuant to the terms of the System Agreement. Under the terms of the System Agreement, generating capacity and other power resources are jointly operated by the domestic utility companies. The System Agreement provides, among other things, that parties having generating reserves greater than their load requirements (long companies) shall receive payments from those parties having deficiencies in generating reserves (short companies). Such payments are at amounts sufficient to cover certain of the long companies' costs for intermediate and peaking oil/gas-fired generation, including operating expenses, fixed charges on debt, dividend requirements on preferred stock, and a fair rate of return on common equity investment. Under the System Agreement, these charges are based on costs associated with the long companies' steam electric generating units fueled by oil or gas. In addition, for all energy exchanged among the domestic utility companies under the System Agreement, the companies purchasing exchange energy are required to pay the cost of fuel consumed in generating such energy plus a charge to cover other associated costs.
Litigation involving the System Agreement is being pursued by the LPSC at both the FERC and before itself. These proceedings include challenges to the allocation of costs as defined by the System Agreement, raise questions of imprudence by the domestic utility companies in their execution of the System Agreement, and seek support for local regulatory authority over System Agreement issues. Regarding the proceeding at the LPSC, Entergy believes that state and local regulators are preempted by federal law from reviewing and deciding System Agreement issues for themselves. An unrelated case between the LPSC and Entergy Louisiana raised the question of whether a state regulator is preempted by federal law from reviewing and interpreting FERC rate schedules that are part of the System Agreement, and from subsequently enforcing that interpretation. The LPSC interpreted a System Agreement rate schedule in the unrelated case, and then sought to enforce its interpretation. The Louisiana Supreme Court affirmed the LPSC's decision. In 2003, the U.S. Supreme Court ruled in Entergy Louisiana's favor and reversed the decisions of the LPSC and the Louisiana Supreme Court.
In February 2004, a FERC ALJ issued an Initial Decision in the LPSC-initiated proceeding at the FERC.
The Initial Decision decided some issues in favor of the relief sought by the LPSC, and decided some issues against the relief sought by the LPSC. Several parties, including Entergy, the LPSC, the APSC, the MPSC, the City Council, and the FERC Staff, filed briefs on exceptions in response to the ALUs Initial Decision. Entergy's exceptions to the AL's Initial Decision include: the practical effect of the Initial Decision is full production cost equalization, which was rejected in the Initial Decision and previously has been rejected by the FERC; resource planning for the Entergy System would be impeded if the Initial Decision were adopted; the remedy in the Initial Decision is inconsistent with the history, structure, and precedent regarding the System Agreement; the Initial Decision's remedy ignores the historical pattern of production cost disparities on the Entergy System and would result in substantial, sudden transfers of costs between groups of Entergy customers; the numerical standards proposed in the Initial Decision are arbitrary and are so complex that they will be difficult to implement; the Initial Decision improperly rejected Entergy's resource planning remedy; the Initial Decision erroneously determined that the full costs of the Vidalia project should be included in Entergy Louisiana's production costs for purposes of calculating relative production costs; and the Initial Decision erroneously adopted a new method of calculating reserve sharing costs rather than the current method.
If the FERC grants the relief requested by the LPSC in the proceeding, the relief may result in a material increase in the total production costs the FERC allocates to companies whose costs currently are projected to be less than the Entergy System average, and a material decrease in the total production costs the FERC allocates to 119

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy companies whose costs currently are projected to exceed that average. If the FERC adopts jthe ALJs Initial Decision, the amount of production costs that would be reallocated among the domestic utility companies would be determined through consideration of each domestic utility company's relative total production cost expressed as a percentage of Entergy System average total production cost. The ALUs Initial Decision would reallocate, production costs of the domestic utility companies whose percent of Entergy System average production cost are outside an upper or lower bandwidth. This would be accomplished by payments from domestic utility companies whose production costs are below Entergy System average production cost to domestic utility companies whose production costs are above Entergy System average production cost.
An assessment of the potential effects of the AU's Initial Decision requires assumptions regarding the future total production cost of each domestic utility company, which assumptions include the mix of solid fuel and gas-fired generation available to each company and the costs of natural gas and purchased; power. Entergy Louisiana and Entergy Gulf States are more dependent upon gas-fired generation than Entergy Arkansas, Entergy Mississippi, or Entergy New Orleans. Of these, Entergy Arkansas is the least dependent upon gas-fired generation.
Therefore, increases in natural gas prices likely will increase the amount by which Entergy Arkansas' total production costs are below the average production costs of the domestic utility companies. Considerable uncertainty exists regarding future gas prices. Annual average Henry Hub gas prices have varied significantly over recent years, ranging from $1.72/mmBtu to $5.85/mmBtu for the 1995-2004 period, and averaging $3.43/mmBtu during the ten-year period 1995-2004 and $4.58/mmBtu during the five-year period 2000-2004. Recent market conditions have resulted in gas prices that have averaged $5.85/mmBtu for the twelve months ended December 2004. Based upon analyses considering the effect on future production costs if the FERC adopts the ALUs Initial Decision, the following potential annual production cost reallocations among the domestic utility companies could result assuming annual average gas prices range from $6.39/mmBtu in 2005 declining to $4.97/mmBtu by 2009:
Average Annual Range of Annual Payments    Payments or (Receipts) or (Receipts)       for 2005-2009 Period, (In Millions)    -        (In Millions)
Entergy Arkansas                       $154 to $281                 -  $215 Entergy Gulf States                  ($130) to ($15)                   ($63) -             ;
Entergy Louisiana                    ($199) to ($98)                  ($141)   ,
Entergy Mississippi                      ($16) to $8                     $1 Entergy New Orleans                     ($17) to ($5)                  ($12)
Management believes that any changes in the allocation of production costs resulting from a FERC decision and related. retail proceedings should result in similar rate changes for retail customers, The, timing of recovery of these costs in rates could be the subject of additional proceedings at the APSC and elsewhere, however, and a delay in 'full; recovery of any increased allocation of production costs could result in additional financing requirements. Although the outcome and timing of the FERC, APSC, and other proceedings cannot be predicted at this time, Entergy' does not believe that the ultimate resolution of these proceedings will have a material effect, on its financial condition or results of operation.
In February 2004, the APSC issued an "Order of Investigation," in which it discusses the negative effect that implementation of the FERC.ALJs Initial Decision would have on Entergy Arkansas' customers., The APSC order establishes! an investigation into whether Entergy Arkansas' continued participation in the System Agreement is in the best interest of its customers, and whether there are steps that Entergy Arkansas or the APSC can take "to protect [Entergy Arkansas' customers] from future attempts by Louisiana, or any other Entergy retail regulator, to shift its high costs to Arkansas." Entergy Arkansas filed testimony in response to the APSC's Order, of Investigation. The testimony emphasizes that the AL's Initial Decision is not a final order by the FERC; briefly discusses some of the aspects of the Initial Decision that are included in Entergy's exceptions filed with the FERC; emphasizes that Entergy will seek to reverse the production cost-related portions of the Initial Decision; and states that Entergy Arkansas believes that it is premature, before the FERC makes a decision, for Entergy Arkansas to determine whether its continued participation in the System Agreement is appropriate.
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Part I Item I Entergy Corporation, Domestic utility companies, and System Energy In April 2004, the APSC commenced the investigation into Entergy Louisiana's Vidalia purchased power contract and requested historical documents, records, and information from Entergy Arkansas, which Entergy Arkansas has provided to the APSC. Also in April 2004, the APSC issued an order directing Entergy Arkansas to show cause why Entergy Arkansas should not have to indemnify and hold its customers harmless from any adverse financial effects related to Entergy Louisiana's pending acquisition of the Perryville power plant, or show that the Perryville unit will produce economic benefits for Entergy Arkansas' customers. Entergy Arkansas filed a response in May 2004 stating that Entergy will seek to reverse the production cost-related portions of the AL's Initial Decision in the System Agreement proceeding at the FERC, that the Perryville acquisition is part of Entergy's request for proposal generation planning process, that Entergy Arkansas is not in a position to indemnify its retail customers from actions taken by the FERC, and that the Perryville acquisition is expected to reduce the domestic utility companies' overall production costs. Procedural schedules have not been established in these APSC investigations.
In April 2004, the City Council issued a resolution directing Entergy New Orleans and Entergy Louisiana to notify the City Council and obtain prior approval for any action that would materially modify, amend, or terminate the System Agreement for one or more of the domestic utility companies. Entergy New Orleans and Entergy Louisiana appealed to state court the City Council's resolution on the basis that the imposition of this requirement with respect to the System Agreement, a FERC-approved tariff, exceeds the City Council's jurisdiction and authority. In July 2004, the City Council answered the appeal and filed a third party demand and counterclaim against Entergy, the domestic utility companies, Entergy Services, and System Energy, seeking a declaratory judgment that Entergy and its subsidiaries cannot terminate the System Agreement until obligations owed under a March 2003 rate case settlement are satisfied. In August 2004, Entergy New Orleans and Entergy Louisiana, as well as the -named third party defendants, filed pleadings objecting to the City Council's third party demand and counterclaim on various grounds, including federal preemption. In February 2005, the state court issued an oral decision dismissing the City Council's claims for lack of subject matter jurisdiction and prematurity.
Transmission In 2000, FERC issued an order encouraging utilities to voluntarily 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, and 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. Assuming applicable regulatory support and approvals can be obtained, Entergy proposed to contract with the ICT to oversee the granting of transmission service on the Entergy system as well as the implementation of the proposed weekly procurement process (WPP).
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.
Entergy also proposed to have the ICT administer a transmission expansion pricing protocol that will increase the efficiency of transmission pricing on the Entergy system and that will be designed to protect Entergy's native load customers from bearing the cost of transmission upgrades not required to reliably serve these customers' needs. Entergy intends for the ICT to determine whether transmission upgrades associated with new requests for service should 'be funded directly by the party requesting such service or by a broader group of transmission customers, including Entergy's native load customers. This determination would be made in accordance with protocols approved by the FERC, and any party contesting such determination, including Entergy, would be required to seek review at the FERC. Several technical conferences regarding the ICT proposal, or various components thereof, were held in 2004. Entergy has also responded to discovery requests that resulted from these conferences.
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Part I Item I Entergy Corporation, Domestic utility companies, and System Energy In January 2005, Entergy filed a petition for declaratory order with the FERC requesting that the FERC provide guidance on two important issues: (1) whether the functions performed by the ICT will cause it to become a "public utility" under the Federal Power Act or the "transmission provider" under Entergy's open access transmission tariff; and (2) whether Entergy's transmission pricing proposal, as administered by the ICT, satisfies the FERC's transmission pricing policy. The petition also indicates that, subject to the outcome of the petition and obtaining support of Entergy's retail regulators, Entergy would be willing to have the ICT perform the following additional functions: (a) grant or deny requests for transmission service; (b) calculate available flowgate capacity; (c) administer Entergy's OASIS; and (d) perform an enhanced planning function (integrating the plans of Entergy and other potential transmission owners to identify regional synergies.) Comments and interventions on the petition were filed by market participants and retail regulators on February 4, 2005. In their individual comments, the APSC, LPSC, and City Council supported Entergy's position that the ICT would not become a "public, utility" or "transmission provider" and that the transmission pricing proposal satisfies the FERC's transmission pricing policy. Certain other parties urged the FERC to reject the petition for declaratory order or, in the alternative, that the FERC assert jurisdiction over the ICT and determine that Entergy's proposed pricing policy is inconsistent with FERC's current pricing policy. FERC action on the petition is expected during the first half of 2005.
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 comments 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. Additionally, 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 on the transmission pricing aspects of the ICT proposal is scheduled for May 2005, with a separate hearing on the WPP portion of the proposal currently scheduled for August 2005.
FERC's Supply Margin Assessment In November 2001, FERC issued an order that established a new generation market power screen (called Supply Margin Assessment) for purposes of evaluating a utility's request for market-based, rate authority, applied that new screen to the Entergy System (among others), determined that Entergy and the others failed the screen within their respective control areas, and ordered these utilities to implement certain mitigation measures as a condition to their continued ability to buy and sell at market-based rates. Among other things, the mitigation measures would require that Entergy transact at cost-based rates when it sells in the hourly wholesale market within its control area. Entergy requested rehearing of the order, and FERC delayed the implementation of certain mitigation measures until such time as it had the opportunity to consider the rehearing request. In June 2003, the FERC proposed and ultimately adopted new market behavior rules and tariff provisions that would be applied to any market-based sale. Entergy modified its market-based rate tariffs to reflect the new provisions but requested rehearing of FERC's order.
In April 2004, the FERC issued its Order on Rehearing and Modifying Interim Generation Market Power Analysis and Mitigation Policy. In its April 2004 order, the FERC established a new interim generation market power analysis that will consider two indicative market power screens: (1) the pivotal supplier screen that is designed to measure an applicant's market power based on the applicant's share of uncommitted capacity at the time of the control area market's annual peak demand; and (2) the market share screen that is designed to evaluate an applicant's market share of uncommitted capacity on a seasonal basis. An integrated utility's native load obligation will be reflected in both screens; however, the proxy for native load obligation differs between the screens. For the uncommitted pivotal supplier screen, the proxy for native load is the average of the daily native load peaks during the month in which the annual peak load day occurs; for the uncommitted market share screen the proxy for native load is the minimum peak load day for each season. In the event an applicant fails either of these screens, there will be a rebuttable presumption that market power exists. The applicant will then have the opportunity to either: (1) submit a more detailed market power analysis that reflects market prices and measures an applicant's "economic capacity" and "available economic capacity" under the "delivered price test;" or (2) propose case-specific mitigation 122

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy tailored to the applicant's specific circumstances or adopt cost-based rates for sales within the applicant's control area.
In its April 2004 order, the FERC also: (1) determined that transmission market power and the need to employ an independent entity to operate and administer an applicant's OASIS site is more properly considered in other proceedings, to the extent appropriate, and would not be considered in evaluating an applicant's generation market power for purposes of granting market-based rate authority; and (2) eliminated the exemption from the generation market power analysis for sales within an RTO/ISO that had approved market monitoring. Several parties, including Entergy, filed for rehearing of the April 2004 order. Among other things, Entergy argued that the market share screen is overly conservative and overstates vertically integrated utilities' ability to exercise market power.
In July 2004, the FERC issued an order on rehearing reaffirming the use of the pivotal supplier and market share screens and clarified certain instructions for performing such analysis. With regard to the delivered price test analysis, the FERC declined to make a determination on whether an applicant's native load obligations will be reflected when evaluating an applicant's generation market power, but instead indicated that it would evaluate the arguments of both the applicant and intervenors as to which measure (one with or without native load obligations) more accurately reflects market conditions. Entergy appealed the April 2004 and July 2004 orders to the United States Court of Appeals for the District of Columbia Circuit. In February 2005, the D.C. Circuit granted the FERC's motion to dismiss Entergy's appeal on the grounds that Entergy's claims were premature. The D.C. Circuit found that Entergy's petition was. premature because the D.C. Circuit was not yet in a position to evaluate the manner in which the FERC will apply its new market power tests or whether the tests will have adverse consequences for Entergy. Thus, the D.C. Circuit did not rule on the merits of Entergy's appeal.
Entergy filed with the FERC its generation market power analysis pursuant to the two indicative screens in August 2004. Entergy's analysis indicated that it passed the pivotal supplier screen for all relevant geographical regions, but failed the market share screen within its control area. At the same time, Entergy submitted the results of the delivered price test for Entergy, which indicate that Entergy does not have market power in any wholesale market when Entergy's native load obligations are reflected.
In December 2004, the FERC issued an order pursuant to Section 206 of the Federal Power Act: (1) finding that Entergy failed the market share screen; (2) indicating that the FERC is continuing to review the delivered price test analysis submitted by Entergy; (3) establishing a refund effective date for Entergy's market-based wholesale sales within its control area; and (4) indicating that the FERC believes that it can reach a decision concerning Entergy's market-based rate authority by the second quarter of 2005.
If the FERC were to revoke Entergy's or the domestic utility companies' market-based rate authority for wholesale sales within the Entergy control area, these entities would be limited to making wholesale sales pursuant to cost-based rate schedules approved by the FERC. The wholesale sales of the domestic utility companies and their affiliates, including Entergy's non-nuclear wholesale assets business, within the Entergy control area could either be cost-justified or are of such a limited amount that management does not believe that the revocation of their market-based rate authority would have a material effect on the financial, results of Entergy. Because Entergy believes that it does not possess market power and that the FERC's tests are flawed, Entergy intends to vigorously defend its market-based rate authority.
The FERC has also initiated a rulemaking proceeding to address, among other things, whether the FERC should retain or modify its existing four-prong test for evaluating market-based rate applications (i.e., whether the applicant has generation or transmission market power, whether the applicant can erect barriers to entry, and whether there are affiliate abuse or reciprocal dealing concerns), and whether the FERC should adopt different approaches for affiliate transactions. The FERC has held a series of technical conferences to discuss these issues.
Additionally, in February 2005, the FERC adopted revised reporting obligations for changes in status that apply to public utilities authorized to make wholesale sales of power at market-based rates. The FERC determined to replace the current triennial reporting requirement with more detailed guidelines concerning the types of events that will trigger a reporting obligation and the timing and format for such reports. The new rules will become part of all existing market-based rate tariffs during March 2005.
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Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Interconnection Orders The domestic utility companies (except Entergy New Orleans) are currently defendants to several complaints and rehearing requests before the FERC in which independent generation entities (GenCos) are seeking a refund of monies that the GenCos had previously paid to the Entergy companies for facilities necessary to connect their generation facilities to Entergy's transmission system. The FERC has issued initial orders in response to two of the complaints and in certain other dockets ordering Entergy to refund approximately $100 million in expenses and tax obligations previously paid by the GenCos. The refunds will be in the form of transmission credits that will be utilized over time as the GenCos take transmission service from Entergy.
In addition, Entergy Louisiana was recently directed, effective as of March 2001, to provide transmission credits, with interest, associated with a specific generator that asserted to the FERC that it retained in its contract for interconnection a right to execute the latest form of Entergy's standard interconnection agreement in lieu of its existing contract, which thereby would apply FERC's most recent interconnection cost allocation policies to that generator. Following an ALUs Initial Decision and an order affirming such decision by FERC, approximately $15 million in expenses and tax obligations previously paid by the generator have been ordered refunded in the form of transmission credits, to be utilized over time and applied to Entergy transmission service bills incurred after March 2001. Entergy has sought rehearing of the FERC's order.
To the extent the Entergy companies are ordered to provide such refunds, these costs will qualify for inclusion in the Entergy companies' rates. The recovery of these costs is not automatic; however, especially at the retail level, where the majority of the cost recovery would occur: Entergy intends to pursue all regulatory and legal avenues available to it in order to have these orders reversed and have the affected interconnection agreements reinstated as agreed to originally by the generators.
Available Flowgate Capacity Proceeding On December 17, 2004, the FERC issued an order initiating a hearing and investigation concerning the justness and reasonableness of the Available Flowgate Capacity (AFC) methodology, the methodology used to evaluate short-term transmission service requests under the domestic utility companies' open access transmission tariff, and establishing a refund effective date. In its order, the FERC indicated that although it "appreciates that Entergy is attempting to explore ways to improve transmission access on its system," it believed that an investigation was warranted to gather more evidence in light of the concerns raised: by certain transmission customers and certain issues raised in a FERC audit report finding errors and problems with the predecessor methodology used by Entergy for evaluating short-term transmission requests, the Generator Operating Limits methodology. The FERC order indicates that the investigation will include an examination, of (i) Entergy's implementation'of the AFC program, (ii) whether Entergy's implementation has complied'with prior FERC orders and open access transmission tariff provisions addressing the AFC program, and (iii) whether Entergy's provision of access to short-term transmission on its transmission system was just, reasonable, and not unduly discrirninatory.
Entergy has submitted an Emergency Interim Request for Rehearing requesting the FERC to defer the hearing process and instead proceed initially with an independent audit of the AFC program and the expansion of the current process involving other market participants to address a broader range of issues., Entergy believes that this type of approach is a more efficient and effective mechanism for evaluating the AFC program. Following the completion of the independent audit and process involving other market participants, the FERC could determine whether other procedural steps are necessary. The FERC has not yet ruled on the Emergency Interim Request for Rehearing submitted by Entergy.
Entergy believes that it has complied with the provisions of its open access transmission tariff, including the' provisions addressing the implementation of the AFC methodology; however, the ultimate scope of this proceeding cannot be predicted at this time. A hearing in the AFC proceeding is currently scheduled to commence in August 2005.                                                                          '                     -
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Part I Item I Entergy Corporation, Domestic utility companies, and System Energy FERC Audits In August 2002, the FERC initiated audits and reviews of Entergy's compliance with Order Nos. 888 and 889 and Entergy's open access transmission tariff. In March 2004, a separate audit was started concerning Entergy's administration of the Generator Operating Limits ("GOL") processes. Entergy responded to numerous FERC data requests and the FERC Staff members interviewed several employees. In December 2004, the FERC issued the GOL audit report in which it identified certain input and modeling errors in the implementation of the GOL process (which process was replaced in April 2004 with the AFC process). The report recommends that Entergy implement additional quality control and assurance procedures surrounding the processes for granting short term transmission service. Separately, the FERC investigation staff has provided to Entergy its preliminary findings in a non-public draft report identifying certain areas of concern related to Entergy's compliance with provisions of its open access transmission tariff. Entergy has submitted a comprehensive response and rebuttal to the specific concerns identified by the investigation staff but, at this point, believes that it has complied with the provisions of its open access transmission tariff. The draft report is not a final report and may be modified by the FERC staff based on Entergy's responses or otherwise. In addition, Entergy has the ability to appeal the final reports to the full FERC.
The FERC is currently reviewing certain wholesale sales and purchases involving EPMC that occurred during the 1998-2001 time period. EPMC was an Entergy subsidiary engaged in non-regulated wholesale marketing and trading activities prior to the formation of Entergy-Koch. Entergy is working with the FERC investigation staff to provide information regarding these transactions.
Other Customer-initiated Proceedings at FERC In September 2004, East Texas Electric Cooperative (ETEC), filed a complaint at the FERC against Entergy Arkansas relating to a contract dispute over the pricing of substitute energy at the co-owned coal unit, Independence Steam Electric Station (ISES). In October 2004 Arkansas Electric Cooperative (AECC) filed a similar complaint at FERC against Entergy Arkansas, addressing the same issue with respect to ISES and another co-owned coal unit, White Bluff Electric Station. Entergy Arkansas filed answers to these complaints in October 2004 and November 2004. FERC consolidated the cases, ordered a hearing in the consolidated proceeding, and established refund effective dates. The main issue in the case relates to the consequences under the governing contracts when the dispatch of the coal units is constrained due to system operating conditions. Entergy Arkansas believes that the contracts in dispute recognize the effects of dispatch constraints on the co-owned units and require all of the co-owners, including ETEC and AECC, to bear the burden of the reduced output. Entergy Arkansas expects an initial decision by a FERC ALJ in October 2005.
On February 17, 2005, ExxonMobil Chemical Company and ExxonMobil Refining & Supply Company (ExxonMobil) filed a complaint with FERC against Entergy Services and the domestic utility companies. The complaint alleges that the Entergy defendants have violated Entergy's open access transmission tariff, as well as its interconnection and operating agreement with ExxonMobil, by not allowing ExxonMobil to net its station power needs at its industrial complex in Baton Rouge, Louisiana. ExxonMobil also alleges that the Entergy defendants have been charging rates that are not on file with the FERC and that the Entergy defendants' monthly facilities charge is contrary to the FERC's current interconnection pricing policy. ExxonMobil states that such violations have resulted in. monetary losses to it in excess of -$5 million. Entergy believes that it has complied with the provisions of its open access transmission tariff and the provisions of the interconnection 'and operating agreement.
System Energy and Related Agreements System Energy recovers costs related to its interest in Grand 'Gulf through rates charged to Entergy Arkansas, Entergy Louisiana, Entergy Mississippi; and Entergy New Orleans for capacity and energy under the Unit Power Sales Agreement (described below). In December 1995, System Energy commenced a rate proceeding at the FERC. In July 2001, the rate proceeding became final, with the FERC approving a prospective 10.94%
return on equity. The FERC's decision also affected other aspects of System Energy's charges to the domestic utility companies that it supplies with power. In 1998, the FERC approved requests by Entergy Arkansas and Entergy Mississippi to accelerate a portion of their Grand Gulf purchased power obligations. Entergy Arkansas' 125

Part I Item 1 Entergy Corporation, Domestic utility companies, and System Energy and Entergy Mississippi's acceleration of Grand Gulf purchased power obligations ceased effective July 2001 and July 2003, respectively, as approved by FERC.
Unit Power Sales Agreement The Unit Power Sales Agreement allocates capacity, energy, and the related costs from System Energy's 90% ownership and leasehold interests in Grand Gulf to Entergy Arkansas (366%), Entergy Louisiana (14%),
Entergy Mississippi (33%), and Entergy. New Orleans (17%). Each of these companies is obligated to make payments to System Energy for its entitlement of capacity and energy on a full cost-of-service basis regardless of the quantity of energy delivered, so long as Grand Gulf remains in commercial operation. Payments under the Unit Power Sales Agreement are System Energy's only source of operating revenue. The financial condition of System Energy depends upon the continued commercial operation of Grand Gulf and the receipt of such payments. Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans generally recover payments made under the Unit Power Sales Agreement through rates charged to their customers.
In the case of Entergy Arkansas and Entergy Louisiana, payments are also recovered through sales of electricity from their respective retained shares of Grand Gulf.. Under a settlement agreement entered into with the APSC in 1985 and amended in 1988, Entergy Arkansas retains 22% of its 36% share of Grand Gulf-related costs and recovers the remaining 78% of its share in rates. In the event that Entergy Arkansas is not able to sell its retained share to third parties, it may sell such energy to its retail customers at a price equal to its avoided cost, which is currently less than Entergy Arkansas' cost from its retained share. Entergy Arkansas has life-of-resources purchased power agreements with Entergy Louisiana and Entergy New Orleans pending regulatory approvals that sell a portion of the output of Entergy Arkansas' retained share of Grand Gulf to those companies. In a series of LPSC orders, court decisions, and agreements from late 1985 to mid-1988, Entergy Louisiana was granted rate relief with respect to costs associated with Entergy Louisiana's share of capacity and energy from Grand Gulf, subject to certain terms and conditions. Entergy Louisiana retains and does not recover from retail ratepayers, 18%
of its 14% share of the costs of Grand Gulf capacity and energy and recovers the remaining 82% of its share in rates. Entergy Louisiana is allowed to recover through the fuel adjustment clause 4.6 cents per kWh for the energy related to its retained portion of these costs. Alternatively, Entergy Louisiana may sell such energy to non-affiliated parties at prices above the fuel adjustment clause recovery amount, subject to the LPSC's approval, Availability Agreement The Availability Agreement among System Energy and Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans was entered into in 1974 in connection with the financing by System Energy of Grand Gulf. The Availability Agreement provided that System Energy join in the System Agreement on or before the date on which Grand Gulf 1 was placed in commercial operation and make availableto Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans all capacity and energy available from System Energy's share of Grand Gulf.
Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans also agreed severally to pay System Energy monthly for the right to receive capacity and energy from Grand Gulf in amounts that (when added to any amounts received by System Energy under the Unit Power Sales Agreement) would at least equal System Energy's total operating expenses for Grand Gulf (including depreciation at a specified rate) and interest charges. The September 1989 write-off of System Energy's investment in Grand Gulf 2, amounting to approximately $900 million, is being amortized for Availability Agreement purposes over 27 years.
The allocation percentages under the Availability Agreement are fixed as follows:, Entergy Arkansas -
17.1%; Entergy Louisiana - 26.9%; Entergy Mississippi - 31.3%; and Entergy New Orleans - 24.7%. The allocation percentages under the Availability Agreement would remain in effect and would govern payments made under such agreement in the event of a shortfall of funds available to System Energy from other sources, including payments under the Unit Power Sales Agreement.
System Energy has assigned its rights to payments and advances from Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans under the Availability Agreement as security for its first 126

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy mortgage bonds and reimbursement obligations to certain banks providing letters of credit in connection with the equity funding of the sale and leaseback transactions described in, Note 9 to the financial statements under "Sale and Leaseback Transactions - Grand Gulf Lease Obligations." In these assignments, Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans further agreed that, in the event they. were prohibited by governmental action from making payments under the Availability Agreement (for example, if FERC reduced or disallowed such payments as constituting excessive rates), they would then make subordinated advances to System Energy in the same amounts and- at the same times as the prohibited payments. System Energy would not be allowed to repay these subordinated advances so long as it remained in default under the related indebtedness or in other similar circumstances.
Each of the assignment agreements relating to the Availability Agreement provides that Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans will make payments directly to System Energy.
However, if there is an event of default, those payments must be made directly to the holders of indebtedness that are the beneficiaries of such assignment agreements, The payments must be made pro rata according to the amount of the respective obligations secured.                                                                -
The obligations of Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans to make payments under the Availability Agreement are subject to the receipt and continued effectiveness of all necessary regulatory approvals. Sales of capacity and energy under the Availability Agreement would require that the Availability Agreement be submitted to FERC for approval with respect to the terms of such sale. No such filing with FERC has been made because sales of capacity and energy from Grand Gulf are being made pursuant to the Unit Power Sales Agreement. If, for any reason, sales of capacity and energy are made in the future pursuant to the Availability Agreement, the jurisdictional portions of the Availability Agreement would be submitted to FERC for approval. Other aspects of the Availability Agreement are subject to the jurisdiction of the SEC, whose approval has been obtained, under PUHCA.
Since commercial operation of Grand Gulf began, payments under the Unit Power Sales Agreement to System Energy have exceeded the amounts payable under the Availability Agreement. Therefore, no payments under the Availability Agreement have ever been required. If Entergy Arkansas or Entergy Mississippi fails to make its Unit Power Sales Agreement payments, and System Energy is unable to obtain funds from other sources, Entergy Louisiana and Entergy New Orleans could become subject to claims or demands by System Energy or its creditors for payments or advances under the Availability Agreement (or the assignments thereof) equal to the difference between their required Unit Power Sales Agreement payments and their required Availability Agreement payments because their Availability Agreement obligations exceed their Unit Power Sales Agreement obligations.
The Availability Agreement may be terminated, amended, or modified by mutual agreement of the parties thereto, without further consent of any assignees or other creditors.
Capital Funds Agreement System Energy and Entergy Corporation have entered into the Capital Funds Agreement, whereby Entergy Corporation has agreed to supply System Energy with sufficient capital to (i) maintain System Energy's equity capital at an. amount equal to a minimum of 35% of its total capitalization (excluding short-term debt) and (ii) permit the continued commercial operation of Grand Gulf and pay in full all indebtedness for borrowed money of System Energy when due.
Entergy Corporation has entered into various supplements to the Capital Funds Agreement. System Energy has assigned its rights under such supplements asssecurity for its first mortgage bonds and for reimbursement obligations to certain banks providing letters of credit in connection with the equity funding of the sale and leaseback transactions described in Note 9 to the financial statements under "Sale and Leaseback Transactions -
Grand Gulf Lease Obligations." Each such supplement provides that permitted indebtedness for borrowed money incurred by System Energy in connection with the financing of Grand Gulf may be secured by System Energy's rights under the Capital Funds Agreement on a pro rata basis (except for the Specific Payments, as defined below).
In addition, in the supplements to the Capital Funds Agreement relating to the specific indebtedness being secured, Entergy Corporation has agreed to make cash capital contributions directly to System Energy sufficient to enable 127

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy System Energy to make payments when due on such indebtedness (Specific Payments). However, if there is an event of default, Entergy Corporation must make those payments directly to the holders of indebtedness benefiting from the supplemental agreements. The payments (other than the Specific Payments) must be made pro. rata according to the amount of the respective obligations benefiting from the supplemental agreements.
The Capital Funds Agreement may be terminated, amended, or modified by mutual agreement of the parties thereto, upon obtaining the consent, if required, of those holders of System Energy's indebtedness then outstanding who have received the assignments of the Capital Funds Agreement.
Service Companies Entergy Services, a, corporation wholly-owned by Entergy Corporation, provides management, administrative, accounting, legal, engineering, and other services primarily to the domestic utility companies.
Entergy Operations is also wholly-owned by Entergy Corporation and provides nuclear management, operations and maintenance services under contract for ANO, River Bend, Waterford 3, and Grand Gulf, subject to the owner oversight of Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy, respectively. Entergy Services and Entergy Operations provide their services to the domestic utility companies and System Energy on an "at cost" basis, pursuant to service agreements approved by the SEC under PUHCA.
Earnings Ratios of Domestic Utility Companies and System Energy The domestic utility companies' and System Energy's ratios of earnings to fixed charges and ratios of earnings to combined fixed charges and preferred dividends pursuant to Item 503 of SEC Regulation S-K are as follows:
Ratios of Earnings to Fixed Charges Years Ended December 31,
                                                      '2004         2003       2002        2001        2000
     * '      Entergy Arkansas                     '    3.37      '  3.17    -   2.79       3.29       '3.01
* Entergy Gulf States                       3.04         1.51        2;49       2.36     '2.60 Entergy Louisiana                         3.60         3.93    '  '3.14       2.76         3.33 Entergy Mississippi                       3.41         3.06         2.48      2.14         2.33 Entergy New Orleans                     '3.60          1.73          (b)        (c)  '     2.66 System Energy                             3.95         3.66         3.25      2.12         2.41 Ratios of Earnings to Combined Fixed Charges and Preferred Dividends Years Ended December 31, 2004         2003       2002        2001        2000 Entergy Arkansas                          2.98         2.79         2.53      2.99         2.70 Entergy Gulf States (a)                   2.90         1.45        2.40       2.21         2.39 Entergy Louisiana                      '  3.16         3.46        2.86       2.51         2.93 Entergy Mississippi                       3.07         2.77        2.27        1.96        2.09 Entergy New Orleans                       3.31         1.59          (b)        (c)        2.43 (a)     "Preferred Dividends" in the case of Entergy Gulf States also include dividends on preference stock, which was redeemed in July 2000.
(b)     For Eitergy New Orleans, earnings for the twelve'months ended December 31, 2002 were not adequate to cover fixed charges and combined fixed charges and preferred dividends by $0.7 million and $3.4 million, respectively.
(c)     For Entergy New Orleans, earnings for the twelve months ended December 31, 2001 were not adequate to cover fixed charges and combined fixed charges and preferred dividends by $6.6 million and $9.5 million, respectively.
128

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Non-Utility Nuclear Entergy's Non-Utility Nuclear business owns and operates five nuclear power plants and is primarily focused on selling electric power produced by those plants to wholesale customers. This business also provides operations and management services to nuclear power plants owned by other utilities in the United States.
Operations and management services, including decommissioning services, are provided through Entergy's wholly-owned subsidiary, Entergy Nuclear, Inc.
Property Generating Stations Entergy's Non-Utility Nuclear business owns the following nuclear power plants:
License.
Maximum                                                Expiration Power Plant          Acquired       Location           Capacity                Reactor Type                      Date Pilgrim                  July 1999 Plymouth, MA             688 MW       Boiling Water Reactor                        2012.
FitzPatrick              Nov. 2000 Oswego, NY               838 MW        Boiling Water Reactor                       2014 Indian Point 3           Nov. 2000 Westchester              994 MW        Pressurized Water Reactor                   2015 County, NY Indian Point 2           Sept. 2001 Westchester           1,028 MW        Pressurized Water Reactor                   2013 County, NY Vermont Yankee           July 2002 Vernon, VT               510 MW        Boiling Water Reactor                       2012 Non-Utility Nuclear added 57 MW of capacity in 2004 through uprates and plans an additional 142 MW of uprates through 2006. The planned uprates include a total of 95 MW for Vermont Yankee that are currently pending approval by the NRC and the Public Service Board of Vermont.
Interconnections The Pilgrim and Vermont Yankee plants are dispatched as a part of Independent System Operator (ISO)
New England and the FitzPatrick and Indian Point plants are dispatched by the New York Independent System Operator (NYISO). The primary purpose of ISO New England is to direct the operations of the major generation and transmission facilities in the New England region and the primary purpose of NYISO is to direct the operations of the major generation and transmission facilities in New York state.
Energy and Capacity Sales Entergy's Non-Utility Nuclear business has entered into power purchase agreements (PPAs) with creditworthy counterparties to sell the energy 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 at fixed prices:
2005           2006          2007           2008          2009 Non-Utility Nuclear:
Percent of planned generation sold forward:
Unit-contingent                                              36%            20%            17%            1%            0%
Unit-contingent with availability guarantees                 54%            52%           38%            25%            0%
Firm liquidated damages                                       4%             4%             2%            0%,           0%
Total                                                        94%            76%            57%           26%            0%
Planned generation (TWh)                                          34              35             34            34            35 Average contracted price per MWh                                  $39            $41            $42           $44           N/A 129

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy The Vermont Yankee acquisition included a 10-year PPA under which the former owners will buy the power produced by the plant, which is through the expiration in 2012 of the current operating license for the plant.
The PPA includes an adjustment clause under which the prices specified in the PPA will be adjusted downward monthly, beginning in November 2005, if power market prices drop below PPA prices. Accordingly, because the price is not fixed, the table above does not report power from that plant as sold forward after November 2005.
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 unit to generate power at or above a specified availability threshold. To date, Entergy has not incurred any payment obligation to any power purchaser pursuant to an availability guarantee. All of Entergy's outstanding availability guarantees provide for dollar limits on Entergy's maximum liability under such guarantees.
Some of the agreements to sell the power produced by Entergy's Non-Utility Nuclear power plants 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 business sells its power. The primary form of the collateral to satisfy these requirements would be an Entergy Corporation guaranty. Cash and letters of credit are also acceptable forms of collateral.' At December 31, 2004, based on power prices at that time, Entergy had in place as collateral $545.5 million of Entergy Corporation guarantees and $47.5 million of letters of credit. In the event of a decrease in Entergy Corporation's credit-rating to specified levels 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 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 forward: '         - -
2005      2006      2007         2008,    2009 Non-Utility Nuclear:
Percent of capacity sold forward:                          -                 ;
Bundled capacity and energy contracts               .;-             13%       13%       13%         13%       13%
Capacity contracts                                                   58%      67%        36%         22%       10%;
Total-                                                       -       71%      80%       49%
* 35%    !  23%
Planned net MW in operation                                            4,155     4,200     4,200       4,200     4,200 Average capacity contract price per kW per month                        $1.2      $1.1      $1.1        $1.0      $0.9 Blended Capacity and Energy (based on revenues)
% of planned generation and capacity sold forward                       93%      87%        65%         36%       12%
Average contract revenue per MWh                              -         $40       $42       $43          $44-     $43 As of December 31, 2004, approximately 99% of Entergy's countetparties to Non-Utility Nuclear's energy and capacity contracts have investment grade credit ratings.
Fuel Supply Nuclear Fuel The nuclear fuel requirements for Pilgrim, FitzPatrick, Indian Point 2, Indian Point 3, and Vermont Yankee are met pursuant to contracts made by Entergy's Non-Utility Nuclear business. Entergy Nuclear Fuels Company is responsible for contracts to acquire nuclear materials, except for fuel fabrication, for these non-utility nuclear plants.          !
130

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Based upon currently planned fuel cycles, Entergy's nuclear units have contracts and inventory that provide adequate materials and services. Existing contracts for uranium concentrate, conversion of the concentrate to uranium hexafluoride, and enrichment of the uranium hexafluoride will provide a significant percentage of these materials and services over the next several years. Uranium market supply became much tighter in recent years.
Costs and risks of obtaining supplies have increased for nuclear fuel users. It will be necessary for Entergy to enter into additional arrangements to acquire nuclear fuel in the future. It is not possible to predict the ultimate cost or availability of such arrangements.
Other Business Activities Entergy Nuclear, Inc. also pursues service agreements with other nuclear power plants owners who seek the advantages of Entergy's scale and expertise but do not necessarily want to sell their assets. Services provided by either Entergy Nuclear, Inc. or other Non-Utility Nuclear subsidiaries include engineering, operations and maintenance, fuel procurement, management and supervision, technical support and training, administrative support, and other managerial or technical services required to operate, maintain, and decommission nuclear electric power facilities. Entergy Nuclear, Inc. currently provides decommissioning services for the Maine Yankee nuclear power plant and continues to pursue opportunities for Non-Utility Nuclear with other nuclear plant owners through operating agreements or innovative arrangements such as structured leases.
In September 2003, Entergy's Non-Utility Nuclear business agreed to provide administrative support services for the 800 MW Cooper Nuclear Station located near Brownville, Nebraska. The contract is for 10 years, the remaining term of the plant's operating license. Entergy will receive $13 million in 2005, and $14 million in 2006 and each of the remaining years of the contract. Entergy can also receive up to $6 million more per year beginning in 2007 if safety and regulatory goals are met. In addition, Entergy will be reimbursed for all employee-related expenses.
Entergy Nuclear, Inc. also is a party to two business arrangements that assist Entergy Nuclear, Inc. in providing operation and management services. Entergy Nuclear, Inc., in partnership with Framatome ANP, offers operating license renewal and life extension services to nuclear power plants in the United States. Entergy Nuclear Inc., through its subsidiary, TLG Services, offers decommissioning, engineering, and related services to nuclear power plant owners.
Energv Commodity Services The Energy Commodity Services segment includes Entergy's non-nuclear wholesale assets business and Entergy-Koch, LP. Entergy's non-nuclear wholesale assets business owns power plants capable of generating about 1,500 MW of electricity for sale in the wholesale market. Entergy-Koch, LP is a limited partnership owned 50%
each by Entergy and Koch Industries, Inc. through subsidiaries. Entergy-Koch engaged in two major businesses:
energy commodity marketing and trading through Entergy-Koch Trading, and gas transportation and storage through Gulf South Pipeline. Entergy-Koch sold both of these businesses in the fourth quarter 2004, and Entergy-Koch is no longer an operating entity. Previously, Entergy's Energy Commodity Services business also engaged in power development activities through Entergy Wholesale Operations, but these activities were discontinued in early 2002.
131

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Non-Nuclear Wholesale Assets Business Property Generating Stations The capacity of the generating stations owned in Entergy's non-nuclear wholesaje assets business as of December 31, 2004 is indicated below:
Net Owned Plant                           Location            Ownership      Capacity(1)         Type Ritchie Unit 2, 544 MW                   Helena, AR                    100%         544 MW        Gas/Oil Independence Unit 2, 842 MW               Newark, AR                      14%       121 MW(2)      Coal Warren Power, 300 MW                      Vicksburg, MS                 i 75%       225 MW(2)      Gas Turbine Top of Iowa, 80 MW (3)                    Worth County, IA                50%         40 MW        Wind, White Deer, 80 MW (3)                     Amarillo, TX                    50%         40 MW        Wind RS Cogen, 425 MW (3)                      Lake Charles, LA                50%        213 MW        Gas/Steam Harrison County, 550 MW                   Marshall, TX                   61%        335 MW(2)      Gas Turbine (1)        "Net Owned Capacity" refers to the nameplate rating on the generating unit.
(2)        The owned MW capacity is the portion of the plant capacity owned by Entergy's non-nuclear wholesale assets business. For a complete listing of Entergy's joint-owned generating stations, refer to "Jointlv-Owned Generating Stations" in Note 1 to the consolidated financial statements.
(3)        Indirectly owned through interests in unconsolidated joint ventures.
In addition to these generating stations, Entergy's non-nuclear wholesale assets business has a contract to take 60MW of the power from a portion of the Nelson 6 coal plant owned by a third party.
Entergy sold its interest in the Crete power plant located in Illinois in January 2004.,
Energy and Capacity Sales 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:
5       26        27    . .28             0 2005        2006      2007,    2008        -2009.
Energy Commodity Services:
Capacity Planned MW in operation                                             1,578       1,578     1,578    1,578     ;   1,578
   % of capacity sold forward                                          44%         330/0     29%      29%          ;19%,
Energy Planned generation (TWh)                                              3            3         3        3             4
   % of planned generation sold forward                                69%          54%      45%      45%           35%
Blended Capacity and Energy (based on revenues)
   % of planned energy and capacity sold forward                       63%         44%        38%     39%           22%
Average contract revenue per MWh                                     $24         $24       $28      $28           $21 Entergy-Koch, LP Entergy-Koch is a limited partnership owned 50% each by Entergy and Koch Industries, Inc, through subsidiaries. Entergy-Koch began operations on February 1, 2001. Entergy contributed most of the assets and trading contracts of its power marketing and trading business and $414 million cash to the venture and Koch contributed its approximately 8,000-mile Koch Gateway Pipeline (renamed Gulf South Pipeline), gas storage facilities, and Koch Energy Trading, which marketed and traded electricity, gas, weather derivatives, and other 132

Part I Item 1 Entergy Corporation, Domestic utility companies, and System Energy energy-related commodities and services. As specified in the partnership agreement, Entergy contributed an additional $72.7 million to the partnership in January 2004.
In the fourth quarter of 2004, Entergy-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 $862 million of cash distributions in 2004 from Entergy-Koch after the business sales, and Entergy ultimately expects to receive total net cash distributions exceeding $1 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.
Regulation of Enteray's Business PUHCA The Public Utility Holding Company Act of 1935, as amended, regulates companies like Entergy Corporation that serve as holding companies to, domestic operating utilities. Some of the more significant impacts of PUHCA are that it:
* limits the operations of a registered holding company system to a single, integrated public utility, system, plus related systems and businesses;
* regulates transactions among affiliates within a holding company system;
* governs the issuance, acquisition, and disposition of securities and assets by registered holding companies and their subsidiaries;
* limits the entry by registered holding companies and their subsidiaries into businesses other than electric and/or gas utility businesses; and
* requires SEC approval for certain utility mergers and acquisitions.
Entergy continues to support the broad industry effort to pass legislation in the United States Congress to repeal PUHCA and transfer certain aspects of the oversight of public utility holding companies from the SEC to FERC. Entergy believes that PUHCA inhibits its ability to compete in the evolving electric energy marketplace and largely duplicates the oversight activities otherwise performed by FERC, other federal regulators, and state and local regulators.
Federal Power Act The Federal Power Act regulates:
* the transmission and wholesale sale of electric energy in interstate commerce;
* the licensing of certain hydroelectric projects; and
* certain other activities, including accounting policies and practices of electric and gas utilities.
The Federal Power Act gives FERC jurisdiction over the rates charged by System Energy for Grand Gulf capacity and energy provided to Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans and over some of the rates charged by Entergy Arkansas and Entergy Gulf States. FERC also, regulates the rates charged for intrasystem sales pursuant to the System Agreement.
Entergy Arkansas holds a FERC license that expires in 2053 for two hydroelectric projects totaling 70 MW of capacity.
133

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy State Regulation Entergy Arkansas is subject to regulation by the APSC, which includes the authority to:
* oversee utility service;
* set retail rates;
* determine reasonable and adequate service;
* require. proper accounting;
* control leasing;
* control the acquisition or sale of any public utility plant or property constituting' an operating unit or' system;
* set rates of depreciation;
* issue certificates of convenience and necessity and certificates of environmental compatibility and public need; and
* regulate the issuance and sale of certain securities.
Entergy Gulf States may be subject to the original jurisdiction of the municipal authorities of a number of incorporated cities in Texas with appellate jurisdiction over such matters residing in the PUCT. Whether such municipal jurisdiction currently exists is the subject of a declaratory judgment proceeding initiated at the PUCT by certain Cities served by Entergy Gulf States in December 2004. Entergy Gulf States' Texas business is also subject to regulation by the PUCT as to:
* retail rates and service;
* customer service standards;                                                                '
* certification' of new'transmission lines; and                                                '       ''
* extensions of service into new areas.
Entergy Gulf States' Louisiana electric and gas business and Entergy Louisiana are subject to regulation by the LPSC as to:
    '      utility service;'
* retail rates and charges; '
* certification of generating facilities;
* power or capacity purchase contracts; and
* depreciation, accounting, and other matters.
Entergy Louisiana is also subject to the jurisdiction of the Council with respect to such matters within Algiers in Orleans Parish.
Entergy Mississippi is subject to regulation by the MPSC as to the following:
* utility service;,
* service areas;
* facilities; and
* retail rates.
Entergy Mississippi is also subject to regulation by the APSC as to, the certificate of environmental compatibility and public need for the Independence Station, which is located in Arkansas.
Entergy New Orleans is subject to regulation by the Council as to the following:
* utility service;
* retail rates and charges; 134

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy
* standards of service;
* depreciation, accounting, and issuance and sale of certain securities; and
* other matters.
Regulation of the Nuclear Power Industry Atomic Energy Act of 1954 and Energy Reorganization Act of 1974 Under the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974, the operation of nuclear plants is heavily regulated by the NRC, which has broad power to impose licensing and safety-related requirements.
The NRC has broad authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy, as owners of all or portions of ANO, River Bend, Waterford 3, and Grand Gulf, respectively, and Entergy Operations, as the licensee and operator of these units, are subject to the jurisdiction of the NRC.
Entergy has made substantial capital expenditures at these nuclear plants because of revised safety requirements of the NRC in the past, and additional expenditures could be required in the future. Entergy's Non-Utility Nuclear business is subject to the NRC's jurisdiction as the owner and operator of Pilgrim, Indian Point Energy Center, FitzPatrick, and Vermont Yankee. Substantial capital expenditures at these nuclear plants because of revised safety requirements of the NRC could be required in the future.
Nuclear Waste Policy Act of 1982 Under the Nuclear Waste Policy Act of 1982, the DOE is required, for a specified fee, to construct storage facilities for,: and to dispose of, all spent nuclear fuel and other high-level radioactive waste generated by domestic nuclear power reactors. Entergy's nuclear owner/licensee subsidiaries provide for the estimated future disposal costs of spent nuclear fuel in accordance with the Nuclear Waste Policy Act of 1982. The affected Entergy companies entered into contracts with the DOE, whereby the DOE will furnish disposal service at a cost of one mill per net kWh generated and sold after April 7, 1983, plus a one-time fee for generation prior to that date. Entergy Arkansas is the only Entergy company that generated electric power with nuclear fuel prior to that date and has a recorded liability as of December31, 2004 of $156.3 million for the one-time fee. Entergy's Non-Utility Nuclear business has accepted assignment of the Pilgrim, FitzPatrick, Indian Point 3, Indian Point 2, and Vermont Yankee spent fuel disposal contracts with the DOE held by their previous owners. The previous owners have paid or retained liability for the fees for all generation prior to the purchase dates of those plants. The fees payable to the DOE may be adjusted in the future to assure full recovery. Entergy considers all costs incurred for the disposal of spent nuclear fuel, except accrued interest, to be proper components of nuclear fuel expense. Provisions to recover such costs have been or will be made in applications to regulatory authorities for the U.S. Utility plants.
The permanent spent fuel repository in the U.S. has been legislated to be Yucca Mountain, Nevada. The DOE will now' proceed with the licensing and, if the license is granted by the NRC, eventual construction of the repository will begin-and receipt of spent fuel may begin sometime after 2010. Considerable uncertainty remains regarding the time frame under which the DOE will begin to accept spent fuel from Entergy's facilities for storage or disposal. As a result, future expenditures will be required to increase spent fuel storage capacity at Entergy's nuclear plant sites.
As a result of the DOE's failure to begin disposal of spent nuclear fuel in 1998 pursuant to the Nuclear Waste Policy Act of 1982 and the spent fuel disposal contracts, Entergy's nuclear owner/licensee subsidiaries have incurred and will continue to incur damages.; These subsidiaries in November 2003 began litigation to recover the damages caused by the DOE's delay in performance. Management cannot predict the timing or amount of any potential recovery.
Pending DOE acceptance and disposal of spent nuclear fuel, the owners of nuclear plants are responsible for their own spent fuel storage. Current on-site spent fuel storage capacity at Grand Gulf 1, River Bend, and Waterford is estimated to be sufficient until approximately 2007, 2006, and 2012, respectively; dry cask storage facilities are planned to be placed into service at these units in 2007, 2005, and 2011, respectively. An ANO storage facility using dry casks began operation in 1996 and has been expanded since and will be further expanded 135

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy as needed. The spent fuel storage facility at Pilgrim is licensed to provide enough storage capacity until approximately 2012. The first dry spent fuel storage casks wete loaded at Fitzpatrick in 2002, and further casks will be loaded there as needed. Indian Point and Vermont Yankee currently have sufficient spent fuel storage capacity until approximately 2006 and 2007, respectively; dry cask storage facilities are planned to begin operation at both sites in 2006. Implementation of dry cask storage at Vermont Yankee is currently the subject of pending legislative and regulatory proceedings in Vermont.
Nuclear Plant Decommissioning
                        *-Jo,   ,U                        t '   i *w A w)>lj ' i v e     . '. >     ; i Ut              e Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy recover from customets through electric rates the estimated decommissioning costs for ANO, the portion of River Bend subject to retail rate regulation, Waterford 3, and Grand Gulf, respectively. These amounts are deposited in trust funds that can only be used for future decommissioning costs. Entergy periodically reviews and updates estimated decommissioning costs to reflect inflation and changes in regulatory requirements and technology, and then makes applications to the regulatory authorities to reflect, in rates, the changes in projected decommissioning costs.                   - .
In June 2001, Entergy Arkansas received notification from the NRC of approval for a renewed operating license authorizing operations at ANO 1 through May 2034. In October 2003, a request was filed with the NRC to extend the operating license of ANO 2 for an additional 20 years. The APSC ordered Entergy Arkansas to use a 20-year life extension assumption for ANO 1 and 2, which resulted in the cessation of the collection of funds to decommission ANO 1 and 2 beginning in 2001. Entergy Arkansas' projections show that with the assumption of 20 years of extended operational life for both units, the current fund balance with earnings over the extended life will be sufficient to decommission both units. Every five years, Entergy Arkansas is required by the APSC to update the estimated costs to decommission ANO. In March 2003, Entergy Arkansas filed with the APSC its third five-year estimate of ANO decommissioning costs. The updated estimate- indicated the current cost to decommission the two ANO units would be, $936 million compared to $813 million in the 1997 estimate. In September 2003, the APSC approved a stipulation, between the APSC Staff andEntergy Arkansas resolving issues in the decommissioning cost estimate proceeding. Entergy Arkansas and the APSC Staff agreed to exclude, at this time, certain spent fuel management costs because of uncertainty associated with the responsibility of the DOE for all or a portion of those costs as a result of Entergy Arkansas' contract with the DOE to start taking spent fuel from ANO beginning in 1998. Entergy Arkansas reserves the right.to seek a decision from the APSC on this issue prior to the next required decommissioning cost filing should significant changes in relevant facts and circumstances warrant.
In December 2002, the LPSC approved a settlement between Entergy Gulf States and the LPSC staff. The settlement included, among other things, the approval to cease collection of funds to decommission River Bend based on an assumed license extension for River Bend.                           t   . ,       . ..      *- 1' ',,J.-fl3    1    riJ
                                                                                                                                   &#x17d;j As part of the Pilgrim, Indian Point 1 and 2, and Vermont Yankee purchases, Boston Edison, Consolidated Edison, and VYNPC, respectively, transferred decommissioning trust funds, along -with the liability to decommission the plants, to Entergy. Entergy believes that the decommissioning trust funds will be adequate to cover future decommissioning costs for these plants without any additional deposits to the trusts. wi :.f                ; t it U-,!i For the Indian Point 3 and FitzPatrick plants purchased in 2000, NYPA retained the decommissioning trusts and the decommissioning liability. NYPA 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 NYPA, 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 contributions to the trusts. In conjunction with the Pilgrim acquisition, Entergy received Pilgrim's decommissioning trust fund. Entergy believes that Pilgrim's decommissioning fund will be adequate to cover future decommissioning costs for the plant without any additional deposits to the trust. As part of the Indian Point 1 and 2 purchase, Consolidated Edison transferred the decommissioning trust fund and the liability 'to decommission Indian Point 1 and 2 to Entergy. Entergy also funded an additional $25 million to the decommissioning trust fund and believes that the trust will be adequate to cover future decommissioning costs for 136

Part I Item 1 Entergy Corporation, Domestic utility companies, and System Energy Indian Point 1 and 2 without any additional deposits to the trust.                                                                                  uJ             j                 II JLi     !
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:f njyj;ijr;                                   :iiiti The Energy Policy Act of 1992 requires all electric utilities (including Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy) that purchased uranium enrichment services from the DOE to contribute up to a total of $150 million annually over approximately 15 'years (adjusted for inflation, up to a total of
$2.25 billion) for decontamination and decommissioning of enrichment facilities. At December 31, 2004, two years of assessments remain. In accordance with the Energy Policy Act of 1992, contributions to decontamination and decommissioning funds are recovered through rates in the same nWamner-as other fuel costs. The estimated annual contributions by Entergy for decontamination and decommissioning fees are discussed in, Note 8 to the financial statements. Entergy will oppose any 'attempts to extend the assessments past this date, but cannot state with certainty that an extension will not be made.                                                                                                               * -    a.'         '        .                            'iiI     1  4i Price-Anderson Act                                                                                                                                                                              -                     Ati
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The Price-Anderson Act limits public liability for a single nuclear incident to approximately $100.6 million per reactor (with currently 104 nuclear industry reactors participating). 'Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, System Energy, and Entergy's Non-Utility Nuclear business have protection with respect to this liability through a combination of private insurance and an industry assessment program, as well as insurance for property damage, costs of replacement power, and other risks relating to "nuclear generating units. Insurance applicable to the nuclear programs of Entergy is discussed in Note 8 to the financial statements.                                                                                                              .
Environmental Regulation                                      ;.--t ? 'i'r3            1fi50                    1sJ..Jlotir fl        to ncV-trii~$,              :. PJ   JI I      '3ZTi                    'J'Ajkt                  Lif}Z1
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  '.w.i..Entergy's                 facilities and operations are' subject to regulation by various governmental authorities having jurisdiction over air quality, water quality, control of toxic substances 'and hazardous and solid wastes, and other environmental matters. Management believes that its affected companies are in substantial compliance with environmental regulations currently applicable to their facilities and operations. Because environmental regulations are subject to change, future compliance costs cannot be precisely estimated.
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The Clean Air Act and its subsequent Amendments (the Clean Air Act) established several programs that currently or in the future may affect Entergy's fossil-fueled generation facilities:
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* New source review and preconstruction permits for new sources -of criteria air pollutants and significant modifications to existing facilities; i       Acid rain program for control of sulfur dioxide (SO 2 ) and nitrogeni oxides (NO,);                                                                                                        *i          3.. 3.
* OZone noh-attainmnt -drea'pMgfdram for control of NO, 'aid volatile organic conipounds; ta
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Preconstruction permits are required for new facilities and for existing facilities that inderg6'a rnodification that is not classified as routine repair, maintenance, or replacement. Units that undergo a non-routine modification must obtain a perini miodicatin6i! and miay le required 'to insital adlitiinal air pollution cl6htrol technologies.
Entergy has an 6ikstAid'p~toceds for iientifying ffi                                                                                                      additionial permitting approval and as followed the"e ieuatlds'aiN'd                            as-sociated             guidnce                pv6~ideddby'the'fii                      teVsaiind   the federal govenhiletf with reard to 137

Part I Item 1 Entergy Corporation, Domestic utility companies, and System Energy the determination of routine repair, maintenance, and replacement. In recent years, however, EPA has begun an enforcement initiative, aimed primarily at coal plants, to identify modifications that it does not consider routine and that have failed to obtain a permit modification. Entergy to date has not been included in any of these enforcement actions. Nevertheless, various courts and EPA have been inconsistent in their judgments regarding what modifications are considered routine. In 2003, EPA promulgated a rule to attempt to clarify this issue, but the rule has been challenged in the United States Court of Appeals for the District of Columbia Circuit, and its effectiveness has been stayed by the court. In June 2004, EPA granted a request to reconsider certain aspects of the rule.
Acid Rain Program The Clean Air Act provides SO2 allowances to most of the affected Entergy generating units for emissions based upon past emission levels and operating characteristics. Each allowance is an entitlement to emit one ton of SO2 per year. Plant owners are required to possess allowances for SO2 emissions from affected generating units.
Virtually all Entergy fossil-fueled generating units are subject to SO2 allowance requirements. Entergy could be required to purchase additional allowances when it generates power using fuel oil. Fuel oil usage is determined by economic dispatch and influenced by the price of natural gas, incremental emission allowance costs, and the availability and cost of purchased power.
Ozone Non-attainment Entergy Gulf States and Entergy Louisiana each operate fossil-fueled generating units in geographic areas that are not in attainment of the currently-enforced national ambient air quality standards for ozone. Texas non-attainment areas that impact Entergy are the Houston-Galveston and the Beaumont-Port Arthur areas. In Louisiana, Entergy is affected by the non-attainment status of the Baton Rouge area. Areas in non-attainment are classified as "moderate," "serious," or "severe." When an area fails to meet the ambient air standard, the EPA requires state regulatory authorities to prepare state implementation plans meant to cause progress toward bringing the area into attainment with applicable standards. Texas and Louisiana submitted plans for the Beaumont-Port Arthur and Baton Rouge areas that included an extension of the regulatory deadline to gain attainment. The EPA initially approved these plans and the deadline extensions, but through litigation and a decision of the United States Court of Appeals for the Fifth Circuit in December 2002, the approval of the state plans has been withdrawn as violating provisions and deadlines required by the Clean Air Act.
The EPA has now reclassified the Beaumont-Port Arthur area from "moderate" to "serious" and has reclassified the Baton Rouge area from "serious" to "severe". These actions will require that Texas and Louisiana adopt plans to restrict the emission of certain air pollutants and to make progress toward eventual attainment of national standards. Texas adopted and forwarded to the EPA for approval revisions to the state implementation plan in December 2004. Based on this submittal, Entergy Gulf States believes that new NO, control equipment will not be required at the Beaumont-Port Arthur area facilities. The Louisiana plan revisions were due in June 2004; however, due to legal and regulatory disputes over requirements unrelated to Entergy's interests, the state has chosen to delay the submittal. The final content and effect on Entergy of these developing plans is unknown, but Entergy continues to monitor events in these areas.
In April 2004, EPA issued a final rule, effective June 2005, stating that areas designated as non-attainment under a new 8-hour ozone standard shall have one year to adjust to the new requirements. For Louisiana, the Baton Rouge area would be classified as a "marginal" (rather than "severe") non-attainment area under the new standard with an attainment date of June 2007. For Texas, the BeaumontlPort Arthur area would be designated as a "marginal" (rather than "serious") non-attainment area under the new standard with an attainment date of June 2007 and the Houston-Galveston area would be designated as "moderate" non-attainment under the new standard with an attainment date of June 2010.
Hazardous Air Pollutants In December 2000, the EPA made a determination that coal and oil-fired steam electric generating units should be regulated under the section of the Clean Air Act relating to, emissions of hazardous air pollutants (HAPs).
The principal HAPs of concern are mercury from coal and nickel from oil. The EPA has proposed regulations for 138

Part I Item I Entergy Corporation, Domestic utility companies,,and System,Energy these sources and initially set a deadline of December 2004 for finalizing the rules. Entergy owns units that would be subject to these regulations. The EPA has since postponed finalization of mercury and nickel HAPs regulations until the second quarter of 2005.
The regulations may require coal and oil-fired units to reduce mercury and nickel emissions through various methods, including installation of controls, switching fuels or fuel suppliers, reducing utilization of unity, or some combination of these methods. The earliest expected compliance date for this rule would be 2007, and Entergy could begin to incur costs of compliance as early as 2006 with the work taking up to three years to complete. These costs should be offset by advances in control technology or through the implementation.-of proposed cap and trade provisions which are not final at this time.
Interstate Air Transport In January 2004, the EPA proposed the Interstate Air Quality Rule, renamed the Clean Air Interstate Rule (CAIR), which intends to reduce S02 and NO, emissions from plants in order to improve air quality in the northeastern United States. The EPA has postponed issuing a final rule until the second quarter of,2005. The rule has the potential to require significant pollution control capital and/or operating costs (including any potential impacts to the value of SO2 allowances). Entergy's capital investment and annual operation and maintenance allowance purchase costs will depend on the economic assessment of NO. and S02 allowance markets, cost of control technologies, and unit usage as well as other uncertainties described below.
The capital financial impact could be offset by proposed emission markets which would allow operation and maintenance purchases or use of allocated credits; however, the allocation of the emission allowances and the set up of the market will determine the ultimate cost to Entergy. Entergy is concerned that the allocation may be unfairly skewed towards states with relatively higher emissions. Entergy will continue to study the proposed rule's impact to its generation fleet and will work to ensure that all states are treated fairly in the allocation of emission credits.                                                 i In May 2004, the EPA re-proposed the Best Retrofit Control Technology (BART) regulations which could potentially result in a requirement to install S02 pollution control technology on certain of Entergy's coal and. oil generation units. The impact of this proposed rule is unclear, but could result in significant increased capital and operating costs on certain units:
Future Legislative and Regulatory Developments In addition to the specific-instances described above, there are a number of legislative and- regulatory initiatives relating to the reduction of emissions that are under consideration at the federal, state, and international level. Because of the nature of Entergy's business, the adoption of each of these could affect its operations.;- These initiatives include:
* designation by the EPA and state environmental agencies of areas that are not in attainment with national ambient air quality standards;
* EPA initiatives related to regional haze;
* introduction of several bills in Congress proposing firther limits on NOR, SO2 , mercury, or limits on carbon dioxide (CO2) emissions; and
* pursuit by the Bush administration of a voluntary program intended to reduce C02 emissions.
Entergy continues to monitor these actions in order to analyze their potential operational and cost implications. In anticipation of the potential imposition of CO2 emission limits on the electric industry in the future, Entergy has initiated actions designed to reduce its exposure to potential new governmental requirements related to C0 2 emissions. These actions include establishment of a formal program to stabilize power plant CO2 emissions at year 2000 levels through 2005 and support for national legislation that would increase planning certainty for electric utilities while addressing emissions in a, responsible and flexible manner. iBy virtue of its proportionally large investment in low or non-emitting gas-fired and nuclear generation technologies, Entergy's overall C02 emission "intensity," or rate of C02 emitted per kilowatt-hour of electricity generated, is already among 139

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy the lowest in the industry. Total CO2 emissions representing the company's ownership share of power plants in the United States were approximately 53.24 million tons in 2000, 49.58 million tons in 2001, 44.20 million tons in 2002, 36.78 million tons in 2003, and 38.28 million tons in 2004.
Clean Water Act The 1972 amendments to the Federal Water Pollution Control Act (known as the Clean Water Act or CWA) provide the statutory basis for the National Pollutant Discharge Elimination System (NPDES) permit program and the basic structure for regulating the discharge of pollutants from point sources to waters of the United States. The CWA requires all discharges of pollutants to waters of the United States to be permitted.
316(b) Cooling Water Intake Structures The EPA finalized new regulations in July 2004.governing the intake of water at large existing power plants that employ cooling water intake structures. The rule seeks to reduce perceived impacts on aquatic resources by requiring covered facilities to implement technology or other measures to meet EPA-targeted reductions in water use and corresponding perceived aquatic impacts. Entergy, other industry members and industry groups, environmental groups, and a coalition of northeastern and mid-Atlantic states have challenged various aspects of the rule. This challenge currently is lodged in the United States Court of Appeals for the Second Circuit in New York City after a motion to transfer from the Ninth Circuit in San Francisco was granted in December 2004.
Entergy's non-utility nuclear generation business is currently in various stages of the data evaluation and discharge permitting process for its generation facilities. Indian Point is involved in an administrative permitting process with the New York environmental authority for renewal of the Indian Point 2 and 3 discharge permits. In November 2003, the New York State Department of Environmental Conservation (NYDEC) issued a draft permit indicating that closed cycle cooling would be considered the "best technology available" for minimizing perceived adverse environmental impacts attributable to the intake and discharge of cooling water at Indian Point 2 and 3.
The draft permit would require Entergy to take certain steps to assess the feasibility of retrofitting the site to install cooling towers before re-licensing Indian Point 2 and 3, whose current licenses with the NRC 'expire in 2013 and 2015. The draft permit could also require, upon its becoming effective, the facilities to take an annual 42' unit-day outage and provide a payment into a NYDEC account until the start of cooling tower construction. Entergy is participating in the administrative process in order to have the draft permit modified prior to final issuance and opposes any requirement to install cooling towers or to begin annual outages at Indian Point 2 and 3. Accordingly, Entergy also has filed a separate action in New York state court seeking a determination that the state cooling water intake structure regulation underpinning the NYDEC's draft permit for Indian Point 2 and 3 was improperly promulgated and is thus void. The New York trial court dismissed Entergy's claim, and Entergy has appealed to the New York Court of Appeals. Pilgrim received approval from EPA allowing the full 3 1/2-year schedule for compliance demonstration as is outlined in the new rule and will also pursue appropriate supplementation of the existing record regarding perceived impacts, options and costs. Entergy's other Non-Utility Nuclear generation facilities are in the process of reviewing data, considering implementation options, providing information required by the current rule to EPA and the affected states, and requesting the 3 1/2-year submission schedule allowed by the rule, where necessary.
Oil Pollution Prevention Regulation The EPA published a revised Oil Pollution Prevention rule in July 2002., The rule affects Entergy's operation of its approximately 3,500 transmission and distribution electrical equipment installations that are potentially subject to the rule. While the published rule provides a great deal of flexibility to the regulated community insofar as allowable strategies, it also provided the EPA with a great deal of discretion in evaluation of a facility's compliance with the rule. In September 2004, EPA solicited comments on alternative management strategies for oil-filled electrical equipment that were proposed by the Utility Solid Waste Activities Group and Entergy.       Entergy is currently in the final stages of revising existing Integrated Response Plans and Spill Prevention, Control and Countermeasures Plans to meet the requirements of the rule and does not expect significant compliance costs.
140

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Comprehensive Environmental Response. Compensation. and Liability Act of 1980 The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (CERCLA), authorizes the EPA and, indirectly, the states, to mandate clean-up, or reimbursement of clean-up costs, by owners or operators of sites from which hazardous substances may be or have been released. Parties that transported hazardous substances to these sites or arranged for the disposal of the substances are also deemed liable by CERCLA. -CERCLA has been interpreted to impose strict, joint, and several liability on responsible parties.
The domestic utility companies have sent waste materials to various disposal sites over the years. In addition, environmental laws now regulate certain of the companies' operating procedures and maintenance practices which historically were not subject to regulation. Some disposal sites used by Entergy have been the subject of governmental action under CERCLA, resulting in site clean-up activities. The domestic utility companies have participated to various degrees in accordance with their respective potential liabilities in such site clean-ups and have developed experience with clean-up costs. The affected companies have established reserves for such environmental clean-up and restoration activities. Details of material CERCLA liabilities are discussed for each operating company in the "Other Environmental Matters" section below.
Other Environmental Matters Entergy Gulf States Several class action and other suits have been filed in state and federal courts seeking relief from Entergy Gulf States and others for damages caused by the disposal of hazardous waste and for asbestos-related disease allegedly resulting from exposure on Entergy Gulf States' premises (see "Litigation" below).
Entergy Gulf States is currently involved in a remedial investigation of the Lake Charles Service Center site, located in Lake Charles, Louisiana. A manufactured gas plant (MGP) is believed to have operated at this site from approximately 1916 to 1931. Coal tar, a by-product of the distillation process employed at MGPs, was apparently routed to a portion of the property for disposal. The same area has also been used as a landfill. In 1999, Entergy Gulf States signed a second Administrative Consent Order with the EPA to perform removal action at the site. In 2002, approximately 7,400 tons of contaminated soil and debris were excavated and disposed of from an area within the service center. In 2003, a cap was constructed over the remedial area to prevent the migration of contamination to the surface. Entergy Gulf States anticipates commencement of a ten-year groundwater monitoring study upon issuance of a negotiated order by the EPA, which is expected to issue the order in early 2005. Entergy Gulf States believes that its ultimate responsibility for this site will not materially exceed its existing clean-up provision of$1.5 million.
In 1994, Entergy Gulf States performed a site assessment in conjunction with a construction project at the Louisiana Station Generating Plant (Louisiana Station). In 1995, a further assessment confirmed subsurface soil and groundwater impact to three areas on the plant site. After validation, a notification was made to the LDEQ and a phased process was executed to remediate each area of concern. The final phase of groundwater clean-up and monitoring at Louisiana Station is expected to continue through 2005. The remediation cost incurred through December 31, 2004 for this site was $6.7 million. Future costs are not expected to exceed the existing provision of
 $0.8 million.
Entergy Louisiana and Entergy New Orleans Several class action and other suits have been filed in state and federal courts seeking relief from Entergy Louisiana and Entergy New Orleans and others for damages caused by the disposal of hazardous waste and for asbestos-related disease allegedly resulting from exposure on Entergy Louisiana's and Entergy New Orleans' premises (see "Litigation" below).
The Southern Transformer Shop located in New Orleans served both Entergy Louisiana and Entergy New Orleans. This transformer shop is now closed and soil and groundwater assessment activities have resumed since the demolition of the onsite buildings and structures was completed in early 2004. Entergy has entered into the Voluntary Remediation Program with the LDEQ and submitted a Site Investigation Workplan. A liability of 141

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy approximately $350,000 has been established for environmental assessment and remediation costs with estimated completion by the end of 2005.
During 1993, the LDEQ issued new rules for solid waste regulation, including regulation of wastewater impoundments. Entergy Louisiana and Entergy New Orleans have determined that certain of their power plant wastewater impoundments were affected by these regulations and chose to remediate and repair or close them.
Completion of this work is pending LDEQ approval. LDEQ has issued notices of deficiencies for certain of these sites. As a result, recorded liabilities in the amounts of $5.8 million for Entergy Louisiana and $0.5 million for Entergy New Orleans existed at December 31, 2004 for wastewater remediation and repairs and closures.
Management of Entergy Louisiana and Entergy New Orleans believes these reserves are adequate based on current estimates.
Entergy Arkansas, Entergy Gulf States, and Entergy Louisiana The Texas Commission on Environmental Quality (Commission) notified Entergy Arkansas, Entergy Gulf States, and Entergy Louisiana in September through November 2003 that the Commission believes those entities are potentially responsible parties (PRPs) concerning contamination existing at the San Angelo Electric Service Company (SESCO) facility in San Angelo, Texas. The facility operated as a transformer repair and scrapping facility from the 1930s until 2003. Both soil and groundwater contamination exists at the site. Entergy Gulf States and Entergy Louisiana sent transformers to this facility during the 1980s. There has been no indication that Entergy Arkansas ever used this facility. Entergy Gulf States, Entergy Louisiana, and Entergy Arkansas have responded to an information request from the Commission and will continue to cooperate in this investigation. It, is likely that Entergy Gulf States and Entergy Louisiana will be required to contribute to the remediation of contaminated groundwater at the site, but the contributions likely will be less than those of other SESCO customers that continued to use the site long after 1990, and the list of PRPs who likely will share in the cost is long. Based on current information, the estimate of Entergy's portion of the liability is $0.6 million.
Entergy New Orleans In March 2004, agents of the United States Fish and Wildlife Service conducted an inspection of Entergy New Orleans' Michoud power plant and found a number of dead brown pelicans near the facility's water intake structure and fish-return trough. Brown pelicans are an endangered species in Louisiana. The United States Attorney's Office for the Eastern District of Louisiana (Attorney's Office) issued a grand jury subpoena to an Entergy New Orleans employee in May 2004 to give evidence regarding the cause of death of the pelicans. The Attorney's Office then agreed to meet with Entergy New Orleans rather than requiring the employee to testify. As a result of that meeting, Entergy New Orleans conducted an internal investigation of the matter and submitted a report to the Attorney's Office in August 2004. Entergy New Orleans also constructed an engineered walkway and cover over the intake structure and feeding trough to eliminate pelican access to the area. Entergy New. Orleans continues negotiations with the Attorney's Office regarding final resolution of this matter.
Litliration Certain states in which Entergy operates have proven to be unusually litigious environments. Judges and juries in Louisiana, Mississippi, and Texas have demonstrated a willingness to grant large verdicts, including punitive damages, to plaintiffs in personal injury, property damage, and business tort cases. Entergy uses legal and appropriate means to contest litigation threatened or filed against it, but the litigation environment in these states poses a-significant business risk.
Ratenayer Lawsuits (Entergy Corporation, Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and Entergy New Orleans)
Entergy New Orleans Fuel Clause Lawsuit 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 Entergy New 142

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy 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. Plaintiffs allege that Entergy New Orleans and the other defendant Entergy companies conspired to make these purchases 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 by stipulation of the parties pending a decision by the City Council in the proceeding discussed in the next paragraph.
Plaintiffs also filed this complaint with the City Council in order to initiate a review by the City Council of the plaintiffs' allegations and to force restitution to ratepayers of all costs they allege were improperly and imprudently included in the fuel adjustment filings. Testimony was filed on behalf of the plaintiffs in this proceeding asserting, among other things, that Entergy New Orleans and other defendants 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 $100 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 refund to customers of $11.3 million, including interest, during the months of June through September 2004. The resolution concludes, among other things, that the 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. The plaintiffs have appealed the City Council resolution to the state court in Orleans Parish. Oral argument on the plaintiffs' appeal was conducted in February 2005.
Entergy New Orleans Rate of Return Lawsuit In April 1998, a group of residential and business ratepayers filed a complaint against Entergy New Orleans in state court in Orleans Parish purportedly on behalf of all ratepayers in New Orleans. The plaintiffs allege that Entergy New Orleans overcharged ratepayers by at least $300 million since 1975 in violation of limits on Entergy New Orleans' rate of return that the plaintiffs allege were established by ordinances passed by the Council in 1922.
The plaintiffs seek, among other things, (i) a declaratory judgment that such franchise ordinances have been violated; and (ii) a remand to the Council for the establishment of the amount of overcharges plus interest. Entergy New Orleans believes the lawsuit is without merit. Entergy New Orleans has charged only those rates authorized by the Council in accordance with applicable law. In May 2000, a court of appeal granted Entergy New Orleans' exception to jurisdiction in the case and dismissed the proceeding. The Louisiana Supreme Court denied the plaintiff's request for a writ of certiorari. The plaintiffs then commenced a similar proceeding before the Council.
The plaintiffs and the advisors for the Council each filed their first round of testimony in January 2002. In their testimony, the plaintiffs allege that Entergy New Orleans earned in excess of the legally authorized rate of return during the period 1979 to 2000 and that Entergy New Orleans should be required to refund between $240 million and $825 million to its ratepayers. In the testimony submitted by the Council advisors, the advisors allege that Entergy New Orleans has not earned in excess of its authorized rate of return for the period at issue and that no refund is therefore warranted. A hearing scheduled in June 2002 was canceled.
In December 2003, the Council Advisors filed a motion in the Council proceedings to bifurcate the hearing in this matter, such that the effect of the provision of the 1922 Ordinance in setting lawful rates would be considered first. Only if it is determined that this provision establishes a limitation, would the remaining issues be reached. The motion to bifurcate was granted by the City Council in April 2004, and a hearing on the first part of the bifurcated proceeding is currently scheduled to begin in June 2005.
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Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Texas Power Price Lawsuit In August 2003, a lawsuit was filed in the district court of Chambers County, Texas by Texas residents on behalf of a purported class apparently of the Texas retail customers of Entergy Gulf States who were billed and paid for electric power from January 1, 1994 to the present." The named defendants are Entergy Corporatibn, Entergy Services, Entergy Power, Entergy Power Marketing Corp., Arkansas Electric Cooperative Corporation and Vntergy Arkansas. Entergy Gulf States is not a named defendant, but is alleged to be a co-conspirator. The court has granted the request of Entergy Gulf States to intervene in the lawsuit to protect its interests.
Plaintiffs allege that the defendants implemented a "price gouging accounting scheme" to sell to plaintiffs and similarly situated utility customers higher priced power generated by the defendants while' rejecting and/or reselling to off-system utilities, less expensive power offered and/or purchased from off-system suppliers and/or generated by the Entergy system. In particular, plaintiffs allege that the defendants manipulated and continue to manipulate the dispatch of generation so that power is purchased from affiliated expensive resources instead of buying cheaper off-system power.
Plaintiffs estimate that customers in Texas were charged at least $57 million above prevailing market prices for power. Plaintiffs seek actual, consequential and exemplary damages, costs and attorneys' fees;- and disgorgement of profits. In September 2003, the Entergy defendants removed the lawsuit to the federal court in Galveston, and in October 2003, filed a pleading seeking dismissal of the plaintiffs' claims.' In Octobet 2003, the plaintiffs filed a motion to remand the case to state court. In January 2004, the federal court determined that it did not have jurisdiction over the subject matter of the lawsuit, and remanded the case to the state district court in Chambers County. In November 2004, the state district court dismissed the case based on a lack of jurisdiction.
The plaintiffs have initiated appellate proceedings in the Court of Appeals,                '
Entergy Louisiana Formula Ratemaking Plan Lawsuit In May 1998, a group of ratepayers filed a complaint against Entergy Louisiana and the LPSC in state court in East Baton Rouge Parish purportedly on behalf of all Entergy Louisiana ratepayers. The plaintiffs allege that the formula ratemaking plan authorized by the LPSC has allowed Entergy Louisiana to earn amounts in excess of a fair return. The plaintiffs seek, among other things, (i) a declaratory judgment that the formula ratemaking plan is an improper ratemaking practice; and (ii) a refund of the amounts allegedly charged in excess of proper rateniaking practices. This case has not been active, and abandonment issues are being evaluated. At this time, management cannot determine the amount of damages being sought.              '                              .          l' Murphy Oil Lawsuit (Entergy Corporation and Entergy Louisiana)
Residents located near the Murphy Oil Refinery in Meraux, Louisiana filed several lawsuits in state court in St, Bernard Parish, Louisiana against Murphy Oil, Entergy Louisiana, and others for injuries they allegedly suffered as a result of an explosion at the refinery in June 1995. -The lawsuits were consolidated and a class of plaintiffs was certified. Plaintiffs alleged, among other things, that an electrical fault at an Entergy -Louisiana, substation contributed to causing the explosion. Murphy Oil filed a cross-claim against Entergy Louisiana based on the same allegation, in which Murphy Oil seeks recovery of any damages it has paid to the plaintiffs.. Claiborne P. Deming, who became a director of Entergy Corporation in 2002, is the President and Chief Executive Officer of Murphy Oil.
Murphy Oil and other defendants settled with the plaintiffs for $8.8 million, but Entergy Louisiana did not participate in the settlement. After trial for the remaining parties in the proceeding, the judge issued a decision finding Entergy Louisiana 40% responsible and awarding monetary damages, which total approximately $11 million with interest against Entergy Louisiana. Entergy Louisiana appealed the judgment to the Court of Appeals.
Entergy Louisiana has insurance in place for claims of this type, and management does not expect a material adverse financial effect from this decision.                         ,
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Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Fiber Optic Cable Litigation (Entergy Corporation, Entergy Gulf States, and Entergy Louisiana and Entergy Mississippi)
In 1998, a group of property owners filed a class action suit against Entergy Corporation, Entergy Gulf States, Entergy Services and Entergy Technology Holding Company in state court in Jefferson County, Texas purportedly on behalf of all property owners in each of the states throughout the Entergy service area who have conveyed easements to the defendants. The lawsuit alleged that Entergy installed fiber optic cable across their property without obtaining appropriate easements. The plaintiffs sought actual damages for the use of the land and a share of the profits made through use of the fiber optic cables and punitive damages. The state court petition was voluntarily dismissed, and the plaintiffs commenced a class action suit with the same claims in the United States District Court in Beaumont, Texas. Both sides have filed motions for summary judgment, which were heard by the court in late 2001. In 2003, the district judge ruled that as a matter of law, all of the Texas easements permit Entergy to utilize the fiber for their own communications. Further, the court ruled that approximately two-thirds of the Texas easements allow Entergy to use the fiber for external or third party communications. Entergy believes that any damages suffered by the remaining one-third plaintiff landowners are negligible and that there is no basis for the claim seeking a share of profits. In April 2004, the trial court entered an order denying the plaintiffs' request that this case be certified as a class. The plaintiffs have appealed this ruling to the United States Court of Appeals for the Fifth Circuit. At this time, management cannot determine the specific amount of damages being sought.
Several property owners have filed a class action suit against Entergy Louisiana, Entergy Services, ETHC, and Entergy Technology Company in state court in St. James Parish, Louisiana purportedly on behalf of all property owners in Louisiana who have conveyed easements to the defendants. The lawsuit alleges that Entergy installed fiber optic cable across their property without obtaining appropriate easements. The plaintiffs seek actual damages for the use of the land and a share of the profits made through use of the fiber optic cables and punitive damages.
Entergy removed the case to federal court in New Orleans; however, the District Court remanded the case back to state court. While Entergy appealed this ruling, recently the United States Court of Appeals for the Fifth Circuit denied this appeal. In December 2003, the trial court held a hearing to determine if a class should be certified. On February 18, 2004, the trial court entered an order certifying this matter as a class. Entergy has appealed this ruling to the Louisiana Fifth Circuit Court of Appeals, and oral arguments have been held. At this time, management cannot determine the specific amount of damages being sought.
Several property owners have filed separate lawsuits against Entergy Corporation, Entergy Mississippi, Entergy Services, ETHC, and ETC in state court in various counties in Mississippi alleging that Entergy Mississippi installed fiber optic cable across their properties without obtaining appropriate easements. The plaintiffs seek actual damages for the use of the land, a share of the profits made through use of the fiber optic cables, and at least $20 million in punitive damages in one case, and an unspecified amount of punitive damages in the other cases.
Asbestos and Hazardous Waste Suits (Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans)
Numerous lawsuits have been filed in federal and state courts in, Texas, Louisiana, and Mississippi primarily by contractor employees in the 1950-1980 timeframe against Entergy Gulf States, Entergy Louisiana, Entergy New Orleans, and Entergy Mississippi as premises owners of power plants, for damages caused by alleged exposure to asbestos or other hazardous material. Many other defendants are named in these lawsuits as well.
Currently, there are approximately 480 lawsuits involving approximately 10,000 claims. Reserves have been established that should be adequate to cover any exposure. Additionally, negotiations continue with insurers to recover more reimbursement, while new coverage is being secured to minimize anticipated future potential exposures. Management believes that loss exposure has been and will continue to be handled successfully so that the ultimate resolution of these matters will not be material, in the aggregate, to the companies' financial position or results of operation.
145

Part I Item I Entergy Corporation, Domestic utility companies, and System Energy Employment Litigation (Entergy Corporation, Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)
Entergy Corporation and the domestic utility companies are defendants in numerous lawsuits that have been filed by former employees alleging that they were wrongfully terminated and/or discriminated against on the basis of age, race, sex, and/or other protected characteristics. Entergy Corporation and the domestic utility companies are vigorously defending these suits and deny any liability to the plaintiffs. However, no assurance can be given as to the outcome of these cases, and at this time management cannot estimate the total amount of damages sought.
Included in the employment litigation are two cases filed in state court in Claiborne County, Mississippi in December 2002. The two cases were filed by former employees of Entergy Operations who were based at Grand Gulf. Entergy Operations and Entergy employees are named as defendants. The cases make employment-related claims, and seek in total $53 million in alleged actual damages and $168 million in punitive damages. Entergy subsequently removed both proceedings to the federal district in Jackson, Mississippi. Entergy cannot predict the ultimate outcome of this proceeding.
Research Spendin2 Entergy is a member of the Electric Power Research Institute (EPRI). EPRI conducts a broad range of research in major technical fields related to the electric utility industry. Entergy participates in various EPRI projects based on Entergy's needs and available resources. The domestic utility companies contributed $1.6 million in 2004, $1.5 million in 2003, and $2.1 million in 2002 to EPRI. The Non-Utility Nuclear business contributed
$3.2 million in 2004 and $3 million in both 2003 and 2002 to EPRI.
Employees Employees are an integral' part of Entergy's commitment to serving its customers. As of December 31, 2004, Entergy employed 14,425 people.
U.S. Utility:
Entergy Arkansas                      1,494 Entergy Gulf States                   1,641
                                         -Entergy Louisiana                       943 Entergy Mississippi                    '793 Entergy New Orleans                     403 System Energy Entergy Operations                    2,735 Entergy Services                      2,704 Entergy Nuclear Operations              3,245 Other subsidiaries                       *277 Total Full-time                   14,235 Part-time                               190 Total Entergy                     14,425 Approximately 4,900 employees are represented by the International Brotherhood of Electrical Workers Union, the Utility Workers Union of America, and the International Brotherhood of Teamsters Union.
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ENTERGY ARKANSAS, INC.
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS Results of Operations Net Income 2004 Compared to 2003 Net income increased $16.2 million due to lower other operation and maintenance expenses, a lower effective income tax rate for 2004 compared to 2003, and lower interest charges. The increase was partially offset by lower net revenue.
2003 Compared to 2002 Net income decreased $9.6 million due to lower net revenue, higher depreciation and amortization expenses, and   a higher  effective income tax rate for 2003 compared to 2002. The decrease was substantially offset by lower other operation and maintenance expenses, higher other income, and lower interest charges.
Net Revenue 2004 Compared to 2003 Net revenue, which is Entergy Arkansas' measure of gross margin, consists of operating revenues net of: 1) fuel, fuel-related, and purchased power expenses and 2) other regulatory credits. Following is an analysis of the change in net revenue comparing 2004 to 2003.
(In Millions) 2003 net revenue                                   $998.7 Deferred fuel cost revisions                        (16.9)
Other                                                 (3.4) 2004 net revenue                                   $978.4 Deferred fuel cost revisions includes the difference between the estimated deferred fuel expense and the actual calculation of recoverable fuel expense, which occurs on an annual basis. Deferred fuel cost revisions decreased net revenue due to a revised estimate of fuel costs filed for recovery at Entergy Arkansas in the March 2004 energy cost recovery rider, which reduced net revenue by $11.5 million. The remainder of the variance is due to the 2002 energy cost recovery true-up, made in the first quarter of 2003, which increased net revenue in 2003.
Gross operatingrevenues, fuel andpurchasedpower expenses, and other regulatorycredits Gross operating revenues increased primarily due to:
* an increase of $20.7 million in fuel cost recovery revenues due to an increase in the energy cost recovery rider effective April 2004 (fuel cost recovery revenues are discussed in Note 2 to the domestic utility companies and System Energy financial statements);
* an increase of $15.5 million in Grand Gulf revenues due to an increase in the Grand Gulf rider effective January 2004;
* an increase of $13.9 million in gross wholesale revenue primarily due to increased sales to affiliated systems; and
* an increase of $9.5 million due to volume/weather primarily resulting from increased usage during the unbilled sales period, partially offset by the effect of milder weather on billed sales in 2004.
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Entergy Arkansas, Inc.
Management's Financial Discussion and Analysis Fuel and purchased power expenses increased primarily due to increased recovery of deferred fuel and purchased power costs primarily due to an increase in April 2004 in the energy cost recovery rider and the true-ups to the 2003 and 2002 energy cost recovery rider filings.
Other regulatory credits decreased primarily due to the over-recovery of Grand Gulf costs due to an increase in the Grand Gulf rider effective January 2004.
2003 Compared to 2002 Net revenue, which is Entergy Arkansas' measure of gross margin, consists of operating revenues net of: 1) fuel, fuel-related, and purchased power expenses and 2) other regulatory credits. Following is an analysis of the change in net revenue comparing 2003 to 2002.
(In Millions) 2002 net revenue                            $1,095.9 March 2002 settlement agreement               (154.0)
Volume/weather                                  (7.7)
Asset retirement obligation                     30.1 Net wholesale revenue                            16.6 Deferred fuel cost revisions                     10.2 Other                                             7.6 2003 net revenue                              $998.7
         .The March 2002 settlement agreement resolved a request for recovery of ice storm costs incurred in December 2000 with an offset of those costs for funds contributed to pay for future stranded costs. A 1997 settlement provided for the collection of earnings in excess of an 11% return on equity in a transition cost account (TCA) to offset stranded costs if retail open access were implemented.
In mid- and late December 2000, two separate ice storms left 226,000 and 212,500 Entergy Arkansas customers, respectively, without electric power in its service area. Entergy Arkansas filed a proposal to recover costs plus carrying charges associated with power restoration caused by the ice storms. Entergy Arkansas' final storm damage cost determination reflected costs of approximately $195 million. The APSC approved a settlement agreement submitted in March 2002 by Entergy Arkansas, the APSC staff, and the Arkansas Attorney General. In the March 2002 settlement, the parties agreed that $153 million of the ice storm costs would be classified as incremental ice storm expenses that can be offset against the TCA on a rate class basis, and any excess of ice storm costs over the amount available in the TCA would be deferred and amortized over 30 years, although such excess costs were not allowed to be included as a separate component of rate base. The allocated ice storm*expenses exceeded the available TCA funds by $15.8 million which was recorded as a regulatory asset in June 2002. In accordance with the settlement agreement and following the APSC's approval of the 2001 earnings review related to the TCA, Entergy Arkansas filed to return $18.1 million of the TCA to certain large general service class customers that paid more into the TCA than their allocation of storm costs. The APSC approved the return of funds to the large general service customer class in the form of refund checks in August 2002. As part of the implementation of the March 2002 settlement agreement provisions, the TCA procedure ceased with the 2001 earnings evaluation.
Of the remaining ice storm costs, $32.2 million was addressed through established ratemaking procedures, including $22.2 million classified as capital additions, while $3.8 million of the ice storm costs was not recovered through rates.-.
The effect on net income of the March 2002 settlement agreement and 2001 earnings review was a $2.2 million increase in 2003, because the decrease in net revenue was offset by the decrease in operation and maintenance expenses discussed below.,
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Entergy Arkansas, Inc.
Management's Financial Discussion and Analysis The volume/weather variance is the result of less favorable sales volume primarily due to the effect of colder winter weather in December 2002.
The asset retirement obligation variance was dueto the implementation of SFAS 143, "Accounting for Asset Retirement Obligations," adopted in January 2003. See "Critical Accounting Estimates" for more details on SFAS 143. The increase was offset by an increase in decommissioning expense and has no effect on net income.
The net wholesale revenue variance was primarily due to an increase in sales volume to Entergy New Orleans pursuant to a purchased power agreement and also due to higher wholesale prices and volume.
Deferred fuel cost revisions includes the difference between the estimated deferred fuel expense and the actual calculation of recoverable fuel expense, which occurs on an annual basis. In 2002, the deferred fuel expense estimate was larger than the actual recoverable fuel expense, which decreased net revenue. In 2003, the actual recoverable fuel expense was larger than the deferred fuel expense estimate, which increased net revenue.
Gross operatingrevenues, fuel andpurchasedpower expenses, and other regulatory credits
         ,.Gross operating.revenues increased primarily due to an increase of $95.7 million in gross wholesale revenue due to the same factors discussed above that increased net wholesale revenue and also due to increased sales to affiliates in addition to the Entergy New Orleans sales mentioned above. The increase was partially offset by a decrease of $74.4 millionin fuel cost recovery revenues due to a decrease ine the annual recovery rider in October 2002.
Fuel and purchased power expenses decreased primarily due to the displacement of higher-priced natural gas generation by lower-priced purchased power and coal generation.
Other regulatory credits decreased primarily due to the March 2002 settlement agreement and 2001 earnings review mentioned above, which increased other regulatory credits in 2002 to offset $159.9 million in other operation and maintenance expenses related to the December 2000 ice storms. The decrease was partially offset by the asset retirement obligation mentioned. above, which increased regulatory, credits in 2003 to offset the increase in decommissioning expense.
Other Income Statement Variances 2004 Compared to 2003 Other operation and maintenance expenses decreased primarily due to voluntary severance accruals of $31.8 million in 2003. The decrease was partially offset by.the following:
* an increase of $6.6 million in customer service support costs; and
     -     an increase of $5.1 million in benefits costs.
Interest charges decreased primarily due to the refinancing of First Mortgage Bonds in mid-2003.
2003 Compared to 2002 Other operation and maintenance expenses decreased primarily due to expenses in 2002 of $159.9 million due to theMarch 2002 settlement agreement and,2001 earnings review which allowed Entergy Arkansas to recover a large majority of 2000 and 2001 ice storm repair expenses through the previously-collected transition cost account amounts (which was offset by a corresponding decrease in other regulatory credits and has no effect on net income). Decreases of $18.7 million in administrative and general expenses and $4.7 million in contract labor costs also contributed to the decrease. The decrease was partially offset by the following:
* voluntary severance accruals of $31.8 million in 2003; and
* an increase of $10.4 million in benefits costs.
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Entergy Arkansas, Inc.
Managernenfs Financial Discussion and Analysis Decommissioning expense increased due to the implementation of SFAS 143, "Accounting for Asset Retirement Obligations." The increase in decommissioning expense was offset by increases in other regulatory credits and interest and dividend income and has no effect on net income.
Depreciation and amortization expenses increased primarily due to an increase in plant in service.
Other income increased primarily due to:
* an increase of $7.3 million in interest and dividend income due to the implementation of SFAS 143, "Accounting for Asset Retirement Obligations." As mentioned above, the increase was offset in decommissioning expense and has no effect on net income; and
* an increase of $4.8 million in the allowance for equity funds used during construction due to an increase in construction work in progress.
Interest charges decreased primarily due to:
* an increase in interest expense in 2002 resulting from a true-up of the annual fuel recovery rider in March 2002 of $4.5 million;
* interest recorded in 2002 of $4.1 million (offset by a corresponding decrease in other regulatory credits and has no effect on net income) on the transition cost account obligation, which was terminated as a result of the March 2002 settlement agreement; and
* an increase in 2003 of $3.0 million in the allowance for borrowed funds used during construction due to an increase in construction work in progress.
Income Taxes The effective income tax rates for 2004, 2003, and 2002 were 38.5%, 45.5%, and 34.5%, respectively. See Note 3 to the domestic utility companies and System Energy financial statements for a reconciliation of the federal statutory rate of 35.0% to the effective income tax rate. The lower effective income tax rate in 2004 compared to 2003 was primarily due to book and tax differences related to utility plant items and flow-through items. Tax reserves not expected to reverse within the next year are reflected as non-current taxes accrued on the balance sheet.
Liquidity and Capital Resources Cash Flow Cash flows for the years ended December 31, 2004, 2003, and 2002 were as follows:
2004              2003             2002 (In Thousands)
Cash and cash equivalents at beginning of period                          $8,834          $95,513         $103,466 Cash flow provided by (used in):
Operating activities                                               446,298           437,520          357,421 Investing activities                                              (269,385)         (337,509)        (249,438)
Financing activities                                                (96,003)        (186,690)        (115,936)
Net increase (decrease) in cash and cash equivalents                80,910          (86,679)          (7,953)
Cash and cash equivalents at end of period                              $89,744            $8,834          $95,513 150

Entergy Arkansas, Inc.
Managemenfs Financial Discussion and Analysis Operating Activities Cash flow from operations increased $8.8 million in 2004 compared to 2003 primarily due to income tax benefits received in 2004, and increased recovery of deferred fuel costs. This increase was substantially offset by money pool activity.
In 2003, the domestic utility companies and System Energy filed, with the IRS, a change in tax accounting method notification 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 provided under the IRS capitalization regulations. The cumulative adjustment placing these companies on the new methodology resulted in a $1.171 billion deduction for Entergy Arkansas on Entergy's 2003 income tax return. There was -no cash benefit from the method change in 2003. In 2004, Entergy Arkansas realized $173 million in cash tax benefit from the method change. This tax accounting method change is an issue across the utility industry and will likely be challenged by the IRS on audit.
As of December 31, 2004, Entergy Arkansas has a net operating loss (NOL) carnyforward for tax purposes of $766.9 million, principally resulting from the change in tax accounting method related to cost of goods sold. If the tax accounting method change is sustained, Entergy Arkansas expects to utilize the NOL carryforward through 2006.
Cash flow from operations increased $80.1 million in 2003 compared to 2002 primarily due to income taxes paid of $2.2 million in 2003 compared to income taxes paid of $83.9 million in 2002, and money pool activity. ! This increase was partially offset by decreased recovery of deferred fuel costs in 2003.
Entergy Arkansas' receivables from or (payables to) the money pool were as follows as of December 31 for each of the following years:
2004             2003            2002            2001 (In Thousands)
                                        $23,561        ($69,153)         $4,279          $23,794 Money pool activity used $92.7 million of Entergy Arkansas' operating cash flow in 2004, provided $73.4 million in 2003, and provided $19.5 million in 2002. See Note 4 to the domestic utility companies and System Energy financial statements for a description of the money pool.
Inyesting Activities The decrease of $68.1 million in net cash used in investing activities in 2004 compared to 2003 was primarily due to a decrease in construction expenditures resulting from   rless transmission upgrade work requested by merchant generators    in 2004 combined    with lower  spending on customer support projects in 2004.'
The increase' of $88.1 million in net cash 'used in investing activities in 2003 compared to 2002 was primarily due to an increase in construction expenditures of $57.4 million and the maturity of $38.4 million of other temporary investments in the first quarter of 2002. Construction expenditures increased in 2003 primarily due to the following:
* a FERC ruling that shifted responsibility for transmission upgrade work performed for independent power producers to Entergy Arkansas; and
* the ANO 1 steam generator, reactor vessel head, and transformer replacement project.
Financing Activities The decrease of $90.7 million in net cash used in financing activities in 2004 compared to 2003 was primarily due to the net redemption of $2.4 million of long-term debt in 2004 compared to $109.3 million in 2003, partially offset by the payment of $16.2 million more in common stock dividends during the same period.
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Entergy Arkansas, Inc.
Management's Financial Discussion and Analysis The increase of $70.8 million in net cash used in financing activities in 2003 compared to 2002 was primarily due to the net redemption of $109.3 million of long-term debt in 2003 compared to the net issuance of
 $18.4 million in 2002, partially offset by the payment of $56.3 million less in common stock dividends during the same period.
See Note 5 to the domestic utility companies and System Energy financial statements for details on long-term debt.
Uses of Capital Entergy Arkansas requires capital resources for:
* construction and other capital investments;
* debt and preferred stock maturities;
* working capital purposes, including the financing of fuel and purchased power costs; and
  /
* dividend and interest payments.
Following are the amounts of Entergy Arkansas' planned construction and other capital investments, existing debt and lease obligations, and other purchase obligations:
2005      2006-2007        2008-2009      after 2009       Total (In Millions)
Planned construction and capital investment (1)                          $321            $455               N/A         N/A           $776 Long-term debt                                    $147               $          .     $1       $1,191        $1,339 Capital lease payments                             $10              $9                $2            $2          $23 Operating leases                                   $24             $38               $23          $54          $139 Purchase obligations (2)                          $433            $832              $827       $2,840        $4,932 Nuclear fuel lease obligations (3)                 $42             $52               N/A         N/A            $94 (1)     Includes approximately $175 to 180 million annually for maintenance capital, which is planned spending on routine capital projects that are necessary to support reliability of service, equipment or systems and to support normal customer growth.
(2)     Purchase obligations represent the minimum purchase obligation or cancellation charge for' contractual obligations to purchase goods or services. For Entergy Arkansas almost all of the total consists of unconditional fuel and purchased power obligations, including its obligations under the Unit Power Sales Agreement, which is discussed in Note 8 to the domestic utility companies and System Energy financial statements.
(3)     It is expected that additional financing under the leases will be arranged as needed to acquire additional fuel, to pay interest, and to pay maturing debt. If such additional financing cannot be arranged, however, the lessee in each case must repurchase sufficient nuclear fuel to allow the lessor to meet its obligations.
In addition to these contractual obligations, Entergy Arkansas expects to contribute $20.6 million to its pension plans and $16.1 million to other postretirement plans in 2005.
On July 25, 2002, the Board authorized Entergy Arkansas and Entergy Operations' to replace the ANO I steam generators and reactor vessel closure head. Entergy management estimates the cost of the fabrication and replacement to be approximately $235 million, of which approximately $96 million has been incurred through 2004.
 $115 million is expected to be incurred in 2005, with the remainder of the costs expected in 2006. Management expects that the replacement will occur during a planned refueling outage in 2005. Entergy Arkansas filed with the APSC in January 2003 a request for a declaratory order thatthe investment in the replacement is in the public interest.
The APSC issued the requested order in May 2003. This order is analogous to the order received in 1998 prior to the replacement of the ANO 2 steam generators. See "Nuclear Matters" below for further discussion of the replacement of the ANO I steam generators and reactor vessel closure head.
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Entergy Arkansas, Inc.
Management's Financial Discussion and Analysis In addition to the steam generators and reactor vessel closure head replacement, the planned capital investment estimate for Entergy Arkansas also reflects capital required to support existing business and customer growth. The estimated capital expenditures are subject to periodic review and modification and may vary based on the ongoing effects of regulatory constraints, market volatility, economic trends, environmental compliance, and the ability to access capital. Management provides more information on long-term debt and preferred stock maturities in Notes 5 and 6 to the domestic utility companies and System Energy financial statements.
As a wholly-owned subsidiary, Entergy Arkansas pays dividends to Entergy Corporation from its earnings at a percentage determined monthly. Entergy Arkansas' long-term debt indentures restrict the amount of retained earnings available for the payment of cash dividends or other distributions on its common and preferred stock. As of December 31, 2004, Entergy Arkansas had restricted retained earnings unavailable for distribution to Entergy Corporation of $394.9 million.
Sources of Capital Entergy Arkansas' sources to meet its capital requirements include:
* internally generated funds;
* cash on hand;
* debt or preferred stock issuances; and
* bank financing under new or existing facilities (Entergy Arkansas has a 364-day credit facility available with an expiration date of April 2005 in the amount of $85 million, of which none was drawn at December 31, 2004).
Entergy Arkansas issued first mortgage bonds in 2004 as follows:
Issue Date         Description           Maturity                 Amount (In Thousands)
October 2004        6.38% Series       November 2034                   $60,000 The proceeds were used to redeem junior subordinated debentures as follows:
Retirement         Description           Maturity                 Amount Date (In Thousands)
November 2004       8.50% Series       September 2045                   $61,856 Entergy Arkansas may refinance or redeem debt and preferred stock prior to maturity, to the extent market conditions and interest and dividend rates are favorable.
All debt and common and preferred stock issuances by Entergy Arkansas require prior regulatory approval.
Preferred stock and debt issuances are also subject to issuance tests set forth in corporate charters, bond indentures, and other agreements. Entergy Arkansas has sufficient capacity under these tests to meet its foreseeable capital needs.
Short-term borrowings by Entergy Arkansas, including borrowings under the money pool, are limited to an amount authorized by the SEC, which is $235 million. Under its SEC Order and without further authorization, Entergy Arkansas cannot incur additional short-term indebtedness unless (a) it and Entergy Corporation maintain a common equity ratio of at least 30% and (b) with the exception of money pool borrowings, the security to be issued (if rated) and all outstanding securities of Entergy Arkansas, as well as all outstanding securities of Entergy Corporation, that are rated, are rated investment grade. See Note 4 to the domestic utility companies and System Energy financial statements for further discussion of Entergy Arkansas' short-term borrowing limits.
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Management's Financial Discussion and Analysis Signiflcant Factors and Known Trends Utility Restructuring In April 1999, the Arkansas legislature enacted Act 1556, the Arkansas Electric Consumer Choice Act, providing for competition in the electric utility.industmy through retail open access. In December 2001, the APSC recommended to the Arkansas General Assembly that legislation be enacted during the 2003 legislative session to either repeal; Act 1556 or, further delay retail open access until at. least 2010. In February 2003, the Arkansas legislaturt voted to repeal Act 1556 and the repeal was signed into law by the governor.
At.;    C    restruct i  g  .t th whole       .l'.elha   beu
        ' At FERC, restructuring at the wholesale level has begun but has been delayed. It is too early to predict the ultimate effects of changes in U.S. energy markets. Restructuring issues are complex and are continually affected by events at the national, regional, state, and local levels. However, these changes may result, in the long term, in fundamental changes in the way traditional integrated utilities and holding company systems, like the Entergy system, conduct their business. Some of these changes may be positive for Entergy, while others may not.
System Agreement Proceedings The domestic utility companies historically have engaged in the coordinated planning, construction, and operation of generating and transmission facilities under the terms of an agreement called the System Agreement that has been approved by the FERC. Litigation involving the System Agreement is being pursued by the LPSC at both the' FERC and before itself. These proceedings include challenges to the allocation of costs as defined by the System Agreement, raise questions of imprudence by the domestic utility companies in their execution of the System Agreement, and seek support for local regulatory authority over System Agreement issues. Regarding the proceeding at the LPSC, Entergy believes that state and'local regulators are preempted by federal law from reviewing and deciding System Agreement issues for themselves. An unrelated case between the LPSC and Entergy Louisiana raised the question of w'hether- a state regulator is preempted by federal law from reviewing and interpreting FERC rate schedules that are part of the System Agreement, and from subsequently enforcing that interpretation. The LPSC interpreted a System Agreement rate schedule in the unrelated case, and then sought to enforce its interpretation. The Louisiana Supreme Court affirmed the LPSC's decision. In 2003, the U.S. Supreme Court ruled in Entergy Louisiana's favor and reversed the decisions of the LPSC and the Louisiana Supreme Court.
In February 2004, a FERC ALJ issued an Initial Decision in the LPSC-initiated proceeding at the FERC.
The Initial Decision decided some issues in favor of the relief sought by the LPSC, and decided some issues against the relief sought by the LPSC.. Several parties, including Entergy, the LPSC, the APSC, the MPSC, the City Council, and the FERC Staff, filed briefs on exceptions in response to the ALUs Initial Decision. Entergy's exceptions to the ALUs Initial Decision include: the practical effect of the Initial Decision is full production cost equalization, which was rejected in the Initial Decision'and previously has been' rejected by the FERC; resource planning for the Entergy System would be impeded if the Initial Decision were adopted; the remedy in the Initial Decision is inconsisteiit with the history, structure, and precedent regarding the System Agreement; the Initial Decision's remedy ignores the historical pattern of production cost disparities on the Entergy System and would result in substantial, sudden transfers of costs between groups of Entergy customers; the numerical standards proposed in the Initial' Decision are arbitrary and are so complex that they will be difficult to implement; the Initial Decision' improperly 'rejected Entergy's resource planning remedy; the Initial Decision erroneously determined that the, full costs of the Vidalia'project should be included in Entergy Louisiana's production costs for purposes of calculating relative production costs; and the Initial Decision erroneously adopted a new method of calculating reserve&sharing costs rather than the current method. i If the FERC grants the relief requested by the LPSC in the proceeding, the relief may result in a material increase'in the total production costs the FERC allocates to companies whose costs currently are projected to be less than the Entergy Sytem' average, and a material decrease-in the total production costs the FERC allocates to companiesg'whose costs currently are*projected to exceed that average. If the FERC adopts the AL's Initial Decision, the amount of production costs that would be reallocated among the domestic utility companies would be determined through consideration of each domestic utility company's relative total production cost expressed as a percentage of Entergy System average total production cost. The AL's Initial Decision would reallocate production 154

Entergy Arkansas, Inc.
Managemenfs Financial Discussion and Analysis costs of the domestic utility companies whose percent of Entergy System average production cost are outside an upper or lower bandwidth. This would be accomplished by payments from domestic utility companies whose production costs are below Entergy System average production cost to domestic utility companies whose production costs are above Entergy System average production cost.
An assessment of the potential effects 'of the AL's Initial Decision requires assumptions regarding the future total production cost of each domestic utility company, which assumptions include the mix of solid fuel and gas-fired generation available to each company and the costs of natural gas and purchased power. Entergy Louisiana and Entergy Gulf States are more dependent upon gas-fired generation than Entergy Arkansas, Entergy Mississippi, or Entergy New Orleans. Of these, Entergy Arkansas is the least dependent upon gas-fired generation.
Therefore, increases in natural gas prices likely will increase the amount by which Entergy Arkansas' total production costs are below the average production costs of the domestic utility companies. Considerable uncertainty exists regarding future gas prices. Annual average Henry Hub gas prices have varied significantly over recent years, ranging from $1.72/mmBtu to $5.85ImmBtu for the 1995-2004 period, and averaging $3A3/mmBtu during the ten-year period 1995-2004 and $4.58/mmBtu during the five-year period 2000-2004. Recent market conditions have resulted in gas prices that have averaged $5.85/mmBtu for the twelve months ended December 2004. Based upon analyses considering the effect on future production costs if the FERC adopts the AL's Initial Decision, the following potential annual production cost reallocations among the domestic utility companies could result assuming annual average gas prices range from $6.39/mmBtu in 2005 declining to $4.97/mmBtu by 2009:
Average Annual Range of Annual Payments         Payments or (Receipts) or (Receipts)             for 2005-2009 Period (In Millions)                 (In Millions)
Entergy Arkansas                     $154 to $281                      $215 Entergy Gulf States               ($130) to ($15)                      ($63)
Entergy Louisiana                 ($199) to ($98)                     ($141)
Entergy Mississippi                    ($16) to $8                        $1 Entergy New Orleans                   ($17) to ($5)                    ($12)
Management believes that any changes in the allocation of production costs resulting from a FERC decision and related retail proceedings should result in similar rate changes for retail customers. The timing of recovery of these costs in rates could be the subject of additional proceedings at the APSC and elsewhere, however, and a delay in full recovery of any increased allocation of production costs could result in additional financing requirements. Although the outcome and timing of the FERC, APSC, and other proceedings cannot be predicted at this time, Entergy Arkansas does not believe that the ultimate resolution of these proceedings will have a material effect on its financial condition or results of operation.
In February 2004, the APSC issued an "Order of Investigation," in which it discusses the negative effect that implementation of the FERC AL's Initial Decision would have on Entergy Arkansas' customers. The APSC order establishes an investigation into whether Entergy Arkansas' continued participation in the System Agreement is in the best interest of its customers, and whether there are steps that Entergy Arkansas or the APSC can take "to protect [Entergy Arkansas' customers] from future attempts by Louisiana, or any other Entergy retail regulator, to shift its high costs to Arkansas." Entergy 'Arkansas filed testimony in response to the APSC's Order of Investigation. The testimony emphasizes that the AL's Initial Decision is not a final order by the FERC; briefly discusses some of the aspects of the Initial Decision that are included in Entergy's exceptions filed with the FERC; emphasizes that Entergy will seek to reverse the production cost-related portions of the Initial Decision; and states that Entergy Arkansas believes that it is premature, before the FERC makes a decision, for Entergy Arkansas to determine whether its continued participation in the System Agreement is appropriate.
In April 2004, the APSC commenced the investigation into Entergy Louisiana's Vidalia purchased power contract and requested historical documents, records, and information from Entergy Arkansas, which Entergy Arkansas has provided to the APSC. Also in April 2004, the APSC issued an order directing Entergy Arkansas to show cause why Entergy Arkansas should not have to indemnify and hold its customers harmless from any adverse 155

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Management's Financial Discussion and Analysis financial effects related to Entergy Louisiana's pending acquisition of the Perryville power plant, or show that the Perryville unit will produce economic benefits for Entergy Arkansas' customers. Entergy Arkansas filed a response in May 2004 stating that Entergy will seek to reverse the production cost-related portions of the ALUs Initial Decision in the System Agreement proceeding at the FERC, that the Perryville acquisition is part of Entergy's request for proposal generation planning process, that Entergy Arkansas is not in a position to indemnify its retail customers from actions taken by the FERC, and that the Perryville acquisition is expected to reduce the domestic utility companies' overall production costs. Procedural schedules have not been established in these APSC investigations.
In April 2004, the City Council issued a resolution directing Entergy New Orleans and Entergy Louisiana to notify the City Council and obtain prior approval for any action that would materially modify, amend, or terminate the System Agreement for one or more of the domestic utility companies. Entergy New Orleans and Entergy Louisiana appealed to state court the City Council's resolution on the basis that the imposition of this requirement with respect to the System Agreement, a FERC-approved tariff, exceeds the City Council's jurisdiction and authority. In July 2004, the City Council answered the appeal and filed a third party demand and counterclaim against Entergy, the domestic utility companies, Entergy Services, and System Energy, seeking a declaratory judgment that Entergy and its subsidiaries cannot terminate the System Agreement. until obligations owed under a March 2003 rate case settlement are satisfied. In August 2004, Entergy New Orleans and Entergy Louisiana, as well as the named third party defendants, filed pleadings objecting to the City Council's third party demand and counterclaim on various grounds, including federal preemption. In February 2005, the state court issued an oral decision dismissing the City Council's claims for lack of subject matter jurisdiction and prematurity.
Transmission In 2000, FERC issued an order encouraging utilities to voluntarily 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, and 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. Assuming applicable regulatory support and approvals can be obtained, Entergy proposed to contract with the ICT to oversee the granting of transmission service on the Entergy system as well as the implementation of the proposed weekly procurement' process (WPP). r-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, Entergy also proposed to have the ICT. administer a transmission expansion pricing protocol that will; increase the efficiency of transmission pricing on the Entergy system and that will be designed to protect,Entergy's native load customers from bearing the cost of transmission upgrades not required to reliably serve these customers' needs.
Entergy intends for the ICT to determine whether transmission upgrades associated with new requests for service should be funded directly by the party requesting such service or by a broader group of transmission customers, including Entergy's native load customers. This determination would be made in accordance with protocols approved by the FERC, and any party contesting such determination, including Entergy, would be required to seek review-at the FERC. Several technical conferences regarding the ICT proposal, or various components thereof, were held in 2004.
Entergy has also responded to discovery requests that resulted from these conferences.
In January 2005, Entergy filed a petition for declaratory order with the FERC requesting that the FERC provide guidance on two important issues: (1) whether the functions performed by the ICT will cause it to become a "public utility" under the Federal Power Act or the "transmission provider" under Entergy's open access transmission tariff; and (2) whether Entergy's transmission pricing proposal, as administered by the ICT, satisfies the FERC's transmission pricing policy; The petition also indicates that, subject to the outcome of the petition and obtaining support of Entergy's retail regulators, Entergy would be willing to have the ICT perform the following additional 156

Entergy Arkansas, Inc.
Management's Financial Discussion and Analysis functions: (a) grant or deny requests for transmission service; (b) calculate available flowgate capacity; (c) administer Entergy's OASIS; and (d) perform an enhanced planning function (integrating the plans of Entergy and other potential transmission owners to identify regional synergies.) Comments and interventions on the petition were filed by market participants and retail regulators on February 4, 2005. In their individual comments, the APSC, LPSC, and City Council supported Entergy's position that the ICT would not become a "public utility" or "transmission provider" and that the transmission pricing proposal satisfies the FERC's transmission pricing policy, Certain other parties urged the FERC to reject the petition for declaratory order or, in the alternative, that the FERC assert jurisdiction over the ICT and determine that Entergy's proposed pricing policy is inconsistent with FERC's current pricing policy. FERC action on the petition is expected during the first half of 2005.
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 comments 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. Additionally, 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 on the transmission pricing aspects of the ICT proposal is scheduled for May 2005, with a separate hearing on the WPP portion of the proposal currently scheduled for August 2005.
Interconnection Orders
       -   The domestic utility companies (except Entergy New Orleans) are currently defendants to several complaints and rehearing requests before the FERC in which independent generation entities (GenCos) are seeking a refund of monies that the GenCos had previously paid to the Entergy companies for facilities necessary to connect their generation facilities to Entergy's transmission system. The FERC has issued initial orders in response to two of the complaints and in certain other dockets ordering Entergy to refund approximately $100 million in expenses and tax obligations previously paid by the GenCos, including $42 million for Entergy Arkansas. The refunds will be in the form of transmission credits that will be utilized over time as the GenCos take transmission service from Entergy. To the extent the Entergy companies are ordered to provide such refunds, these costs will qualify for inclusion in the Entergy companies' rates. The recovery of these costs is not automatic, however, especially at the retail level, where the majority of the cost recovery would occur. Entergy intends to pursue all regulatory and legal avenues available to it in order to have these orders reversed and have the affected interconnection agreements reinstated as agreed to originally by the generators.
Available Flowgate Capacity Proceeding On December 17, 2004, the FERC issued an order initiating a hearing and investigation concerning the justness and reasonableness of the Available Flowgate Capacity (AFC) methodology, the methodology used to evaluate short-term transmission service requests under the domestic utility companies' open access transmission tariff, and establishing a refund effective date. In its order, the FERC indicated that although it "appreciates that Entergy is attempting to explore ways to improve transmission access on its system," it believed that an investigation was warranted to gather more evidence in light of the concerns raised by certain transmission customers and certain issues raised in a FERC audit report finding errors and problems with the predecessor methodology used by Entergy for evaluating short-term transmission requests, the Generator Operating Limits methodology. The FERC order indicates that the investigation will include an examination of (i) Entergy's implementation of the AFC program, (ii) whether Entergy's implementation has complied with prior FERC orders and open access transmission tariff provisions addressing the AFC program, and (iii) whether Entergy's provision of access to short-term transmission on its transmission system was just, reasonable, and not unduly discriminatory.
Entergy has submitted an Emergency Interim Request for Rehearing requesting the FERC to defer the hearing process and instead proceed initially with an independent audit of the AFC program and the expansion of the current process involving other market participants to address a broader range of issues. Entergy believes that this type of approach is a more efficient and effective mechanism for evaluating the AFC program. Following the completion of 157

Entergy Arkansas, Inc.
Management's Financial Discussion and Analysis the independent audit and process involving other market participants, the FERC could determine whether other procedural steps are necessary. The FERC has not yet ruled on the Emergency Interim Request for Rehearing
                                                                                                         .iuJii              .,;x-.'i.Y;                              i    :         WiJ.
submitted by Entergy.            ' .. i             i'i!  _ '    io.       i i
                                                .Iffl                                                t       j                                            1              1        x J-Entergy believes that it has complied with the provisions of it' oprecess transmission tariff, including the provisions addressing the implementation of the AFC methodology; hoWever, the ultimate scope of this proceeding cannot be predicted at this time.' A hearing in the AFC proceeding is currently scheduled to commence in August 2005.                                                                                   _A9 ~~3/4                                                               h            4 10 o ' ta,J;,      O    I             .i-i&#xa3;
                                                                                                            ,Etcs., Xt                                                  i, Qs1,.
                                                                                                                                                                           ;.,9siA Market and Credit Risks Entergy Arkansas has certain market and credit risks inherent in its business operations. Market risks represent 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. Credit risk is risk of loss from nonperformance by suppliers, customers, or financial counterparties to a contract or agreement;                i'A. r                                 .               -J Sno              e                i Interest Rate and Equity Price Risk - Decommissioning Trust Funds                                                          :    -                                                        -.
: 1.            .' iJ'':;          .i'j:.       i                . '                         i       i     .1f     *,,-  .iiitA'
                                                                                                                                                                             -:.I Entergy Arkansas' nuclear decommissioning trust funds are- exposed to fluctuations in equity prices and interest rates. The NRC requires Entergy Arkansas to maintain trusts to fund the costs of decommissgiotting ANO 1 and ANO 2. The funds are invested primarily in equity securities; fixed-rate, fixed-income securities; and cash and cash equivalents. Management believes that its exposure to market fluctuations will not affect results of operations for the ANO trust funds because of the application of regulatory accounting principles. The decommissioning trust funds are discussed more thoroughly in Notes 1, 8, and 12 to the domestic utility companies and System Energy financial statements.                          ,;.  -   *-***                '      i     By,             i        I'>4          ';ILX. 5   '0'             2 State and Local Rate Regulatory Risks                          .      *'u                               .LA                a The rates that Entergy Arkansas charges for its services arte-ani important item influencing Entergy Arkansas' financial position, results of operations, and liquidity. Entergy Arkansas-is closely regulated and the rates charged to its customers are determined in regulatory proceedings. A gove rntal agency, the APSC, is, primarily responsible for approval of the rates charged to customers. Entergy Arkansas' fuel costs recovered from customers al'e also subject to regulatory scrutiny. Refer to Note 2 to the domestic utility companies 'and System Energ&-financial statements for fuel recovery and retail rate proceedings.               -l'e .-?' -.                                 -;       .l      -i i:*..''             ifit 01                 t 11 Nuclear Matters
                                                                                                                                                      .,.     .-           J. i,,
Entergy Arkansas owns and operates, through an affiliate, the ANO 1 and ANO 2 nuclear power plants.
Entergy Arkansas is, therefore, subject to the risks related to owning and operating nuclear plants. These include risks from the use, storage, handling and disposal of high-level and low-'level radioactive materials, limitations on the amounts and types of insurance commercially available for losses in connection with nuclear operations, and technological and financial uncertainties related to decommissioning nuclear plants at the end of their licensed lives, including the sufficiency of funds in decommissioning trusts. In the event of an unanticipated early shutdown of either ANO 1 or ANO 2, Entergy Arkansas may be required'to file with the APSC a rate nfechanism'to provide additional funds or credit support to satisfy regulatory requirements for decommissioning.                                                       ;
In August 2001, the NRC issued a bulletin requesting all pressUrized water'teactof owners and ojeratdts to report on the structural integrity of their reactor vessel head penefration nozzles to justify continued operations past December 31, 2001. These types of reactors are susceptible to stress corrosion cracking of the reactoi vessel head nozzles. ANO 1 and ANO 2 are pressurized water reactOrs: In December 2001, Entergy issued a request for proposal to provide replacement steam generators for ANO 1. Entergy subsequently entered a contract for delivery of the replacement generators in August 2005 in time for installatio'ni during the scheduled refueling outage. Both the new steam generators and the reactor vessel head will be installed in the fall of 2005. To date, thefe has been no primary side stress corrosion cracking identified in the ANO 2`ioact'oteSesel head.' Inspectioiil of the ANO 2 reactor vessel head will continue during planned refueling outages - a -.<i                     .      .    ..                                   .
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Management's Financial Discussiobn'and Analysis
   ;-i'        Efitergy Arkansas filed with the APSC in January 2003 a reqV61st for a declaratory order that the investment in the replacement is in the public interest. The APSC issued the -requested order in May 2003. This order is analogous to the order rdceived in 1998 prior to the replacement of the ANO 2 steam generators.
Environmental Risks
              =;:I...        j1/4:.-. thi        f;l[Cicfatrnntl to east;: wir                       .321,;         JaiN b519&dJo.9 ?Petri             i.'I,;i lvJe K <it ,2                           it Entergy Arkansas' facilities-and operations are subject to regulation by various                                                                               governmental                       authorities having jurisdiction over air quality, watet quality, control of toxic substances afid hazardous and solid wastes, and other environmental matt&s. Management believes that Eniergy Arkansas is in substantial compliance with environmental regulations currently applicable to its facilities and operations. Because etvironrffiental regulations are subject to change, future compliancelcosts cannot bte precisely estimated.                                                                            '            :                                 . If
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Critical Accounting Estimates                                                                                                                                             HSJ        kit'       ltOz           4  :     <Ut         ;t}
The preparation of Entergy Arkansas' financial statements in conformity with generally accepted accounting principles requires management to apply appropriate accounting policies and to make estimates and judgni6nts thatcan haVeta significant effect on reported finaiciail o6sitioh; results of operations, and cash flows.
Management has identified the f6llowing accountinfg 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 could produce estimates that Woiuld haVe-a material effect on the presentation of Entergy Arkansas' financial position or results of operations.                                                                                                         .         Jr.        ,.             'i' 2)           -'i'     ti)
Nuclear Decommissioning Costs                                                      -'                                   stp <P1           .A P.                               LI!
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        -   . Regulations require Entergy Arkansas to decommission the ANO 1 and ANO 2 nuclear power plants after the facilities are 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 Arkansas conducts periodic decommissioning cost studies (typically updated every 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: -.....                                                                                  1ti .J.                    '
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* Cost Escalation Factors - Entergy Arkansas' decommissi6ningStidies include an assumption that decommissioning costs will escalate over present cost levels by an annual factor approximating CPI-U. A 50 basis point change in this assumption could change the ultimate cost of decommissioning a facility by as much as 11%.
* Timing - The date of the plant's retirement must be estimated and an assumption must be made whether decommissioning will bogmi immediately upon plant retirement, or whether the plant will be held in IIrI                                                                                                                 I "safestore" status for later decotnis'sioning, as permitted                                                      by   applicable         regulations.               While         the       effect         of      4>   -
it           these assumptions cannot be determined with precision, assuming either                                                                     license       extension             or     use       of    a,,,
               ."safestore" status can possibly decrease the present valu&of these obligations. As discussed in Note 8 to*
4J-A the domestic utility companies and System Energy financial statements, Entergy Arkansas recorded a revision in 2004 to its estimated decommissioning cost liability for ANO 1 and ANO 2 to reflect changes due to a new decommissioning study. The changes in probability for ANO 1 and ANO 2 had no effect on
          -P^net income because, as discussed further below, any ambfouhtt recorded related to SFAS 143 are offset by the recording of regulatory as*ets or regulatory liabilities when projected decommissioning costs are                                                                                                             .
collected in rates. tbi; Z.              X              :)                       BaAa        d)M               o                                             Iyt i  .      C;       imc... euaru   ?  II        .
* Spent Fuel Disposal -Federal regulatio" require the DOS WVtpr6vide a permanentfrepsitory for the storag'e of spent nuclear fuel, and legislation has beeft'pased by Congress to develop this repository at Yucca Mountain, Nevada. Until this site is available, however, nuclear plant operators must provide for interim spent fuel storage on the nuclear plant site, which can require the construction and maintenarice of dry cask storage sites or other facilities. The costs of developing and maintaining these facilities can have a significant effect (as much as 16% of estimated decorfihiissi6 iingI5sts). These estimates could change in the fuiture based on the timing of the op-ehing of the Vucd ModWrfain facility, the Schedule for shipferifts to
    * "-         that facility when it is olened, or other factors.- t'1IA                                                                 01           ;       sd vU.i f7                        Jr. t-.di 1;
* Technology 'and Regulation T-to                                         date,          ith&re        limifed         faticale-ixperiencen                             nwith ihU-uiedSiafes                                       actual decomrmissioning of large iiuclear facilities& s                                                i&periede          Is-ga:inied     and      technology              chariges,             cost          '
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Management's Financial Discussion and Analysis estimates could also change. If regulations regarding nuclear decommissioning were to change, this could have a potentially significant effect on cost estimates. The effect of these potential changes is not presently determinable. Entergy Arkansas' decommissioning cost studies assume current technologies and regulations.
Through 2001, Entergy Arkansas collected the projected costs of decommissioning ANO I and ANO 2 through rates charged to customers. Now, based on assumptions approved by the APSC, including an assumed license extension for ANO 2 (ANO 1's license has already been extended), which significantly extends the earnings period, and the sufficiency of previously collected funds, Entergy Arkansas is not collecting additional funds to decommission ANO I and ANO 2 in its current rates. The assumptions will be reviewed annually and reflected in Entergy Arkansas' filing of its annual determination of the nuclear decommissioning rate rider. The amounts that were collected through rates, which were based upon decommissioning cost studies, were deposited in decommissioning trust funds.
SFAS 143 Eptergy Arkansas implemented SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. Nuclear decommissioning costs comprise substantially all of Entergy Arkansas' asset retirement obligations, and the measurement and recording of Entergy Arkansas' decommissioning obligations outlined above changed significantly with the implementation of SFAS 143. The most significant differences in the measurement of these obligations are outlined below:
* Recording of full obligation - SFAS 143 requires that the fair value of an asset retirement obligation be recorded when it is incurred. This caused the recorded decommissioning obligation of Entergy Arkansas to increase significantly, as Entergy Arkansas had previously only recorded this obligation as the related costs were collected from customers, and as earnings were recorded on the related trust funds.
* Fair value approach - SFAS 143 requires that these obligations be measured using a fair value approach.
Among other things, this entails the assumption that the costs will be incurred by a third party and will, therefore include appropriate profit margins and risk premiums. Entergy Arkansas' decommissioning studies to date have been based on Entergy Arkansas performing the work, and have not included any such margins or premiums. Inclusion of these items increases cost estimates.
* Discount rate - SFAS 143 requires that these obligations be discounted using a credit-adjusted risk-free rate.
The net effect of implementing this standard for Entergy Arkansas was recorded as a regulatory asset, with no resulting impact on Entergy Arkansas' net income. Entergy Arkansas recorded this regulatory asset because its existing rate mechanism is based on the original or historical cost standard that allows Entergy Arkansas to recover all ultimate costs of decommissioning existing assets from current and future customers. Upon implementation, assets and liabilities increased by $532 million in 2003 as a result of recording the asset retirement obligation at its fair value as determined under SWAS 143, increasing total utility! plant by $106 million, reducing accumulated depreciation by $252 million, and recording the related regulatory asset of $174 million.
      -  In the first quarter of 2004, Entergy Arkansas recorded a revision to its estimated decommissioning cost liability in accordance with a new decommissioning cost study for ANO I and 2 as a result of revised decommissioning costs and changes in assumptions regarding the timing of when the decommissioning of the plants will begin. The revised, estimate resulted in a $107,7 million reduction in its decommissioning liability, along with a $19,5 million reduction in utility plant and an $88.2 million reduction in the related regulatory asset.
Unbilled Revenue As discussed in Note I to the domestic utility companies and System Energy financial statements, Entergy Arkansas records an estimate of the revenues earned for energy delivered since the latest customer billing. Each month the estimated unbilled revenue amounts are recorded as revenue and a receivable, and the prior month's estimate is reversed. The difference between the estimate of the unbilled receivable at the beginning of the period and the end of the period is the amount of unbilled revenue recognized during the period. The estimate recorded is 160

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Management's Financial Discussion and Analysis primarily based upon an estimate of customer usage during the unbilled period and the billed price to customers in that month. Therefore, revenue recognized may be affected by the estimated price and usage at the beginning and end of each period, in addition to changes in certain components of the calculation including changes to estimates such as line loss, which affects the estimate of unbilled customer usage, and assumptions regarding price such as the fuel cost recovery mechanism.
Pension and Other Postretirement Benefits Entergy sponsors defined benefit pension plans which cover substantially all employees. Additionally, Entergy currently provides postretiremnent 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 domestic utility companies and System Energy financial statements, 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 ofthese costs is a critical accounting estimate.
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 obligations, Entergy reviews market yields on high-quality corporate debt and matches these rates with Entergy's projected stream of benefit payments. Based on recent market trends, Entergy reduced its discount rate used to calculate benefit obligations from 6.75% in 2002 to 6.25% in 2003 and to 6% in 2004. 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, 2004 accumulated postretirement benefit obligation to a 10%
increase in health care costs in 2005 gradually decreasing each successive year, until it reaches a 4.5% annual increase in health care costs in 2011 and beyond.
In determining its expected long-term rate of return on plan assets, Entergy reviews past long-term performance, asset allocations, and long-term inflation assumptions. Entergy targets an asset allocation for its pension plan assets of roughly 65% equity securities, 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 2002 and 2003 to 8.5% in 2004. The assumed rate of increase in future compensation levels used to calculate benefit obligations was 3.25% in 2002, 2003, and 2004.
161

Entergy Arkansas, Inc.
Management's Financial Discussion and Analysis Cost Sensitivity The following chart reflects the sensitivity of pension cost to changes in certain actuarial assumptions (dollars in thousands):
Change in           Impact on 2004          Impact on Projected Actuarial Assumption                   Assumption             Pension Cost           Benefit Obligation Increase/(Decrease)
Discount rate                                  (0.25%)                  $2,001                    $20,608 Rate of return on plan assets                  (0.25%)                  $1,055 Rate of increase in compensation                0.25%                     $907                     $5,200 The following chart reflects the sensitivity of postretirement benefit cost to changes in certain actuarial assumptions (dollars in thousands):
Impact on Accumulated Change in              Impact on 2004              Postrefirement Benefit Actuarial Assumption               Assumption        Postrefirement Benefit Cost             Obligation Increase/(Decrease)
Health care cost trend                    0.25%                        $557                           $3,633 Discount rate                            (0.25%)                       $342                           $4,623 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 utilizes a number of accounting mechanisms that reduce the volatility 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 necessary, the excess is amortized over the average remaining service period of active employees.
         'Additionally, Entergy accounts for the impact of asset performance on pension expense over a twenty-quarter phase-in period through a "market-related" value 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 pension 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 accordance with SFAS 87.
Costs and Funding Total pension cost for Entergy Arkansas in 2004 was $16.5 million.' Entergy Arkansas anticipates 2005 pension cost to increase to $21.8 million due to decrease in the discount rate' (from 6.25% to 6.00%) and the expected rate 'of return (from 8.75% to 8.5%) used to 'calculate benefit obligations. Entergy Arkansas contributed
 $5.3 million to its pension plan in 2004, and anticipates making $20.6 million in contributions in 2005. The rise in pension funding requirements is due to declining interest rates and the phased-in effect of asset underperformance from 2000 to 2002, partially offset by the Pension Funding Equity Act relief passed in April 2004.
Entergy Arkansas' accumulated benefit obligation at December 31, 2004, 2003, and 2002 exceeded plan assets. As a result, Entergy Arkansas was required to recognize an additional minimum liability as prescribed by SFAS 87 at December 31, 2004, 2003, and 2002. At December 31, 2004, Entergy Arkansas increased its additional minimum liability to $81.2 million from $54.9 million at December 31, 2003. Entergy Arkansas decreased its intangible asset for the unrecognized prior service cost to $10.3 million at December 31, 2004 from $13.3 million at December 31, 2003. Entergy Arkansas also increased the regulatory asset to $70.8 million at December 31, 2004 from $41.6 million at December 31, 2003. Net income for 2004, 2003, and 2002 was not impacted.
162

Entergy Arkansas, Inc.
Managemnent's Financial Discussion and Analysis Total postretirement health care and life insurance benefit costs for Entergy Arkansas in 2004 were $12.8 million, including $5 million in savings due, to the estimated effect of future Medicare Part D subsidies. Entergy Arkansas expects 2005 postretiremenit healih care and lIfe intsuraince benefit costs to a'pproximate $13.7 million, including $5.8 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 disc olunt rate (from 6.25% to 6.00%) and an increase in the health care cost trend rate used to calculate benefit obligations.
               "I
                                         -I I t I "
                                , . II ;             II ! '
                                                                   . .    .L 163

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Entergy Arkansas, Inc.:                                              ;,      -
We have audited the accompanying balance sheets of Entergy Arkansas, Inc. as of December 31, 2004 and 2003, and the related statements of income, retained earnings, and cash flows (pages 165 through 170 and applicable items in pages 284 through 348) for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing 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 provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Entergy Arkansas, Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 5 and Note 8 to the notes to respective financial statements, in 2003 Entergy Arkansas, Inc.
adopted the provisions of Statement of Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, and Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, 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 8, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP New Orleans, Louisiana March 8, 2005 164

ENTERGY ARKANSAS, INC.
INCOME STATEMENTS For the Years Ended December 31, 2004              2003          2002 (In Thousands)
OPERATING REVENUES Domestic electric                                               $1,653,145       $1,589,670    $1,561,110 OPERATING EXPENSES Operation and Maintenance:
Fuel, fuel-related expenses, and gas purchased for resale                                        210,394           153,866       294,244 Purchased power                                                  484,849           476,447       355,211 Nuclear refueling outage expenses                                  24,568           23,638         24,387 Other operation and maintenance                                  384,424           402,108       543,677 Decommissioning                                                      32,902           35,887 Taxes other than income taxes                                        35,848           37,385         38,127 Depreciation and amortization                                      206,926           202,497       187,525 Other regulatory credits - net                                      (20,501)         (39,347)     (184,270)
TOTAL                                                            1,359,410         1,292,481     1,258,901 OPERATING INCOME                                                   293,735           297,189       302,209 OTHER INCOME Allowance for equity funds used during construction                  11,737           12,153           7,324 Interest and dividend income                                         10,298             9,790          2,467 Miscellaneous - net                                                   (6,354)         (4,332)         (6,442)
TOTAL                                                                15,681           17,611           3,349 INTEREST AND OTHER CHARGES Interest on long-term debt                                           79,521           87,666         89,923 Other interest - net                      I I                          4,909            3,555        13,287 Allowance for borrowed funds used during construction                 (6,288)          (7,726)        (4,699)
TOTAL                                                                78,142           83,495         98,511 INCOME BEFORE INCOME TAXES                                         231,274           231,305       207,047 Income taxes                                                         89,064          105,296         71,404 NET INCOME                                                          142,210          126,009        135,643 Preferred dividend requirements and other                              7,776            7,776          7,776 EARNINGS APPLICABLE TO COMMON STOCK                                                      $134,434          $118,233      $127,867 See Notes to Respective Financial Statements.
165

    - - x.,
166

ENTERGY ARKANSAS, INC.
STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2004                    2003                  2002 (In Thousands)
OPERATING ACTIVITIES Net income                                                                       $142,210                $126,009              $135,643 Adjustments to reconcile net income to net cash flow provided by operating activities:
Reserve for regulatory adjustments                                                   3,099                      1,739 Other regulatory credits - net                                                   (20,501)                  (39,347)           (184,270)
Depreciation, amortization, and decommissioning                                 239,828                   238,384              187,525 Deferred income taxes and investment tax credits                                  65,847                    48,357               54,955 Changes in working capital:
Receivables                                                                     (86,564)                  (29,616)              50,898 Fuel inventory                                                                     2,424                      4,159              (6,509)
Accounts payable                                                                (40,871)                    40,615              39,077 137,767                    48,791              (69,812)
Taxes accrued Interest accrued                                                                       (48)                 (6,348)              (2,772)
Deferred fuel costs                                                                 6,880                 (46,333)              59,849 Other working capital accounts                                                     4,753                  (79,331)             (33,698)
Provision for estimated losses and reserves                                        (5,172)                     8,686              (9,952)
Changes in other regulatory assets                                                 37,668                  (54,745)             182,244 Other                                                                            (41,022)                  176,500              (45,757)
Net cash flow provided by operating activities                                    446,298                  437,520              357,421 INVESTING ACTIVITIES        - -
Construction expenditures                                                        (270,427)                (334,556)            (277,189)
Allowance for equity funds used during construction                                 11,737                     12,153                7,324 Nuclear fuel purchases                                                               (8,101)                (60,685)             (68,127)
Proceeds from sale/leaseback of nuclear fuel                                          8,101                   60,685               68,127 Decommissioning trust contributions and realized change in trust assets                                                            (8,860)                   (8i279)           (17,970)
Changes in other investments - net                                                    1,856
* 38,397 Other regulatory investments                                                         (3,691)                   (6,827)
Net cash flow used in investing activities                                       (269,385)                (337,509)            (249,438)
FINANCING ACTIVITIES Proceeds from the issuance of long-term debt                                        59,429                  361,726              188,407 Retirement of long-term debt                                                       (61,856)                (471,040)            (170,000)
Changes in short-term borrowings                                                                                                      (667)
Dividends paid:
Common stock'                                                                     (85,800)                  (69,600)           (125,900)
(7,7700)            '     (7,776)              (7,776)
Preferred stock Net cash flow used in financing activities                                      1.(96,003)                 (186,690)            (115,936)
Net increase (decrease) in cash and cash equivalents                                80,910                   (86,679)               (7,953)
Cash and cash equivalents at beginning of period                                       8,834                -  95,513             103,466 Cash and cash equivalents at end of period                                         $89,744                     $8,834            S95,513 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid/(received) during the period for Interest - net of amount capitalized                                             $78,144                   $91,142,           $100,965
($103,476)                     $2,177 ' '         $83,911 Income taxes Noncash investing and financing activities:
Long-term debt refunded with proceeds from long-term debt issued in prior periods                                                                                       ($47,000)
See Notes to Respective Financial Statements.
167

ENTERGY ARKANSAS, INC.
BALANCE SHEETS ASSETS December 31, 2004                 2003 (In Thousands)
CURRENT ASSETS Cash and cash equivalents:
Cash                                                                $7,133             $8,834 Temporary cash investments - at cost, which approximates market                                       . 82,611 Total cash and cash equivalents                              . 89,744-               8,834 Accounts receivable:
Customer                                                            87,131             69,036 Allowance for doubtful accounts                                    (11,039)             (9,020)
Associated companies                                                72,472             50,390 Other                                                               72,425             30,930 Accrued unbilled revenues                                           71,643             64,732 Total accounts receivable                                         292,632            206,068 Deferred fuel costs                                                   7,368             10,557 Accumulated deferred income taxes                                    27,306             18,362 Fuel inventory - at average cost                                      4,298               6,722 Materials and supplies - at average cost                             85,076             80,506 Deferred nuclear refueling outage costs                              16,485             19,793 Prepayments and other                                                 6,154             23,938 TOTAL                                                               529,063            374,780 OTHER PROPERTY AND INVESTMENTS Investment in affiliates - at equity                                 11,208             11,212 Decommissioning trust funds                                       i 383,784            360,485 Non-utility property - at cost (less accumulated depreciation)        1,453               1,456 Other                                                                 2,976               4,832 TOTAL                                                               399,421            377,985 UTILITY PLANT Electric                                                         6,124,359           5,948,090 Property under capital lease                                         17,500             24,047 Constructiorn work in progress                                      226,172            238,807 Nuclear fuel under capital lease                                     93,855            102,691 Nuclear fuel                                                         12,201               7,466 TOTAL UTILITY PLANT                                              6,474,087           6,321,101 Less - accumulated depreciation and amortization                 2,753,525.          2,627,441 UTILITY PLANT - NET                                              3,720,562           3,693,660 DEFERRED DEBITS AND OTHER ASSETS Regulatory assets:
SFAS 109 regulatory asset - net                                    101,658            128,311 Other regulatory assets                                            400,174            437,544 Other                                                                42,514             45,798 TOTAL                                                               544,346            611,653 TOTAL ASSETS                                                    $5,193,392          $5,058,078 See Notes to Respective Financial Statements.
168

ENTERGY ARKANSAS, INC.
I*     BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY December 31, 2004                 2003 (In Thousands)
CURRENT LIABILITIES Currently maturing long-term debt                               $147,000 Accounts payable:
Associated companies                                               68,829             106,958 Other                                                              89,896               92,638 Customer deposits                                                   41,639               37,693 Taxes accrued                                                       35,874 Interest accrued                                                    21,376               21,424 Obligations under capital leases                                    49,816               59,089 Other                                                               19,648               16,924 TOTAL.                                                            474,078              334,726 NON-CURRENT LIABILITIES Accumulated deferred income taxes and taxes accrued             1,121,623.             996,455 Accumulated deferred investment tax credits                         68,452               73,280 Obligations under capital leases                                    61,538               67,648 Other regulatory liabilities                                        67,362               52,923 Decommissioning                                                   492,745              567,546 Accumulated provisions                                              34,977               40,149 Long-term debt                                                  1,191,763            1,338,378 Other                                                             237,447               192,200 TOTAL                                                           3,275,907            3,328,579 Commitments and Contingencies SHAREHOLDERS' EQUITY Preferred stock without sinking fund                              116,350              116,350 Common stock, $0.01 par value, authorized 325,000,000 shares; issued and outstanding 46,980,196 shares in 2004 and 2003                                                             470                  470 Paid-in capital                                                   591,127              591,127 Retained earnings                                                 735,460              686,826 TOTAL                                                           1,443,407            1,394,773 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                    $5,193,392           $5,058,078 See Notes to Respective Financial Statements.
169

ENTERGY ARKANSAS, INC.
STATEMENTS OF RETAINED EARNINGS For the Years Ended December 31, 2004           2003        2002 (In Thousands)
Retained Earnings, January I                          $686,826       $638,193    $636,226 Add:
Net income                                            142,210        126,009     135,643 Deduct:
Dividends declared:
Preferred stock                                        7,776          7,776       7,776 Common stock                                          85,800         69,600     125,900 Total                                               93,576         77,376     133,676 Retained Earnings, December 31                        $735,460       $686,826    $638,193 See Notes to Respective Financial Statements.
170

ENTERGY ARKANSAS, INC.
SELECTED FINANCIAL DATA - FIVE-YEAR COMPARISON 2004           2003           2002            2001            2000 (In Thousands)
Operating revenues                      $1,653,145      $1,589,670     $1,561,110     $1,776,776      $1,762,635 Net Income                                $142,210        $126,009       $135,643        $178,185       $137,047 Total assets                            $5,193,392      $5,058,078     $4,569,511     $4,451,580      $4,228,211 Long-term obligations (1)               $1,253,301      $1,406,026     $1,246,567     $1,417,262      $1,401,062 (1) Included long-term debt (excluding currently maturing debt) and noncurrent capital lease obligations.
2004            2003           2002            2001           2000 (Dollars In Millions)
Electric Operating Revenues:
Residential                                    $539           $526            $556          $586           $561 Commercial                                      305            291             304            330            307 Industrial                                      318            305             330            371            353 Governmental                                     16             15                             16             15 Total retail                                1,178          1,137           1,205          1,303          1,236 Sales for resale:
Associated companies                          250            234             165            240            246 Non-associated companies                      186            188             164            201            235 Other                                            39             31              27             33             46 Total                                     $1,653          $1,590         $1,561          $1,777         $1,763 Billed Electric Energy Sales (GWh):
Residential                                   7,028          7,057           7,050          6,918          6,791 Commercial                                    5,428          5,328           5,221          5,162          5,063 Industrial                                    7,004          6,999          -7,074          7,052          7,240 Governmental                                   275            266             255            245            239 Total retail                             19,735          19,650         19,600          19,377         19,333 Sales for resale:
Associated companies                       7,437          7,036           6,811          7,217          6,513 Non-associated companies                   4,911          5,399       - 5,069            4,909          5,537 Total                                    32,083          32,085         31,480          31,503         31,383 171

ENTERGY GULF STATES, INC..               -
MIANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS Results of Operations'''
Net Income 2004 Compared to 2003 Net income increased $149.7. million primarily due to the following:
* the $107.7 million accrual ($65.6 million net-of-tax) in June 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 domestic utility companies and System Energy financial statements for more details regarding the River Bend abeyed plant costs;                 -            - '
* the $21.3 million net-of-tax cumulative effect of accounting change in 2003 due to the implementation of SFAS 143. See "Critical Accounting Estimates" below for more information on the implementation of' SFAS 143;
* an increase if $39.7 million (pre-tax) in net revenue, as discussed below;
* miscellaneous income of $27.7 million (pre-tax) resulting from a revision of the decommissioning liability for River Bend and of $10 million (pre-tax) resulting from a reduction in the loss provision for an environmental clean-up site, both of which occurred in 2004 and are discussed below;
* a decrease of $23.2 million (pre-tax) in interest charges on long-term debt, as discussed below; and
* a decrease of $12.0 million (pre-tax) in other operation and maintenance expenses, as discussed below.
The increase was partially offset by a higher effective income tax rate.
2003 Compared to 2002 Entergy Gulf States experienced a significant decline in net income in 2003 compared to 2002 primarily due to the following:
     * ' the $107.7 million accrual ($65.6 million net-of-tax) for the loss that would be associated with a final, nonappealable decision disallowing abeyed River Bend plant costs. See Note 2 to the domestic utility companies and; System Energy financial statements for more details regarding the River Bend abeyed plant costs;                                                                                         .
* the $21.3 million net-of-tax cumulative effect of accounting change due to the implementation of SFAS 143.
See "Critical Accounting Estimates" below for more information on the implementation'of SFAS 143;
* a decrease of $20.6 million (pre-tax) in net revenuej as discussed below; and        '
* an increase of $19.2 million (pre-tax) in other operation and maintenance expenses, as discussed below.
The decrease was partially offset by a lower effective income tax rate.
Net Revenue 2004 Compared to 2003 Net revenue, which is Entergy Gulf States' measure of gross margin, consists of operating revenues net of: 1) fuel, fuel-related, and purchased power expenses and 2) other regulatory credits. Following is an analysis of the change in net revenue comparing 2004 to 2003.
1*7'

Entergy Gulf States, Inc.
Management's Financial Discussion and Analysis (In Millions) 2003 net revenue                                $1,110.1 Volume/weather                                       26.7 Net wholesale revenue                                13.0 Summer capacity charges                               5.5 Price applied to unbilled sales                       4.8 Fuel recovery revenues                             (14.2)
Other                                    V            3.9 2004 set revenue                                $1,149.8 The volume/weather variance resulted primarily from an increase of 1,179 GWh in electricity usage in the industrial sector. Billed usage also increased a total of 291 GWh in the residential, commercial, and governmental sectors.;
The increase in net wholesale revenue is primarily due to an increase in sales volume to municipal and co-op customers.
Summer capacity charges variance is due to the amortization in 2003 of deferred capacity charges for the summer of 2001 compared to the absence of the amortization in 2004. The amortization of these capacity charges began in June 2002 and ended in May 2003.
The price applied to unbilled sales variance resulted primarily from an increase in the fuel price applied to unbilled sales.
Fuel recovery revenues represent an under-recovery of fuel charges that are recovered in base rates.
Entergy Gulf States recorded $22.6 million of provisions in 2004 for potential rate refunds. These provisions are not included in the Net Revenue table above because they are more than offset by provisions recorded in 2003.
Grossoperatingrevenuesfel andpurchasedpowerexpenses, and other regulatorycredits Gross operating revenues increased primarily due to an increase of $187.8 million in fuel cost recovery revenues as a result of higher -fuel rates in both the Louisiana and Texas jurisdictions. The increases in volume/weather and wholesale revenue, discussed above, also contributed to the increase.
Fuel and purchased power expenses increased primarily due to:
* increased recovery of deferred fuel costs due to higher fuel rates;
* increases in the market prices of natural gas, coal, and purchased power; and
* an increase in electricity usage, discussed above.
Other regulatory credits increased primarily due to the amortization in 2003 of deferred capacity charges for the summer of 2001 compared to the absence of amortization in 2004. The amortization of these charges began in June 2002 and ended in May 2003.
2003 Compared to 2002 Net revenue, which is Entergy Gulf States' measure of gross margin, consists of operating revenues net of: 1) fuel, fuel-related, and purchased power expenses and 2) other regulatory credits. Following is an analysis of the change in net revenue comparing 2003 to 2002.
173

Entergy Gulf States, Inc.
Management's Financial Discussion and Analysis (In Millions) 2002 net revenue                                $1,130.7 Volume/weather                                        17.8 Fuel write-offs in 2002                                15.3 Net wholesale revenue                                  10.2-Base rate decreases                                  (23.3),
NISCO gain recognized in 2002        ,               (15.2),
Rate refund provisions                               (11.3)
Other         ''                                     (14.1) 2003 net revenue                                $1,110.1 The volume/weather variance was due to higher electric sales volume in the service territory. Billed usage increased a total of 517 GWh in the residential and commercial sectors. The increase was partially offset by a decrease in industrial usage of 470 GWh due to the loss of two large industrial customers to cogeneration. The customers accounted for approximately 1% of Entergy Gulf States' net revenue in 2002.
In 2002, deferred fuel costs of $8.9 million related to a Texas fuel reconciliation case were written off and
$6.5 million in expense resulted from an adjustment in the deregulated asset plan percentage as the result of a power uprate at RiverBend.                                                                                  .                 i The increase in net wholesale revenue was primarily due to an increase in sales volume to municipal and co-op customers and also to affiliated systems related to Entergy's generation resource planning..
The base rate decreases were effective June 2002 and January 2003, both in the Louisiana jurisdiction. The January 2003 baseratedecrease of $22.1 million had a, minimal impact on net income due tona corresponding reduction in nuclear depreciation and decommissioning expenses associated with the change in accounting to reflect an assumed extension of River Bend's useful life. ;          ,
In 2002, a gain of $15.2 million was recognized for the Louisiana portion of the 1988 Nelson Units 1 and 2 sale. Entergy Gulf States received approval from the LPSC to discontinue applying amortization of the gain against recoverable fuel, resulting in the recognition of the deferred gain in income.
t6 ' .t !      I . .         !                  A           1. 1         : . . . t     . .-       .
Rate refund provisions caused a decrease in net revenue due to additional provisions recorded in 2003 compared to 2002 for potential rate actions and refunds.                   ,,-         ,
Gross operatingrevenues andfuel andpurchasedpower expenses Gross operating revenues increased, primarily due to an increase of $440.2 million in fuel cost, recovery revenues as a result of higher fuel rates in both the Louisiana and Texas Jurisdictions.
Fuel and purchased power expenses increased $471.1 million due to an increase in the market prices of natural gas and purchased power.                ,         .
Other Income Statement Variances 2004 Compared to 2003 Other operation and maintenance expenses decreased primarilydueto:
* voluntary severance program accruals of $22.5 million in 2003, and
* a decrease of $4.3 million in nuclear material and labor costs due to reduced staff in 2004.
174

Entergy Gulf States, Inc.
Management's Financial Discussion and Analysis The decrease was partially offset by the following:
* an increase of $8.5 million in benefit costs; and                                                                -
* an increase of $5 million in customer service support costs.
Miscellaneous income - net increased $145.6 million primarily due to:
* the $107.7. million accrual in June 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 domestic utility companies and System Energy financial statements for more details regarding the River Bend abeyed plant costs;
* the River Bend decommissioning cost liability revision made in accordance with a new decommissioning cost study that reflected an expected life extension for the plant. For the portion of River Bend not subject to cost-based ratemaldng, the revised estimate resulted in the elimination of the asset retirement cost that had been recorded at the time of adoption of SFAS 143 with the remainder recorded as miscellaneous income of $27.7
          .million;and
* a'reduction of approximately $10 million in the loss provision related to an environmental clean-up site.
Interest on long-term debt decreased $23.2 million primarily dueto the financing and debt restructuring program implemented in 2003, which resulted in extended maturities and lower interest rates in Entergy Gulf States' debt portfolio.
2003 Compared to 2002                    ,
Other operation and maintenance expenses increased primarily due to voluntary severance accruals of $22.5 million in 2003.
Decommissioning expense increased primarily due to the implementation of SFAS 143. The increase in decommissioning expense was offset by increases in other regulatory credits and interest and dividend income and has no effect on net income.                            ,       ,           ;    -
Depreciation and amortization expenses decreased primarily due to decreased rates associated with the assumed life extension of River Bend, partially offset by higher depreciation due to an increase in plant in service.
The decrease in depreciation, related to the assumed license extension of River Bend has a minimal impact on net income because it was offset by the January 2003 base rate decrease discussed in "Net Revenue" above.
Other income decreased primarily due to the abeyed River Bend plant cost accrual discussed above.
Interest expense on long-term-debt increased primarily due to the issuance of $340 million of First Mortgage Bonds in November 2002, $600 million in June 2003, and, $440 million in July 2003, partially offset by the retirement of $293 million of First Mortgage Bonds in March 2003 and $745 million in the third quarter of 2003.
Income Taxes                                                                                                       ..           -
The effective income tax rates for 2004, 2003, and 2002 were 36.0%, 21.3%, and 27.5%, respectively. See Note 3 to the domestic utility companies and System Energy financial statements for a reconciliation of the federal statutory rate of 35% to the effective income, tax rate. Tax reserves not expected to reverse within the next year are reflected as non-current taxes accrued on the balance sheet.
7 5                          .         *
                                                    ,'-                                               .f -.
* 175

Entergy Gulf States, Inc.
Management's Financial Discussion and Analysis Liquiditv and Capital Resources Cash Flow Cash flows for the years ended December 31, 2004, 2003, and 2002 were as follows:
2004             2003         2002
                                                                                           ; (In Thousands)
Cash and cash equivalents at beginning of period                           $206,030        $318,404     $123,728
  -Cash flow provided by (used in):
Operating activities                                               649,458          425,963      500,654 Investing activities,                                             (389,344)       ;(446,639)    (351,456)
Financing activities                                              (459,170)         (91,698)       45,478
               . Net increase (decrease) in cash and cash equivalents        :   (199,056)       (112,374)       194,676 Cash and cash equivalents at end of period                              -     $6,974        $206,030      $318,404
               .  .-     .I                      .  .
Operating Activities Cash flow from operations increased $223.5 million in 2004 compared to 2003 primarily due to money pool activity. Decreased vendor payments, increased recovery of deferred fuel costs, and lower interest payments also contributed to the increase.
In 2003, the domestic utility companies and System Energy filed, with the IRS, a change in tax accounting method notification 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 provided under the IRS capitalization regulations. The cumulative adjustment placing these companies on the new methodology resulted in a $674 million deduction for Entergy Gulf States on Entergy's 2003 income tax return. There was no cash benefit from the method change in 2003. In 2004 Entergy Gulf States realized $69 million in cash tax benefit from the method change. This tax accounting method change is an issue across the utility industry and will likely be challenged by the IRS oil audit.
As of December 31, 2004, Entergy Gulf States has a net operating loss (NOL) carryforward for tax purposes of $447.5 million, principally resulting from the' change in tax accounting method related to cost of goods sold. If the tax accounting method change is sustained, Entergy Gulf States expects to utilize the NOL carryforward through 2006.
Cash flow from operations decreased $74.7 million in 2003 compared to 2002 primarily due to money pool activity, higher working capital needs, and increased vendor payments in 2003 relating to storm expense accruals in late-2002. The decrease was partially offset by lower income tax payments.
Entergy Gulf States' receivables from or (payables to) the money pool were as follows as of December 31 for each of the following years:
2004          - 2003            2002             2001
   *r J : ., ,       . t                                           (In Thousands),
($59,720)        $69,354          $18,131          $27,665 Money pool activity provided $129.1 million of Entergy Gulf States' operating cash flows in 2004, used $51.2 million in 2003, and provided $9.5 million in 2002. See Note 4 to the domestic utility companies and System Energy financial statements for a description of the money pool.
Investing Activities Net cash used in investing activities decreased $57.3 million in 2004 compared to 2003 primarily due to the maturity in 2004 of $23.6 million of other temporary investments that had been made in 2003, which provided cash 176

Entergy Gulf States, Inc.
Management's Financial Discussion and Analysis in 2004. Also contributing to the decrease was a $27.2 million decrease in under-recovered fuel and purchased power expenses in Texas that have been deferred and !are expected to be collected over a period greater than twelve months. See Note 1 to the domestic utility companies and System Energy financial statements for further discussion of the accounting for fuel costs.
Net cash used in investing activities increased $95.2 million in 2003 compared to 2002 primarily due to an increase of $23.6 million in other temporary investments in 2003 compared to the maturity of $44.6 million of other temporary investments that provided cash in 2002. The increase was also due to an increase of $37.7 million in under-recovered fuel and purchased power expenses in Texas that have been deferred and are expected to be collected over a period greater than twelve months. See Note 1 to. the domestic utility companies and System Energy financial statements for further discussion of the accounting for fuel costs.
Financing Activities Net cash used in financing activities increased $367.5 million in 2004 compared to 2003 primarily due to the net reduction of $357 million of long-term debt in 2004 compared to $15.4 million in 2003 as well as an increase of $26.2 million in common stock dividends paid.
Entergy Gulf States used $91.7 million of cash in financing activities in 2003 compared to providing $45.5 million of cash in 2002 primarily due to the net reduction of $15.4 million of long-term debt in 2003 compared to the net issuance of $143.4 million of long-term debt in 2002. The increase in cash used in financing activities was partially offset by a decrease of $23.1 million in common stock dividends paid.
See Note 5 to the domestic utility companies and System Energy financial statements for details on long-term debt.,
Uses of Capital Entergy Gulf States requires capital resources for:
* construction and other capital investments;
* debt and preferred stock maturities;
* working capital purposes, including the financing of fuel and purchased power costs; and
* dividend and interest payments.
       .. Followingare the amounts of Entergy Gulf States' planned construction and other capital investments, existing debt and lease obligations, and other purchase obligations:
2005        2006-2007          2008-2009         after 2009           Total (In Millions)
Planned construction and capital investment (1)                     $275              $505               N/A                 N/A            $780 Long-term debt                                 $98                 -             $550              $1,341         $1,989 Operating leases                               $27              $41                $19                $115           $202 Purchase obligations (2)                     $164               $78                  $6             - $21            $269 Other long-term liabilities                     $3               $7        -         $7                    -          $17 Nuclear fuel lease obligations (3)             $33              $38      ,        N/A                 N/A             $71 (1)    Includes approximately $210 to 220 million annually for maintenance capital, which is planned spending on routine capital projects that are necessary to support reliability of service, equipment or systems and to support normal customer growth.
(2)    Purchase obligations represent the minimum purchase obligation or cancellation charge for contractual obligations to purchase goods or services: For Entergy Gulf States it primarily includes unconditional fuel and purchased power obligations.
(3)    It is expected that additional financing under the leases will be arranged as needed to acquire additional fuel, 177

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Management's Financial Discussion and Analysis to pay interest, and to pay maturing debt. If such additional financing cannot be arranged, however, the lessee in each case must repurchase sufficient nuclear, fuel to allow the lessor to meet its obligations. -
                                    !                    , '    ' i In addition to these contractual obligations, Entergy Gulf States expects to contribute $18.9 million to its pension plans and $14.3 million to other postretirement plans in 2005.
The planned capital investment estimate for Entergy Gulf States reflects. capital required to support existing business and customer growth. The estimated capital- expenditures are subject to periodic review and modification and may vary based'on the ongoing effects of regulatory constraints, environmental compliance, market volatility, economic trends, business restructuring, and the ability, to access capital.. Management provides more information on long-term debt and preferred stock maturities in Notes 5 and 6 to the domestic utility companies and System Energy financial statements.
In addition to the purchase obligations presented in the table above, Entergy Gulf States expects to have an obligation to; purchase' power, from the Perryville power plant. In January, 2004, Entergy Louisiana signed a definitive agreemeht to acquire the 718 MW Perryville power plant for $170 million. The agreement has subsequently been amended to allow the current plant owner to retain the interconnection facilities associated with the plant, resulting in a decrease in the acquisition price to $162 million. As a result of the amended terms, the FERC issued an order in October 2004 disclaiming jurisdiction over the acquisition. This order currently is subject to rehearing by the FERC. The plant is owned by a subsidiary of Cleco Corporation, which subsidiary submitted a bid in response to Entergy's Fall 2002 request-'for proposals.for supply-side resources. The signing of the agreement followed a voluntary Chapter 11 bankruptcy filing by the plant's owner. Entergy expects that Entergy Louisiana will own 100 percent of the Perryville plant, and that Entergy Louisiana will sell 75 percent of the output to Entergy Gulf States under a long-term cost-of-service power purchase agreement. In addition,-EntergyLouisiana and Entergy Gulf States executed an interim power purchase agreement with the plant's owner through the date of the acquisition's closing (as long as that occurs by December 2005) for 100 percent of the output of the Perryville power plant. In April 2004, the bankruptcy court approved Entergy Louisiana's agreement to acquire. the'plant. In March 2004, Entergy Gulf States and Entergy Louisiana filed with the LPSC for its approval of the acquisition and long-term cost-of-service power purchase agreement. Entergy is seeking approval from the LPSC' of cost recovery for the acquisition, giving consideration to the need for the power and the prudence, of Entergy Louisiana and Entergy Gulf States in engaging in the transaction. Hearings are scheduled for March 2005.'' 'Assuming' regulatory approval by the LPSC, Entergy Louisiana expects the Perryville acquisition to close in mid-2005.
As a wholly-owned subsidiary, Entergy Gulf States pays dividends to Vntergy Corporation fromfits earnings at a percentage determined monthly. Entergy Gulf States is restricted by long-term debt indentures in the payment of cash dividehds or -other distributions on its commoi and preferred st6ck. Currently, all' of Entergy'Gulf States' retained earnings are available for distribution.
Sources of Capitat Entergy Gulf States' sources to meet its capital requirements include:
* internally generated funds;
    -*    cash on hand;
* debt or preferred stock issuances; and
* bank financing under new or existing facilities.
The following table lists First Mortgage Bonds issued by Entergy Gulf States in 2004:"
           -. IIssue Date'                  Description          '     . Maturity             'Amount-,
                          . *I                                                                (In Thousands)
October 2004            4.875% Series -       .      November 2011                 $200,000 I November 2004           Libor + 0.4% Series          December,2009                  225,000 November 2004           5.6% Series                  December 2014     !,             0,000
                                                                      ' '    I-      ''$475,000 178

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Management's Financial Discussion and Analysis The following table lists First Mortgage Bonds retired by Entergy Gulf States in 2004:
Retirement Date                   Description               Maturity                    Amount (In Thousands)
April 2004                    8.25% Series              April 2004                         $292,000 December 2004                 Libor + 0.9% Series        June 2007                          275,000 December 2004                 5.2% Series                December 2007                      200,000
                                                                                                     $767,000 Entergy Gulf States may refinance or redeem debt and preferred stock prior to maturity, to the extent market conditions and interest and dividend rates are favorable.
In addition, in September 2004, Entergy Gulf States purchased its $62 million 5.65% Series tax-exempt bonds from the holders, pursuant to a mandatory tender provision, and has not remarketed the bonds at this time.
All debt and common and preferred stock issuances by Entergy Gulf States require prior regulatory approval.
Preferred stock and debt issuances are also subject to issuance tests set forth in its corporate charter, bond indentures, and other agreements. Entergy Gulf States has sufficient capacity under these tests to meet its foreseeable capital needs.
Borrowings and securities issuances by Entergy Gulf States are limited to amounts authorized by the SEC.
The current short-term borrowing limitation, including borrowings under the money pool, is $340 million. Under its SEC Orders and without further SEC authorization, Entergy Gulf States cannot incur additional indebtedness or issue other securities unless (a) it and Entergy Corporation maintain a common equity ratio of at least 30% and (b) with the exception of money pool borrowings, the security to be issued (if rated) and all outstanding securities of Entergy Gulf States (other than its preferred stock), as well as all outstanding securities of Entergy Corporation, that are rated, are rated investment grade. See Note 4 to the domestic utility companies and System Energy financial statements for further discussion of Entergy Gulf States' short-term borrowing limits.
Significant Factors and Known Trends Transition to Retail Competition Texas As ordered by the PUCT, in January 2003, Entergy Gulf States filed its proposal for an interim solution (retail open access without a FERC-approved RTO), which among other elements, included:
* the recommendation that retail open access in Entergy Gulf States' Texas service territory, including corporate unbundling, occur by January 1, 2004, or else be delayed until at least January 1,2007. If retail open access is delayed past January 1,2004, Entergy Gulf States seeks 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.
* the recommendation 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.
* the recommendation that the decision points be identified that would require prior to January 1,2004, the PUCT's determination, based upon objective criteria, whether to proceed with further 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 initiate 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.
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Management's Financial Discussion and Analysis 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 February 2005, bills were submitted in the Texas Legislature that would clarify that Entergy Gulf States is no longer subject to a rate freeze and specify that retail open access will not commence in Entergy Gulf States' Texas service territory until the PUCT certifies a power region.
Louisiana In November 2001, the LPSC decided not to move forward with retail open access for any customers at this time. The LPSC instead directed its staff to hold collaborative group meetings concerning open access from time to time, and to have the LPSC staff monitor developments in neighboring states and to report to the LPSC regarding the progress of retail access developments in those states. In September 2004, in response to a study funded by certain industrial customers that evaluated a limited industrial-only retail choice program, the LPSC asked the LPSC staff to solicit comments and obtain information from utilities, customers, and other interested parties concerning the potential costs and benefits of a limited choice program, the impact of such a program on other customers, as well as issues such as stranded costs and transmission service. Comments from interested parties were filed with the LPSC on January 14, 2005. The LPSC has not established a procedural framework for consideration of the comments. At this time, it is not certain what further action, if any, the LPSC might take in response to the information it received.
Jurisdictional Separation Plan                                                           ,
Pursuit of Entergy Gulf States' business separation plan mandated by Texas law in connection with retail open access in the Texas service territory has been complicated by the existence of retail operations in Louisiana subject to the jurisdiction of the LPSC. During the course of Entergy Gulf States' retail open access proceedings with the PUCT, the LPSC has been holding independent proceedings concerning the proposed separation of Entergy Gulf States' business. Unlike the plan filed with the PUCT in 2000 (and amended through 2001), discussed below, to separate Entergy Gulf States' Texas generation, transmission, distribution, and retail electric functions into separate companies, the investigation recently initiated in the LPSC proceedings is evaluating a jurisdictional split of Entergy Gulf States into a Louisiana company and a Texas company. In a status conference held in September 2004 before an ALJ, the LPSC staff asserted that uncertainty with respect to retail open access in Texas should not control whether or when the LPSC should require the jurisdictional separation of Entergy Gulf States and recommended that an investigation concerning the proposed-jurisdictional separation proceed. Entergy Gulf States submitted a preliminary methodology developed by Entergy for the jurisdictional separation of Entergy Gulf States if the regulators should determine that a jurisdictional separation is in the public interest. Although it contains many components that are similar to those set forth in the business separation plan filed with the PUCT, the preliminary methodology filed with the LPSC provides for the separation of Entergy Gulf States into a Louisiana vertically integrated utility company and a' Texas vertically integrated utility company;* ratherthan the separation of Entergy Gulf States' Texas generation, transmission, distribution, and retail electric' functions into separate companies as is envisioned in the plan filed with the PUCT. A procedural schedule was established in the status conference that sets discovery through February 2005, testimony through the first half of June 2005, and a hearing beginning later in June 2005. Approvals of the FERC, the SEC, the PUCT, and the NRC may also be required for certain matters before any implementation of the jurisdictional separation of Entergy Gulf $tates.
Business Separation Plan under the Texas Retail Open Access Law Entergy Gulf States' business separation plan for Texas retail open access developed pursuant to the Texas restructuring law provides for the separation of its generation, transmission, distribution, and retail electric functions into separate companies. It has been amended during the course of various PUQT and LPSC proceedings and is subject to further change and regulatory proceedings. Entergy Gulf States filed the business separation plan with the 180

Entergy Gulf States, In3.
Management's Financial Discussion and Analysis PUCT in January 2000 and amended that plan in June and November 2000 and January 2001. In July 2000, 'the PUCT approved the amended business separation plan in an interim order. In December 2001, the PUCT abated the proceeding and indicated it will consider a final order in a timely manner consistent with a settlement agreement delaying retail open access. The outcome of the LPSC proceedings described below, which have resulted in amendments to the plan beyond what was approved by the PUCT, have been and will continue to be reported to the PUCT and the Office of Public Utility Counsel and may require additional PUCT action before the business separation plan could become final.
The LPSC opened a docket to identify the changes in corporate structure and operations of Entergy Gulf States, and their potential impact on Louisiana retail ratepayers, resulting from restructuring in Texas. In those proceedings, Entergy Gulf States and the LPSC staff reached a settlement on certain Texas business separation plan issues, and after a May 2001 hearing, the LPSC issued an interim order in July 2001 approving the settlement. In July 2001, Entergy Gulf States and the LPSC Staff completed an additional settlement on business separation plan issues relating to the separation of Texas distribution and transmission. A hearing on the distribution and transmission settlement was held and the LPSC approved the settlement in September 2001. Issues related to the separation of generation are still unresolved.
The plan approved by the LPSC in September 2001 provides that Entergy Gulf States will be separated into the following principal companies if retail open access were to commence in Texas:
* a Texas distribution company, which will own and operate Entergy Gulf States' electric distribution system in Texas;
* an intermediate transmission company;
* a Texas generation company (which may be more than one legal entity), which initially will purchase capacity and energy from the generating assets allocated to Texas load (Texas generating assets), and eventually will own those assets;
* Texas retail electric providers, which will provide competitive retail electric service in Texas; and
* Entergy Gulf States-Louisiana.
Pursuant to the LPSC-approved plan, Entergy Gulf States-Louisiana would:
* own and operate Entergy Gulf States' electric distribution system in Louisiana, the Texas generating assets (until they are transferred to the Texas generation company), the remainder of Entergy Gulf States' generating assets, and Entergy Gulf States' other businesses that are not separated, and own Entergy Gulf States' transmission assets allocated to Louisiana (until they are transferred to the intermediate transmission company described in the next bullet); and
* indirectly own a portion of an intermediate transmission company, which will own Entergy Gulf States' electric transmission assets allocated to Texas, and later Entergy Gulf States' transmission assets allocated to Louisiana.
System Agreement Proceedings The domestic utility companies historically have engaged in the coordinated planning, construction, and operation of generating and transmission facilities under the terms of an agreement called the System Agreement that has been approved by the FERC. Litigation involving the System Agreement is being pursued by the LPSC at both the FERC and before itself. These proceedings include challenges to the allocation of costs as defined by the System Agreement, raise questions of imprudence by the domestic utility companies in their execution of the System Agreement, and seek support for local regulatory authority over System Agreement issues.
In February 2004, a FERC ALJ issued an Initial Decision in the LPSC-initiated proceeding at the FERC.
The Initial Decision decided some issues in favor of the relief sought by the LPSC, and decided some issues against the relief sought by the LPSC. Several parties, including Entergy, the LPSC, the APSC, the MPSC, the City Council, and the FERC Staff, filed briefs on exceptions in response to the ALJ's Initial Decision. Entergy's exceptions to the ALJ's Initial Decision include: the practical effect of the Initial Decision is full production cost equalization, which was rejected in the Initial Decision and previously has been rejected by the FERC; resource 181

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Management's Financial Discussion and Analysis planning for the Entergy System would be impeded if the Initial Decision were adopted; the remedy in the Initial Decision is inconsistent with the history, structure, and precedent regarding the System Agreement;, the Initial Decision's remedy ignores the historical pattern of production cost disparities-on the Entergy System and would result in substantial, sudden transfers of costs between groups of Entergy customers; the numerical standards proposed in the Initial Decision are arbitrary and are so complex that they will be difficult to implement; the Initial Decision improperly rejected Entergy's resource planning remedy; the Initial Decision erroneously determined that the full costs of the Vidalia project should be included in Entergy Louisiana's production costs for purposes of calculating relative production costs; and the Initial Decision erroneously adopted a new method of calculating reserve sharing costs rather than the current method.
If the FERC grants the relief requested by the LPSC in the proceeding, the relief may result in a material increase in the total production costs the FERC allocates to companies whose costs currently are projected to be less than the Entergy System average, and a material decrease in the total production costs the FERC allocates to companies whose costs currently are projected to exceed that average. If the FERC adopts the ALJ's Initial Decision, the amount of production costs that would be reallocated among the domestic utility companies would be determined through consideration of each domestic utility company's relative total production cost expressed as a percentage of Entergy System average total production cost. The AL's Initial Decision would reallocate production costs of the domestic utility companies whose percent of Entergy System average production cost are outside an upper or lower bandwidth. This would be accomplished by payments from domestic utility companieswhose production costs are below Entergy System average production cost to domestic utility companies whose production costs are above Entergy System average production cost.
An assessment of the potential effects of the AL's Initial Decision requires assumptions regarding the future total production cost of each domestic utility company, which assumptions include the mix of solid fuel and gas-fired generation available to each company and the costs of, natural gas and purchased power. Entergy Louisiana and Entergy Gulf States are more dependent upon gas-fired generation than Entergy Arkansas, Entergy Mississippi, or Entergy New Orleans. Of these, Entergy Arkansas is the least dependent upon gas-fired generation.
Therefore, increases in natural gas prices likely will increase the amount by which Entery Arkansas' total production costs are below the average production costs of the domestic utility companies. Considerable uncertainty exists regarding future gas prices. Annual average Henry Hub gas prices have varied significantly over recent years, ranging from $1.72/mmBtu to $5.85/mmBtu for the 1995-2004 period, and averaging $3.43ImmBtu during the ten-year period 1995-2004 and $4.58/mmBtu duringthe five-year period 2000-2004. Recent market conditions have resulted in gas prices that have averaged $5.85lmmBtu for the twelve months ended December 2004. Based upon analyses considering the effect on future production costs if the FERC adopts the AL's Initial Decision, the following potential annual production cost reallocations among the domestic utility companies could resultassuming annual average gas prices range from $6.39/mmBtu in 2005 declining td $4.97/mmBtu by 2009:
Average Annual Range of Annual Payments     Payments or (Receipts) or (Receipts)           for 2005-2009 Period (In Millions)               (In Millions)
Entergy Arkansas              ,     $154 to $281                    $215 Entergy Gulf States               ($130) to ($15)                    ($63)
Entergy Louisiana                 ($199) to ($98)                  ($141)
Entergy Mississippi                   ($16) to $8                      $1 Entergy New Orleans                  ($17) to ($5)                  ($12)
Management believes that any changes in the allocation of production costs resulting from a FERC decision and related retail proceedings should result in similFr rate changes for retail customers. Although the outcome and timing of the FERC, APSC, and other proceedings cannot be predicted at this time, Entergy Gulf States does not believe that the ultimate resolution of these proceedings will have a material effect on its financial condition or results of operation.
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Management's Financial Discussion and Analysis In February 2004, the APSC issued an "Order of Investigation," in which it discusses the negative effect that implementation of the FERC AL's Initial Decision would have on Entergy Arkansas' customers. The APSC order establishes an investigation into whether Entergy Arkansas' continued participation in the System Agreement is in the best interest of its customers, and whether there are steps that Entergy Arkansas or the APSC can take "to protect [Entergy Arkansas' customers] from future attempts by Louisiana, or any other Entergy retail regulator, to shift its. high costs to Arkansas." Entergy Arkansas filed testimony in response to the APSC's Order of Investigation. The testimony emphasizes that the ALUs Initial Decision is not a final order by the FERC; briefly discusses some of the aspects of the Initial Decision that are included in Entergy's exceptions filed with the FERC; emphasizes that Entergy will seek to reverse the production cost-related portions of the Initial Decision; and states that Entergy Arkansas believes that it is premature, before the FERC makes a decision, for Entergy Arkansas to determine whether its continued participation in the System Agreement is appropriate.
In April 2004, the APSC commenced the investigation into Entergy Louisiana's Vidalia purchased power contract and requested historical documents, records, and information from Entergy Arkansas, which Entergy Arkansas has provided to the APSC. Also in April 2004, the APSC issued an order directing Entergy Arkansas to show cause why Entergy Arkansas should not have to indemnify and hold its customers harmless from any adverse financial effects related to Entergy Louisiana's pending acquisition of the Perryville power plant, or show that the Perryville unit will produce economic benefits for Entergy Arkansas' customers. Entergy Arkansas filed a response in May 2004 stating that Entergy will seek to reverse the production cost-related portions of the AL's Initial Decision in the System Agreement proceeding at the FERC, that the Perryville acquisition is part of Entergy's request for proposal generation planning process, that Entergy Arkansas is not in a position to indemnify its retail customers from actions taken by the FERC, and that the Perryville acquisition is expected to reduce the domestic utility companies' overall production costs. Procedural schedules have not been established in these APSC investigations.
In April 2004, the City Council issued a resolution directing Entergy New Orleans and Entergy Louisiana to notify the City Council and obtain prior approval for any action that would materially modify, amend, or terminate the System Agreement for one or more of the domestic utility companies. Entergy New Orleans and Entergy Louisiana appealed to state court the City Council's resolution on the basis that the imposition of this requirement with respect to the System Agreement, a FERC-approved tariff, exceeds the City Council's jurisdiction and authority. In July 2004, the City Council answered the appeal and filed a third party demand and counterclaim against Entergy, the domestic utility companies, Entergy Services, and System Energy, seeking a declaratory judgment that Entergy and its subsidiaries cannot terminate the System Agreement until obligations owed under a March 2003 rate case settlement are satisfied. In August 2004, Entergy New Orleans and Entergy Louisiana, as well as the named third party defendants, filed pleadings objecting to the City Council's third party demand and counterclaim on various grounds, including federal preemption. In February 2005, the state court issued an oral decision dismissing the City Council's claims for lack of subject matter jurisdiction and prematurity.
The LPSC instituted a companion ex-parte System Agreement investigation to litigate several of the System Agreement issues that the LPSC is litigating before the FERC in the previously discussed System Agreement proceeding. This companion proceeding will require the LPSC to interpret various provisions of the System Agreement, including those relating to minimum-run and must-run units, the propriety of the methods used for billing and dispatch on the Entergy System, and the use of a rolling, twelve-month average of system peaks for allocating certain costs. In addition, by this companion proceeding the LPSC is questioning whether Entergy Louisiana and Entergy Gulf States were prudent for not seeking changes to the System Agreement previously, so as to lower costs imposed upon their ratepayers and to increase costs imposed upon ratepayers of other domestic utility companies.
The LPSC -staff has filed testimony suggesting that the remedy for the alleged imprudence of Entergy Louisiana and Entergy Gulf;States should be a reduction in allowed rate of return on common equity of 100 basis points. The domestic utility companies have challenged the propriety of the LPSC's litigating System Agreement issues.
Nevertheless, on January 16, 2002 the LPSC affirmed a decision of its AU upholding the LPSC staffs right to litigate System Agreement issues at the LPSC, rather than before the FERC. The procedural schedule is suspended at this time and an evidentiary hearing is not scheduled. An unrelated case between the LPSC and Entergy Louisiana raised the question of whether a state regulator is preempted by federal law from reviewing and interpreting FERC rate schedules that are part of the System Agreement, and from subsequently enforcing that interpretation. The LPSC interpreted a System Agreement rate schedule in the unrelated case, and then sought to enforce its interpretation. The 183

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Managements Financial Discussion and Analysis Louisiana Supreme Court affirmed. In 2003, the U.S. Supreme Court ruled in Entergy Louisiana's favor and reversed the decisions of the LPSC and the Louisiana Supreme Court.                                                   t Transmission In 2000, FERC issued an order encouraging utilities to voluntarily 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, and 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. Assuming applicable regulatory support and approvals can be obtained, Entergy proposed to contract with the ICT to oversee the granting of transmission service on the Entergy system as well as the implementation of the proposed weekly procurement process (WPP). 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.
Entergy also proposed to have the ICT administer a transmission expansion pricing protocol that will increase the efficiency of transmission pricing on the Entergy system and that will be designed to protect Entergy's native load customers from bearing the cost of transmission upgrades not required to reliably serve these customers' needs.
Entergy intends for the ICT to determine whether transmission upgrades associated with new requests for service should be funded directly by the party requesting such service or by a broader group of transmission customers, including Entergy's native load customers. This determination would be made in accordance with protocols approved by the FERC, and any party contesting such determination, including Entergy, would be required to seek review at the FERC. Several technical conferences regarding the ICT proposal, or various components thereof, were held in 2004.
Entergy has also responded to discovery requests that resulted from these conferences.'
In January 2005, Entergy filed a petition for declaratory order with the FERC requesting that the FERC provide guidance on two important issues: (1) whether the functions performed by the ICT will cause it to become a "public utility" under the Federal Power Act or the "transmission provider" under Entergy's open access transmission tariff, and (2) whether Entergy's transmission pricing proposal, as administered by the ICT, satisfies the FERC's transmission pricing policy. I The petition also indicates that, subject to the outcome of the petition and obtaining support of Entergy's retail regulators, Entergy would be willing to have the ICT perform the following additional functions: (a) grant or deny requests for transmission service; (b) calculate available flowgate capacity; (c) administer Entergy's OASIS; and (d) perform an enhanced planning function (integrating the plans of Entergy and other potential transmission owners to identify regional synergies.) Comments and interventions on the petition were filed by market participants and retail regulators on February 4, 2005. In their individual comments, the APSC, LPSC, and City Council supported Entergy's position that the ICT would not become' a "public utility" or "tranismission provider and that the transmission pricing proposal satisfies the FERC's transmission pricing policy. Certain other parties urged the FERC to reject the petition for declaratory order or, in the alternative, that the FERC assert jurisdiction over the ICT and determine that Entergy's proposed pricing policy is inconsistent with FERC's current pricing policy. FERC action on the petition is expected during the first half of 2005.                       '
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 comments 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. Additionally, Entergy Louisiana and Entergy Gulf States have filed an applicationiwith the LPSC requesting that the LPSC find that the ICT proposal is a prudent and appropriate course of action. A hearing on the transmission pricing aspects of the ICT proposal is scheduled for May 2005, with a' separate hearing on theWPP 184

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Management's Financial Discussion and Analysis portion of the proposal currently scheduled for August 2005.                   -.
Interconnection Orders The domestic utility companies (except Entergy New Orleans) are currently defendants to several complaints and rehearing requests before the FERC in which independent generation entities (GenCos) are seeking a refund of monies that the GenCos had previously paid to the Entergy companies for facilities necessary to, connect their generation facilities to Entergy's transmission system. The FERC has issued initial orders in response to two of the complaints and in certain other dockets ordering Entergy to refund approximately $100 million in expenses and tax obligations previously paid by the GenCos, including $28 million for Entergy Gulf States. The refunds will be in the form of transmission credits that will be utilized over time as the GenCos take transmission service from Entergy. To the extent the Entergy companies are ,ordered to provide such refunds, these costs will qualify for inclusion in the Entergy companies' rates., The recovery of these costs is not automatic, however, especially at the retail level,: where the majority of the cost recovery would occur. Entergy intends to pursue all regulatory and legal avenues available to it in order to have these orders reversed and have the affected interconnection agreements reinstated as agreed to originally by the generators.
Available Flowgate Capacity Proceeding On December 17, 2004, the FERC issued an order initiating a hearing and investigation concerning the justness and reasonableness of the Available Flowgate Capacity (AFC) methodology, the methodology used to evaluate short-term transmission, service requests under the domestic utility companies' open access transmission tariff, and establishing a refund effective date. In its order, the FERC indicated that although it "appreciates that Entergy is attempting to explore ways to improve transmission access on its system," it believed that an investigation was warranted to gather more evidence in light of the concerns raised by certain transmission customers and certain issues raised in a FERC audit report finding errors and problems with the predecessor methodology used by Entergy for evaluating short-term transmission requests, the Generator Operating Limits methodology. The FERC order indicates that the investigation will include an examination of (i) Entergy's implementation of the AFC program, (ii) whether Entergy's implementation has complied with prior FERC orders and open access transmission tariff provisions addressing the AFC program, and (iii) whether Entergy's provision of access to short-term transmission on its transmission system was just, reasonable, and not unduly discriminatory.
Entergy has submitted an Emergency Interim Request for Rehearing requesting the FERC to defer the hearing process and instead proceed initially with an independent audit of the AFC program and the expansion of the current process involving other market participants to address a broader range of issues. Entergy believes that this type of approach is a more efficient and effective mechanism for evaluating the AFC program. Following the completion of the independent audit and process involving other market participants, the FERC could determine whether other procedural steps are necessary. The FERC has not yet ruled on the Emergency Interim Request for Rehearing submitted by Entergy.
Entergy believes that it has complied with the provisions of its open access transmission tariff, including the provisions addressing the implementation of the AFC methodology; however, the ultimate scope of this proceeding cannot be predicted at this time. A hearing in the AFC proceeding is currently scheduled to commence in August 2005.
State and Local Rate Regulatory Risks The rates that Entergy Gulf States charges for its services are an important item influencing its financial position, results of operations, and liquidity. Entergy Gulf States is closely regulated and the rates charged to its customers are determined in regulatory proceedings, except for a portion of its operations. Governmental agencies, the LPSC and the PUCT, are primarily responsible for approval of the rates charged to customers.
Entergy Gulf States is operating in Texas under the terms of a December 2001 settlement agreement approved by the PUCT. -The settlement provided for a base rate freeze that has remained in effect during the delay in the implementation of retail open access in Entergy Gulf States' Texas service territory. In view of the PUCT order in 185

Entergy Gulf States, Inc.
Management's Financial Discussion and Analysis July 2004 to further delay retail open access in the Texas service territory, Entergy Gulf States filed a retail electric rate case and fuel reconciliation proceeding with the PUCT in August 2004 seeking the following:
* approval of a base rate increase of $42.6 million annually for the Texas retail jurisdiction;
* approval to implement a $14.1 million per year rider to recover, over a 15-year period, $110.9 million of incurred costs related to its efforts to transition to a competitive retail market in accordance with the Texas restructuring law;
* approval to implement a proposed $11.3 million franchise fee rider to recover payments to municipalities charging such fees; and
* a requested return on equity of 11.5%.
In addition, Entergy Gulf States' fuel reconciliation filing made in conjunction with the base rate case sought'to reconcile approximately $288 million in fuel and purchased power costs incurred during the period September 2003 through March 2004. In October 2004, the PUCT issued a written order in which it dismissed the rate case and fuel reconciliation proceeding indicating that Entergy Gulf States is still subject to a rate freeze based on an agreement, approved by PUCT order in 2001, stipulating that a rate freeze would remain in effect until retail open access commenced in Entergy Gulf States' service territory, unless the rate freeze is lifted by the PUCT prior thereto. Entergy Gulf States believes the PUCT has misinterpreted the settlement and has appealed the PUCT order to the Travis County District Court and intends to pursue other available remedies.
Dismissal of Entergy Gulf States' rate case does not preclude it from seeking recovery of the transition to competition costs when the rate freeze is no longer in effect. ' Similarly,' the dismissal of the rate case does not preclude Entergy Gulf States from seeking the reconciliation of fuel and purchased power costs of $288 million for the period September 2003 through March 2004 when, at the appropriate time, similar costs are reconciled in the future.
As discussed above, in February 2005, bills were submitted in the Texas Legislature that would clarify that Entergy Gulf States is no longer subject to a rate freeze and specify that retail open access will not commience in Entergy Gulf States' Texas service territory until the PUCT certifies a power region.
In September 2004, the LPSC consolidated various dockets that were the subject of settlement discussions between the LPSC staff and Entergy Gulf States and Entergy Louisiana. The LPSC directed its staff to continue the settlement discussions and submit any proposed settlement to the LPSC for its consideration. In January 2005, Entergy Gulf States and Entergy Louisiana filed testimony with the LPSC in support of a proposed settlement that currently includes an'offer to refund $76 million to Entergy Gulf States' Louisiana customers, with no immediate change in current base rates. If the LPSC approves the proposed settlement, Entergy Gulf States will be'regulated under a three-year formula rate plan that, among other provisions, establishes' a ROE mid-point of 10.65% and permits Entergy Gulf States to recover incremental capacity costs without filing a traditional base rate proceeding.
The settlement resolves all issues in, and will result in the dismissal of, Entergy Gulf States' fourth, fifth, sixth, seventh, and eighth annual earnings reviews, Entergy Gulf States' ninth post-merger earnings review and revenue requirement analysis, a fuel review for Entergy Gulf States, dockets established to consider issues concerning power purchases for both Entergy Gulf States and Entergy Louisiana for the summers of 2001, 2002, 2003, and 2004, and a'docket concerning retail issues arising under the Entergy System Agreement. The settlement does not include the System Agreement case pending at FERC. The LPSC has solicited comments on the' proposed settlement from the parties to the various proceedings at issue in the proposed settlement. The proposed settlement is scheduled to be presented to the LPSC for consideration on March 23, 2005. Refer to Note 2 to the domestic utility and System Entergy financial statements for details of the proceedings included in the proposed settlement.
In July 2004, Entergy Gulf States filed with the LPSC an application for a change in its gas base rates and charges seeking an increase of $9.1 million. Entergy Gulf States also is'seeking approval of certain proposed rate design, rate schedule, and policy changes. Discovery is underway, and a decision is expected during the third quarter of 2005.
In addition to rate proceedings, Entergy Gulf States' fuel costs recovered from customers are subject to regulatory scrutiny. Entergy Gulf States' retail rate matters and proceedings, including fuel cost recovery-related issues, are discussed in Note 2 to the domestic utility companies and System Energy financial statements:            '
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Management's Financial Discussion and Analysis Industrial, Commercial, and Wholesale Customers Entergy Gulf States' large industrial and commercial customers continually explore ways to reduce their energy costs. In particular, cogeneration is an option available to a portion of Entergy Gulf States' industrial customer base. Entergy Gulf States responds by working with industrial and commercial customers and negotiating electric service contracts to provide competitive rates that match specific customer needs and load profiles. Despite these actions, Entergy Gulf States expects to lose one large industrial customer to cogeneration in 2005. Current sales-to that 'customer account for approximately $12 million of Entergy Gulf States' net revenue annually. Entergy Gulf States actively participates in economic development, customer retention, and reclamation activities to increase industrial and commercial demand, from both new and existing customers. Entergy Gulf States does not currently expect additional significant losses to cogeneration because of the current economics of the electricity markets and Entergy Gulf States' marketing efforts in retaining industrial customers.                                         -
Market and Credit Risks Entergy Gulf States has certain market and credit risks inherent in its business operations. Market risks represent 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. Credit risk is risk of loss from nonperformance by suppliers, customers, or financial counterparties to a contract or agreement.
Interest Rate and Equity Price Risk - Decommissioning Trust Funds Entergy Gulf States' nuclear decommissioning trust funds expose it to fluctuations in equity prices and interest rates. The NRC requires Entergy Gulf States to maintain trusts to fund the costs of decommissioning River Bend.
The funds are invested primarily in equity securities; fixed-rate, fixed-income securities; and cash and cash equivalents. Management believes that its exposure to market fluctuations will not affect results of operations for the River Bend trust funds because of the application of regulatory accounting principles. The decommissioning trust funds are discussed more thoroughly in Notes 1, 8, and 12 to the domestic utility companies and System Energy financial statements.
Nuclear Matters Entergy Gulf States owns and operates, through an affiliate, the River Bend nuclear power plant. Entergy Gulf States is, therefore, subject to the risks related to owning and operating a nuclear plant. These include risks from the use, storage, handling, and disposal of high-level and low-level radioactive materials, limitations on the amounts and types of insurance commercially available for losses in connection with nuclear operations, and technological and financial uncertainties related to decommissioning nuclear plants at the end of their licensed lives, including the sufficiency of funds in decommissioning trusts. In the event of an unanticipated early shutdown of River Bend, Entergy Gulf States may be required to provide additional funds or credit supportto satisfy regulatory requirements for decommissioning.
Environmental Risks, Entergy Gulf States' facilities and operations are subject to regulation by various governmental authorities having jurisdiction over air quality, water quality, control of toxic substances and hazardous and solid wastes, and other environmental matters. Management believes that Entergy Gulf States is .in substantial compliance with environmental regulations currently applicable to its facilities and operations. Because environmental regulations are subject to change, future compliance costs cannot be precisely estimated.
Litigation Risks The states of Louisiana and Texas in which Entergy Gulf States operates have proven to be unusually litigious environments. Judges and juries in these states fhave demonstrated a willingness to grant large verdicts, including punitive damages, to plaintiffs in personal injury, property damage, and business tort cases. Entergy Gulf 187

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Management's Financial Discussion and Analysis States uses legal and appropriate means to contest litigation threatened or filed against it, but the litigation environment in these states poses a business risk.
Critical Accounting Estimates                                                                              '
The preparation of Entergy Gulf States' 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 could produce estimates that would have a material effect on the presentation of Entergy Gulf States' financial position or results of operations.
Nuclear Decommissioning Costs Regulations require Entergy Gulf States to decommission the River Bend nuclear power plant after the facility is taken out of service, and money is collected and deposited in trust funds during the facility's operating life in order to provide for this obligation. Entergy Gulf States conducts periodic decommissioning cost studies (typically updated every three to five years) to estimate the costs that will be, incurred to decommission the facility.
The following key assumptions have a significant effect on these estimates:
* Cost Escalation Factors - Entergy Gulf States' decommissioning study includes an assumption that decommissioning costs will escalate over present cost levels by an annual factor averaging approximately CPI-U to 4.5%. A 50 basis point change in this assumption could change the ultimate cost of.
decommissioning a facility by as much as. 11%.
* Timing - The date of the plant's retirement must be estimated and 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 decrease the present value of these obligations. As discussed in Note 8 to the domestic utility companies and System Energy financial statements, Entergy Gulf States recorded revisions in 2004 to its estimated decommissioning cost liability for River Bend to reflect changes in assumptions regarding license renewal. Under these license renewal assumptions,'decomnmiissioninig of nuclear plants is assumed to occur at a date later than the original license expiration, thereby lowering the estimate of the decommissioning cost liability. The revised license renewal assumptions for the unregulated portion of Entergy Gulf States increased income in 2004 by $17 million net-of-tax for the excess of the reduction in the liability over the amount of undepreciated asset retirement cost at the time of adoption of SFAS 143. For the regulated portion of Entergy Gulf States, the revised assumptions'had no effect on net income because, as discussed further below, any amounts recorded related to SFAg- 143 are offset by the recording of regulatory assets or regulatory liabilities when projected decommissioning costs are collected in rates. Future revisions to appropriately reflect changes needed to the estimate of decommissioning costs will affect net income for the unregulated portion of Entergy Gulf States. Any increase 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 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 Mountain, Nevada. Until this site is available, however, nuclear plant'operators must provide for interim spent fuel storage on the nuclear plant site, which can require the construction and maintenance of dry cask storage sites or other facilities. The costs of developing and maintaining these facilities can have a significant effect (as much as 16% of estimated decommissioning costs). Entergy Gulf States' '
decommissioning studies include cost estimates for spent fuel storage. However, these estimates could change in the future based on the timting of the opening of the Yucca Mountain facility, the schedule for shipments to that facility when it is opened, or other factors.
* Technology and Regulation - To date, there is limited practical experience in the United States with actual decommissioning of large nuclear facilities. As experience is gained and technology changes, cost 188

Entergy Gulf States, Inc.
Management's Financial Discussion and Analysis estimates could also change. If regulations regarding nuclear decommissioning were to change, this could have a potentially significant effect on cost estimates. The effect of these potential changes is not presently determinable. Entergy Gulf States' decommissioning cost studies assume current technologies and regulations.
Entergy Gulf States collects the projected costs of decommissioning River Bend through rates charged to customers for the portion of the plant subject to cost-based ratemaking. The amounts collected through rates, which are based upon decommissioning cost studies, are deposited in decommissioning trust funds. In December 2002, decommissioning collections from customers for the Louisiana-regulated portion of River Bend were suspended as a result of the settlement with the LPSC of Entergy Gulf States' fourth through eighth earnings reviews. If decommissioning cost study estimates are changed and approved by regulators, collections from customers would also change.
Approximately half of River Bend is not subject to cost-based ratemaking. When Entergy Gulf States acquired the 30% share of River Bend formerly owned by Cajun, Entergy Gulf States obtained decommissioning trust funds of $132 million, which have since grown to $158 million. Entergy Gulf States believes that these funds will be sufficient to cover the costs of decommissioning this portion of River Bend, and no further collections or deposits are being made for these costs.
SFAS 143 Entergy Gulf States implemented SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. Nuclear decommissioning costs comprise substantially all of Entergy Gulf States' asset retirement obligations, and the measurement and recording of Entergy Gulf States' decommissioning obligations changed significantly with the implementation of SFAS 143. The most significant differences in the measurement of these obligations are outlined below:
* Recording of full obligation - SFAS 143 requires that the fair value of an asset retirement obligation be recorded when it is incurred. This caused the recorded decommissioning obligation of Entergy Gulf States to increase significantly, as Entergy Gulf States had previously only recorded this obligation as the related costs were collected from customers, and as earnings were recorded on the related trust funds.
* Fair value approach - SFAS 143 requires that these obligations be measured using a fair value approach.
Among other things, this entails the assumption that the costs will be incurred by a third party and will therefore include appropriate profit margins and risk premiums. Entergy Gulf States' decommissioning studies had been based on Entergy Gulf States performing the work and did not include any'such margins or premiums.
* Discount rate - SFAS 143 requires that these obligations be discounted using a credit-adjusted risk-free rate.
The net effect of implementing SFAS 143 for the portion of River Bend subject to cost-based ratemaking was recorded as a regulatory asset, with no resulting impact on Entergy Gulf, States' net income. Entergy Gulf States recorded this regulatory asset because its existing rate mechanism is based on the original or historical cost standard that allows Entergy Gulf States to recover all ultimate costs of decommissioning existing assets from current and future customers. Upon implementation of SFAS 143 in 2003, assets and liabilities increased as a result of increasing the asset retirement obligation by $129 million to its fair value as determined under SFAS 143, reducing accumulated depreciation by $63 million, and recording the related regulatory asset of $32 million. The net effect of implementing SFAS 143 for the portion of River Bend not subject to cost-based ratemaking resulted in an earnings decrease of $21 million net-of-tax as a result of a one-time cumulative effect of accounting change.
In the third quarter of 2004, Entergy Gulf States recorded a revision to its estimated decommissioning cost liability in accordance with a new decommissioning cost study for River Bend that reflected an expected life extension for the plant. The revised estimate resulted in a $166.4 million reduction in decommissioning liability, along with a $31.3 million reduction in utility plant, a $49.6 million reduction in non-utility property, a $40.1 million reduction in the related regulatory asset, and a regulatory liability of $17.7 million. For the portion of River Bend not subject to cost-based ratemaking, the revised estimate resulted in the elimination of the asset retirement 189

Entergy Gulf States, Inc.
Management's Financial Discussion and Analysis cost that had been recorded at the time of adoption of SFAS 143 with the remainder recorded as miscellaneous income of $27.7 million.                    ,
Application of SFAS 71 The application of SFAS 71, "Accounting for the Effects of Certain Types of Regulation," has a significant and pervasive impact on accounting and reporting for Entergy Gulf States.
Entergy Gulf States' financial statements primarily reflect assets and costs based on existing cost-based ratemaking regulation in accordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation."
Under traditional ratemaking practice, Entergy Gulf States is granted a geographic franchise to sell electricity. In return, Entergy Gulf States must make investments and incur obligations to serve customers. Prudently incurred costs are recovered from customers along with a return on investment. Regulators may require Entergy Gulf States to defer collecting from customers some operating costs until a future date. These deferred costs are recorded as regulatory assets in the financial statements. In order to continue applying SFAS 71 to its financial statements, Entergy Gulf States' rates must be set on a cost-of-service basis by an authorized body and the rates must be charged to and collected from customers...
If the generation portion of a utility company moves toward competition, it is possible that generation rates will no longer be set on a cost-of-service basis. If that occurs, the generation portion of the business could be required to discontinue application of SFAS 71. The result of discontinuing application of SFAS 71 would be the removal of regulatory assets and liabilities from the balance sheet, and could include the recording of asset impairments. This result is because some of the costs or commitments incurred under a regulated pricing system might be impaired or not recovered in a competitive market. These costs are referred to as stranded costs.
Unbilled Revenue As discussed in Note I to the domestic utility companies and System Energy financial statements, Entergy Gulf States records an estimate of the revenues earned for energy delivered since the latest customer billing. Each month the estimated unbilled revenue amounts are recorded as revenue and a receivable, and the prior month's estimate is reversed. The difference between the estimate of the unbilled receivable at the beginning of the period and the end of the period is the amount of unbilled revenue recognized during the period. The estimate recorded is primarily based upon an estimate of customer usage during the unbilled period and the billed price to customers in that month, including fuel price in Entergy Gulf States' Louisiana jurisdiction. Therefore, revenue recognized may be affected by the estimated price and usage at the beginning and end of each period and fuel price fluctuations, in addition to changes in certain components of the calculation including changes to estimates such as line loss, which affects the estimate of unbilled customer usage, and assumptions regarding. price such as the fuel cost recovery mechanism.
Pension and Other Postretirement Benefits Entergy sponsors 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 domestic utility companies and System Energy financial statements, 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 tong-term nature of these obligations, and the importance of the assumptions utilized, Entergy's estimate of these costs is a critical accounting estimate.
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Management's Financial Discussion and Analysis 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 obligations, Entergy reviews market yields on high-quality corporate debt and matches these rates with Entergy's projected stream of benefit payments. Based on recent market trends, Entergy reduced its discount rate used to calculate benefit obligations from 6.75% in 2002 to 6.25% in 2003 and to 6% in 2004. 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, 2004 accumulated postretirement benefit obligation to a 10%
increase in health care costs' in 2005 gradually decreasing each successive year, until it reaches a 4.5% annual increase in health care costs in 2011 and beyond.
In determining its expected long-term rate of return on plan assets, Entergy reviews past long-term performance, asset allocations, and long-term inflation assumptions. Entergy targets an asset allocation for its pension plan assets of roughly 65% equity securities, 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 2002 and 2003 to 8.5% in 2004. The assumed rate of increase in future compensation levels used to calculate benefit obligations was 3.25% in 2002, 2003, and 2004.
Cost Sensitivity The following chart reflects the sensitivity of pension cost to changes in certain actuarial assumptions (dollars in thousands):
Change in            Impact on 2004             Impact on Projected Actuarial Assumption                  Assumption              Pension  Cost             Benefit Obligation Increase/(Decrease)
Discount rate                                  (0.25%)                    $1,994                        $16,385 Rate of return on plan assets                  (0.25%)                    $1,134 Rate of increase in compensation                0.25%                       $726                         $4,157 The following chart reflects the sensitivity of postretirement benefit cost to changes in certain actuarial assumptions (dollars in thousands):
Impact on Accumulated Change In                Impact on 2004                 Postretirement Benefit Actuarial Assumption              Assumption         Postretirement Benefit Cost                   Obligation Increase/(Decrease)
Health care cost trend                 0.25%                         $847                                 $4,751 Discount rate                         (0.25%)                        $510                                 $5,677 Each fluctuation above assumes that the other components of the calculation are held constant.
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Management's Financial Discussion and Analysis Accounting Mechanisms In accordance with SFAS No. 87, "Employers' Accounting for Pensions," Entergy utilizes a number of accounting mechanisms that reduce the volatility 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 necessary, the excess is amortized over the average remaining service period of active employees.
Additionally, Entergy accounts for the impact of asset performance on pension expense over a twenty-quarter phase-in period through a "market-related" value 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 pension 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 accordance with SFAS 87.
Costs and Funding Total pension cost for Entergy Gulf States in 2004 was $0.4 million. Entergy Gulf States anticipates 2005 pension cost to increase to $7.3 million due to decrease in the discount rate,,(from, 6.25% to 6.00%), and the expected rate of return (from 8.75% to 8.5%) used to calculate benefit obligations. Entergy Gulf States contributed
$17 thousand to its pension plan in 2004, and anticipates making $18.9,million in contributions in 2005. The, rise in pension funding requirements is due to declining interest rates and the phased-in effept of asset underperformance from 2000 to 2002, partially offset by the Pension Funding Equity Act relief passed in April 2004.
At December 31, 2003 and 2004, Entergy Gulf States' accumulated benefit obligation was: less than plan assets, therefore there was no additional minimum pension liabilityjrequired to be recognized. Net income, for 2004, 2003, and 2002 was not impacted.
Total postretirement health care and life insurance benefit costs for Entergy Gulf States in 2004 were $17.,6 million, including $4.4 million in savings due to, the estimated effect of future Medicare Part D subsidies. Entergy Gulf States expects 2005 postretirement health care and life insurance benefit costs to be approximately $19.6 million, including $5.1 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 discount rate (from 6.25% to 6.00%) and an increase in the health care cost trend rate~used to calculate benefit obligations.
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192

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Entergy Gulf States, Inc.:
We have audited the accompanying balance sheets of Entergy Gulf States, Inc. as of December 31, 2004 and 2003, and the related statements of income, retained earnings and comprehensive income, and cash flows (pages 194 through 198 and applicable items in pages 284 through 348) for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing 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 provide a reasonable basis for our opinion.
In our opinion,-such financial statements present fairly, in all material respects, the financial position of Entergy Gulf States, Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 5 and Note 8 to the notes to respective financial statements, in 2003 Entergy Gulf States, Inc.
adopted the provisions of Statement of Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, and Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of-the Company's internal control over financial reporting as of December 31, 2004, 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 8, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP New Orleans, Louisiana                                                               .
March 8, 2005 193

ENTERGY GULF STATES, INC INCOME STATEMENTS               -                     f For the Years Ended December 31, 2004.-                  2003        ---        2002 (In Thousands)
OPERATING REVENUES, Domestic electric                                                             $2,821,296             $2,579,916              $2,141,873.
Natural gas          '                                                        '' 61,088                       59,821                42,006 TOTAL                                                                           2,882,384     '        2,639,737               2,183,879 q (     .        I OPERATING EXPENSES Operation and Maintenance:
Fuel, fuel,-related expenses, and gas purchased for resale                                                       772,914          '        693,612              692,901' Purchased power                                                                ' 969,*9              ' 838,498                  368,140 Nuclear refueling outage expenses       -                                           55,969    I I           [14,045 '              12,190 Other operation and maintenance
* 445,413                  457,428               438,259 Decommissioning          I      --                                                   13,645                   14,268                  3,980 Taxes other than income taxes                                            ,  j, f118,081         :       , 117,009                 120,295 Depreciation and amortization                                                      197,234                   199,583              204,202 Other regulatory credits - net                                                      (10,070)                  (2,476)                (7,818)
TOTAL                                                                   '       2,522,965              2,331,967                1,832,149 OPERATING INCOME                                                           -. . 359,419                  307,770               351,730 OTHER INCOME (DEDUCTIONS)
Allowance for equity funds used during construction                                  13,027                   15,855                 11,010 Interest and dividend income                                                         15,753                   17,902                  8,866 Miscellaneous - net'                                                               '36,180                (109,389)                   3,560 TOTAL                                                                                64,960                  (75,632V               23,436 INTEREST AND OTHER CHARGES Interest on long-term debt                                                         125,356            , 148,516               &#xa2;   149,343 Other interest - net                                                                   8,242                   8,827 .        , . 5,497, Allowance for borrowed fuids used during construction                      Zj(9,7i)                 " (13,349) '                     (9,749)
TOTAL                                                           . I 123,827                   143,994         .' 135,091 -
                                                           . . I..                               ,a       I INCOME BEFORE INCOME TAXES AND.                                                , 3 5                           8,4                :-
2     0 I, CUMULATIVE EFFECT OF ACCOUNTING CHANGE                               ;1 .- , 300,552                          88,144,     ~       240,075'    '
Income taxes                                                                       108,288                    24,249                 65,997 INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                               192,264                 !  63,895   *    '     174,078 CUMULATIVE EFFECT OF ACCOUNTING                                                                                                   -,     !I .
CHANGE (net of income taxes of S12,713)                                                                      (21,333)
NET INCOME                                                                         192,264                    42,562              174,078 Preferred dividend requirements and other                                              4,472                   4,701                  4,888 EARNINGS APPLICABLE TO COMMON STOCK                                                                     $187,792                    $37,861            $169,190 See Notes to Respective Financial Statements.
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ENTERGY GULF STATES, INC.
STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2004                      2003              2002
                          -   .                                                                      (In Thousands)
AIN
                                .      A .V_
TI OPERATING ACTIVITIES Net income                                                                         $192,264                    $42,562         $174,078 Adjustments to reconcile net income to net cash flow provided by operating activities:
Reserve for regulatory adjustments                                                     24,112                    12,605           11,147 Other regulatory credits - net                                                       (10,070)                 * (2,476)           (7,818)
Depreciation, amortization, and decommissioning                                     210,879                   213,851          208,182 Deferred income taxes and investment tax credits                                       57,908                   24,574          (11,576)
Cumulative effect of accounting change                                                                          21,333 Changes in working capital:
Receivables                                                                            14,774                 (96,409)           18,155 Fuel inventory                                                                           1,205                  (1,469)           4,617 Accounts payable                                                                      59,846                 (17,013)            83,428 Taxes accrued                                                                         99,955                    12,618         (24,740)
Interest accrued                                                                       (3,834)                  (1,900)          (4,544)
Deferred fuel costs                                                                   78,200                   59,165            65,556 Other working capital accounts                                                          7,426                   11,874         (19,551)
Provision for estimated losses and reserves                                          (13,844)                 115,878               1,478 Changes in other regulatory assets                                                    (10,060)                     3,983         (51,490)
Other                                                                                 (59,303)                  26,787            53,732 Net cash flow provided by operating activities                                        649,458                  425,963           500,654 INVESTING ACTIVITIES Construction expenditures                                                            (357,720)                (348,507)         (355,334)
Allowance for equity funds used during construction                                    ' t,027 3'                     15,855            11,010 Nuclear fuel purchases                                                                 (45,085)                 (39,959)          (21,820)
Proceeds from sale/leaseback of nuclear fuel                                 !I '   , j 38,800                    38,029           21,923 Decommissioning trust contributions and realized change in trust assets                                                              (12,070)                 (11,428)          (12,488)
Changes in other temporary investments --net                                             23,579                 (23,579)           44,643 Other regulatory investments                                                           (49,875)                 (77,050)          (39,390)
Net cash flow used in investing activities                                      -    (389,344)                (446,639)         (351,456)
FINANCING ACTIVITIES Proceeds from the issuance of long-term debt                                          472,039                1,032,682           337,481 Retirement of long-term debt                                                         (829,000)              (1,048,129)         (194,057)
Redemption of preferred stock                                                            (3,450)                   (3,450)          (1,858)
Dividends paid:
Common stock                                                                          (94,300)                '(68,100)         (91,200)
Preferred stock                                                                         (4,459)                  (4,701)          (4,888)
Net cash flow provided by (used in) financing activities                             (459,170)                   (91,698)          45,478 Net increase (decrease) in cash and cash equivalents                                 (199,056)                (112,374)           194,676 206,030                  318,404           123,728 Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period                                               $6,974               $206,030          $318,404 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid/(received) during the period for:
Interest - net of amount capitalized                                               $130,491                 S152,655          $143,961 Income taxes                                                                       ($28,169)                 ($30,987)          $98,734 See Notes to Respective Financial Statements.
195

ENTERGY GULF STATES, INC.
BALANCE SHEETS ' '
ASSETS December 31, 2004                  2003 (In Thousands)
CURRENT ASSETS Cash and cash equivalents:
Cash                               I I                                     $5,627 .            $20 754
                                                                                          .         . 4 Temporary cash investments - at cost,,
which approximates market                                                  1,347              185,276 Total cash and cash equivalents                                         6,974              206,030 Other temporary investments                                                                        23,579 Accounts receivable:
Customer                                                                  124,801              115,729 Allowance for doubtful accounts                                            (2,687)                (4,856)
Associated companies                                                       13,980                 76,726 Other                                                                      40,697                 27,243 Accrued unbilled revenues                                                 137,719              114,442 Total accounts receivable                                               314,510               329,284 Deferred fuel costs                                                         90,124              118,449 Accumulated deferred income taxes                                           14,339      II , ,6,116 Fuel inventory - at average cost                                            49,658                 50,863 Materials and supplies - at average cost                                   101,922                99,357 Prepayments and other                                                       20,556                 51,236 TOTAL                                                               i     598,083           r 884,914 OTHER PROPERTY AND INVESTMENTS Decommissioning trust funds                                               290,952               267,917 Non-utility property - at cost (less accumulated depreciation)              94,052             '139,911 Other                                                                       22,012                21,852 TOTAL                                                                     407,016              '429,680 UTILITY PLANT Electric                                                               8,418,119             8,208,394 Property under capital lease                                          *1 I                         11,009 Natural gas                                                                 78,627.
7---              -' ' 69,180 Construction work in progress                                             331,703               325,888 Nuclear fuel under capital lease                                            71,279                 63,684 TOTAL UTILITY PLANT                                                    8,899,728             8,678,155 Less - accumulated depreciation and amortization                       4,047,182             3,953,275 UTILITY PLANT - NET                                                    4,852,546             4,724,880 DEFERRED DEBITS AND OTHER ASSETS Regulatory assets:
SFAS 109 regulatory asset - net                                          444,799               442,062 Other regulatory assets            -                                     285,017               320,363 Long-term receivables                                                       23,228                 19,375  1i Other                                                                       44,713                 33,588 TOTAL                                                                     797,757               815,388 TOTAL ASSETS .                                                        $6,655,402            $6,854,862 See Notes to Respective Financial Statements.
196

ENTERGY GULF STATES, INC.
BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY December 31, 2004                  2003 (In Thousands)
CURRENT LIABILITIES Currently maturing long-term debt                                        $98,000             $354,000 Accounts payable:
Associated companies                                                    153,069                84,394 Other                                                                   147,337               156,166 Customer deposits                                                          53,229               47,044 Taxes accrued                                                              22,882
                                                                                        --        8,238 Nuclear refueling outage costs Interest accrued                                                           32,742
* 36,576 Obligations under capital leases                                           33,518               34,075 Other                                                                      19,912                14,755 TOTAL                                                                    560,689               735,248 NON-CURRENT LIABILITIES Accumulated deferred income taxes and taxes accrued                    1,533,804             1,422,776 Accumulated deferred investment tax credits                              138,616               144,323 Obligations under capital leases                                           37,711                40,618 Other regulatory liabilities                                               34,009                13,885 Decommissioning and retirement cost liabilities                           152,095              298,785 Transition to competition                                                  79,098                79,098 Regulatory reserves                                                        81,455                57,343 Accumulated provisions                                                     66,875                75,868 Long-term debt                                                        1,891,478             1,989,613 Preferred stock with sinking fund                                           17,400               20,852 Other                                                                   229,408               233,985 TOTAL                                                                 4,261,949             4,377,146 Commitments and Contingencies SHAREHOLDERS' EQUITY Preferred stock without sinking fund                                       47,327               47,327 Common stock, no par value, authorized 200,000,000 shares; issued and outstanding 100 shares in 2004 and 2003              114,055               114,055 Paid-in capital                                                        1,157,486            1,157,484 Retained earnings                                                        513,182               419,690 Accumulated other comprehensive income                                        714                3,912 TOTAL                                                                 1,832,764             1,742,468 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                           $6,655,402            $6,854,862 See Notes to Respective Financial Statements.
197

ENTERGY GULF,STATES, INC.,
STATEMENTS OF RETAINED EARNINGS AND COMPREHENSIVE INCOME
                                                                                             ' Fat the Years Ended December 31, 2004                                 2003                          2002 (In Thousands)
RETAINED EARNINGS Retained Earnings -Beginning of period                           $419,690                            S449,929                        $371,939 Add -Net Income                                                 192,264          S192,264             42,562              $42,562   174,078      S174,078 Deduct Dividends declared on common stock                            94,300                               68,100                         91,200 Preferred dividend requirements and other                      4,472             4,472              4,701                 4,701    4,888         4,888 Total                                                     98,772                               72,801                         96,088 Retained Earnings -End of period                                 $513,182                             S419,690                       $449,929 ACCUMULATED OTHER COMPREHENSIVE INCOME (Net of Taxes):
Balance at beginning of period Accumulated derivative instrument fair value changes              $3,912                               S3,286 Net derivative instrument fair value changes arising during the period                                         (3,198)           (3,198)               626                   626    3,286         3,286 Balance at end of period.-
Accumulated derivative instrument fair value changes                $714                               $3,912       _3,286 Comprehensive Income                                                               $184,594                                 $S38,487               $172,476 See Notes to Respective Financial Statements.
198

ENTERGY GULF STATES, INC.
SELECTED FINANCIAL DATA - FIVE-YEAR COMPARISON 2004           2003            2002           2001           2000 (In Thousands)
Operating revenues                       $2,882,384     $2,639,737      $2,183,879     $2,648,560     $2,511,240 Net Income                                 $192,264        $45,262        $174,078       $179,444       $180,343 Total assets                            $6,655,402      $6,854,862      $6,599,533     $6,209,741     $6,134,017 Long-term obligations (1)                $1,946,589     $2,051,083      $2,096,329     $2,130,245     $1,978,149 (1) Included long-term debt (excluding currently maturing debt), preferred stock with sinking fund, and noncurrent capital lease obligations.
2004            2003            2002           2001           2000 (Dollars In Millions)
Electric Operating Revenues:
Residential                                   $881           $829             $700          $788        - $717, Commercial                                     672            614              502           587            505, Industrial                                     976            853              695           946            871 Governmental                                    37             39.              34            38             33 Total retail                               2,566          2,335            1,931.        2,359          2,126 Sales for resale:
Associated companies                          52             42               28            73             94 Non-associated companies                     160            150              139           146            113 Other                                           43             53               44            13            138 Total                                     $2,821         $2,580          $2,142         $2,591         $2,471 Billed Electric Energy Sales (GWh):
Residential                                  9,803          9,739 -          9,502         9,059          9,405 Commercial                                   8,444          8,174            7,894         7,668          7,660 Industrial                                  16,596         15,417          15,887         16,658         17,960 Governmental                                   432            475              477           452            450 Total retail                              35,275         33,805          33,760         33,837         35,475 Sales for resale:                                                          ii Associated companies                       1,528          1,185 .         I 708          1,087          1,381 Non-associated companies                   3,172          3,358            4,391         3,305          3,248 Total                                     39,975         38,348          38,859         38,229         40,104 199

ENTERGY LOUISIANA, INC.
MIANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS Results of Overations Net Income 2004 Compared to 2003 Net income decreased $18.7 million primarily due to lower net revenue, partially offset by lower other operation and maintenance expenses.
2003 Compared to 2002 Net income increased slightly primarily due to higher net revenue and lower interest charges, almost entirely offset by higher other operation and maintenance expenses, higher, depreciation and amortization expenses, and higher taxes other than income taxes.
Net Revenue 2004 Compared to 2003 Net revenue, which is Entergy Louisiana's measure of gross margin, consists of operating revenues net of:
: 1) fuel, fuel-related, and purchased power expenses and 2) other regulatory credits. Following is an analysis of the change in net revenue comparing 2004 to 2003.
(In Millions) 2003 net revenue                                    $973.7 Price applied to unbilled-sales                      (31.9)
Deferred fuel cost revisions                         (29.4)
Rate refund provisions                               (12.2)
Volume/weather                                        17.0 Summer capacity charges                               11.8 Other                                                  2.3 2004 net revenue                                    $931.3 The price applied to the unbilled sales variance is due to a decrease in the fuel price included in unbilled sales in 2004 caused primarily by the effect of nuclear plant outages in 2003 on average fuel costs.
The deferred fuel cost revisions variance resulted from a revised unbilled sales pricing estimate made in the first quarter of 2003 to more closely align the fuel component of that pricing with expected recoverable fuel costs.
Rate refund provisions caused a decrease in net revenue due to additional provisions recorded in 2004 compared to 2003 for potential rate actions and refunds.
The volume/weather variance is due to a total increase of 620 GWh in weather-adjusted usage in all sectors, partially offset by the effect of milder weather on billed sales in the residential and commercial sectors.
The summer capacity charges variance is due to the amortization in 2003 of deferred capacity charges for the summer of 2001 compared to the absence of the amortization in 2004. The amortization of these capacity charges began in August 2002 and ended in July 2003.
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Entergy Louisiana, Inc.
Managements Financial Discussion and Analysis Gross operatingrevenues, fuel andpurchasedpowerexpenses, and other regulatorycredits Gross operating revenues increased primarily due to:
* an increase of $98.0 million in fuel cost recovery revenues due to higher fuel rates; and
* an increase due to volume/weather, as discussed above.
The increase was partially offset by the following:
* a decrease of $31.9 million in the price applied to unbilled sales, as discussed above;
* a decrease of $12.2 million in rate refund provisions, as discussed above; and
* a decrease of $5.2 million in gross wholesale revenue due to decreased sales to affiliated systems.
Fuel and purchased power expenses increased primarily due to:
* an increase in the recovery from customers of deferred fuel costs; and
* an increase in the market price of natural gas.
Other regulatory credits increased primarily due to:
* the deferral in 2004 of $14.3 million of capacity charges related to generation resource planning as allowed by the LPSC;
* the amortization in 2003 of $11.8 million of deferred capacity charges, as discussed above; and
* the deferral in 2004 of $11.4 million related to Entergy's voluntary severance program, in accordance with a proposed stipulation with the LPSC staff.
2003 Compared to 2002 Net revenue, which is Entergy Louisiana's measure of gross margin, consists of operating revenues net of: 1) fuel, fuel-related, and purchased power expenses and 2) other regulatory charges (credits). Following is an analysis of the change in net revenue comparing 2003 to 2002.
(In Millions) 2002 net revenue                                  $922.9 Deferred fuel cost revisions                         59.1 Asset retirement obligation                           8.2 Volume                                              (16.2)
                               -Vidalia settlement                                   (9.2)
Other                                                 8.9 2003 net revenue                                  $973.7 The deferred fuel cost revisions variance resulted from a revised unbilled sales pricing estimate made in December 2002 and a further revision made in the first quarter of 2003 to more closely align the fuel component of that pricing with expected recoverable fuel costs.
The asset retirement obligation variance was due to the implementation of SFAS 143, "Accounting for Asset Retirement Obligations," adopted in January 2003. See "Critical Accounting Estimates" for more details on SFAS 143. The increase was offset by decommissioning expense and had no effect on net income.
The volume variance was due to a decrease in electricity usage in the service territory. Billed usage decreased 1,868 GWh in the industrial sector including the loss of a large industrial customer to cogeneration.
201

Entergy Louisiana, Inc.
Management's Financial Discussion and Analysis See "Liquiditv and Capital Resources" below for more details regarding the September 2002 settlement related to the Vidalia contract.
Gross operatingrevenues, fuel and purchasedpower expenses, and other regulatorycharges (credits)
Gross operating revenues increased primarily due to:
* an increase of $277.2 million in fuel cost recovery revenues due to higher fuel rates; and
* an increase of $94.7 million in gross wholesale revenue due to increased sales to affiliated systems.
Fuel and purchased power expenses increased primarily due to an increase in the market prices of natural gas and purchased power.
Other regulatory credits increased primarily due to:
* an increase of $8.2 million due to the change in accounting for asset retirement obligations in compliance with SFAS 143, adopted in January 2003. This increase has no effect on net income; and
* an increase of $5.9 million due to the deferral of capacity charges in the third quarter of 2003 as allowed by the LPSC related to generation resource planning.
OtherIncome Statement Variances 2004 Compared to 2003 Other operation and maintenance expenses decreased primarily due to voluntary severance program accruals of $19.7 million in 2003, partially offset by an increase of $9.1 million in customer service support costs.
2003 Compared to 2002 Other operation and maintenance expenses increased primarily due to:
* voluntary severance program accruals of $19.7 million; and
* an increase of $13.4 million in benefit costs.
Decommissioning expenses increased $10.1 million primarily due to the implementation of SFAS 143, "Accounting for Asset Retirement Obligations," adopted in January 2003. See "Critical Accounting Estimates" for more details on SFAS 143. The increase in decommissioning expense was offset by regulatory credits and interest and dividend income and had no effect on net income..
Taxes other than income taxes increased primarily due to the franchise tax adjustments of $10.8 million recorded in 2002 as a result of a favorable court decision that allowed Entergy Louisiana to receive a refund for certain franchise taxes previously expensed and paid under protest.
Depreciation and amortization expenses increased primarily due to anincrease in plant in service.
Interest charges decreased primarily due to decreased interest on long-term debt of $25.5 million due to the redemption of $150 million of First Mortgage Bonds in June 2003 and the redemption of $187 million of First Mortgage Bonds from April through December of 2002, partially offset by the issuance of $150 million of First Mortgage Bonds in March 2002.                  '           -      i,      .
Income Taxes The effective income tax rates for 2004, 2003, and 2002 were 38.4%, 40.0%, and 36.9%, respectively. See Note 3 to the domestic utility companies and System Energy financial statements for a reconciliation of the federal 202

Entergy Louisiana, Inc.
Management's Financial Discussion and Analysis statutory rate of 35.0% to the effective income tax rate. Tax reserves not expected to reverse within the next year are reflected as non-current taxes accrued on the balance sheet.
Liquidity and Capital Resources Cash Flow Cash flows for the years ended December 31, 2004, 2003, and 2002 were as follows:
2004             2003               2002 (In Thousands)
Cash and cash equivalents at beginning of period                        $8,787         $311,800             $42,408 Cash flow provided by (used in):
Operating activities                                               424,718          413,939           1,035,777 Investing activities                                              (243,231)        (268,372)          (212,333)
Financing activities                                              (44,225)        (448,580)          (554,052)
Net increase (decrease) in cash and cash equivalents             137,262         (303,013)            269,392 Cash and cash equivalents at end of period                            $146,049           $8,787           $311,800 Operating Activities Cash flow from operations increased $10.8 million in 2004 primarily due to the increased collection of deferred fuel costs and the receipt of an income tax payment through Entergy's inter-company tax allocation process. The increase was almost entirely offset by money pool activity.
In 2003, the domestic utility companies and System Energy filed, with the IRS, a change in tax accounting method notification 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 provided under the IRS capitalization regulations. The cumulative adjustment placing these companies on the new methodology resulted in a $505 million deduction for Entergy Louisiana on Entergy's 2003 income tax return. There was no cash benefit from the method change in 2003. In 2004 Entergy Louisiana realized $100 million in cash tax benefit from the method change. This tax accounting method change is an issue across the utility industry and will likely be challenged by the IRS on audit.
As of December 31, 2004, Entergy Louisiana has a net operating loss (NOL) carryforward for tax purposes of $195.7 million, principally resulting from the change in tax accounting method related to cost of goods sold. If the tax accounting method change is sustained, Entergy Louisiana expects to utilize the NOL carryforward through 2005.
Cash flow from operations decreased $621.8 million in 2003 as a result of Entergy Louisiana changing its method of accounting for tax purposes related to its wholesale electric power contracts, including the contract to purchase power from the Vidalia project (the contract is discussed in Note 8 to the domestic utility companies and System Energy financial statements). The new tax accounting method provided a cumulative cash flow benefit of approximately $790 million through 2004, which is expected to reverse in the years 2005 through 2031. The election did not reduce book income tax expense. The timing of the reversal of this benefit depends on several variables, including the price of power. In a settlement approved by the LPSC, Entergy Louisiana will keep a portion of the benefit in exchange for crediting customer rates. The credit will be $11 million annually through at least 2010. See Part I, Item I for additional details concerning the settlement.
Entergy Louisiana reduced its indebtedness and preferred stock with a portion of the cash from the tax benefit. In accordance with the terms of the settlement, Entergy Louisiana requested SEC approval to return up to
  $350 million of common equity capital to Entergy Corporation in order to maintain Entergy Louisiana's capital structure. In December 2002, Entergy Louisiana repurchased $120 million of common stock from Entergy Corporation and, at the time of settlement, paid a dividend of $122.6 million pursuant to the SEC approval. The provisions of the settlement provide that the LPSC shall not recognize or use Entergy Louisiana's use of this cash in 203

Entergy Louisiana, Inc.
Management's Financial Discussion and Analysis setting any of Entergy Louisiana's rates. Therefore; to the extent. Entergy Louisiana's use of the proceeds would ordinarily have reduced its rate base, no change in rate base shall be' reflected for ratemaking purposes. The SEC approval for additional return of equity capital is now expired.
Entergy Louisiana's receivables from or (payables to) the money pool were as follows as of December 31 for each of the following years:
2004           2003             2002           2001 (In Thousands)
                                         $40,549      ($41,317)           $18,854        $3,812 Money pool activity used $81.9 million of Entergy Louisiana's operating cash flow in 2004, provided $60.2 million in 2003, and used $15.0 million in 2002: See Note 4 to the domestic utility companies and System Energy financial statements for a description of the money pool.
Investing Activities
         'The decrease of $25.1 million in net cash used by investing activities in 2004 was primarilyidue to decreased spending on customer service projects, partially offset by increases in spending on transmission projects and fossil plant projects.
The increase of $56.0 million in net cash used by investing activities in 2003 was primarily due to increased spending on customer service, transmission, and nuclear projects.
Financing Activities The decrease of $404.4 million in net cash used by.financing activities in 2004 was primarily due to:
* the net issuance of $98.0 million of long-term debt in 2004 compared to the retirement of $261.0 million in 2003;i
* a principal payment of $14.8 million in 2004 for the Waterford Lease Obligation compared to a principal paymentof$35.4millionin2003; and               .             i
* a decrease of $29.0 million in common stock dividends paid.,
The decrease of $105.5 million in net cash used by financing activities in 2003 was primarily due to:
* a decrease of $125.9 million in common stock dividends paid; and
* the repurchase of $120 million of common stock from Entergy Corporation in 2002.
The decrease in net cash used in 2003 was partially offset by the following:
* the retirement inr2003 of $150 million of 8.5% 'Series First Mortgage Bonds compared to the net retirement of $134.6 million of First Mortgage Bonds in 2002; and
* principal payments of $35.4 million in 2003 fdr the Waterford 3 Lease Obligation compared to principal payments of $15.9 million in 2002'.
See Note 5 to the domestic utility companies and System Energy financial statements for details of lobig-term debt.
Uses of Capital Entergy Louisiana requires capital resources for:
* construction and other capital investments;;,                 -      ,
* debt and preferred stock maturities;
* working capital purposes, including the financing of fuel and purchased power costs; and
* dividend and interest payments.          -
204

Entergy Louisiana, Inc.
Management's Financial Discussion and Analysis Following are the amounts of Entergy Louisiana's planned construction and other capital investments, existing debt and lease obligations, and other purchase obligations:
2005        2006-2007          2008-2009       After 2009            Total (In Millions)
Planned construction and capital investment (1)                       $455            $472               N/A              N/A              $927 Long-term debt                                  $55               $-                 $7           $924              $986 Operating leases                                $10              $11                 $6               $2             $29 Purchase obligations (2)                       $639          $1,120               $980          $4,691            $7,430 Nuclear fuel lease obligations (3)              $23               $9              N/A              N/A               $32 (1)    Includes approximately $130 to 160 million annually for maintenance capital, which is planned spending on routine capital projects that are necessary to support reliability of service, equipment or systems and to support normal customer growth.
(2)    Purchase obligations represent the minimum purchase obligation or cancellation charge for contractual obligations to purphase goods or services. For Entergy Louisiana almost all of the total consists of unconditional fuel and purchased power obligations, including its obligations under the Vidalia purchased power agreement and the Unit Power Sales Agreement, both of which are discussed in Note 8 to the domestic utility companies and System Energy financial statements.
(3)    It is expected that additional financing under the leases will be arranged as needed to acquire additional fuel, to pay interest, and to pay maturing debt., If such additional financing cannot be arranged, however, the lessee in each case must repurchase sufficient nuclear fuel to allow the lessor to meet its obligations.
In addition to these contractual obligations, Entergy Louisiana expects to contribute $2.6 million to its pension plans and $8.5 -million to other postretirement plans in 2005.
The planned capital investment estimate for Entergy Louisiana reflects capital required to support existing business and customer growth. The estimated capital expenditures are subject to periodic review and modification and 'may vary based on' the ongoing effects of regulatory constraints, environmental compliance, market volatility, economic trends, business restructuring, and the ability to access capital. Management provides more information on long-term debt and preferred stock maturities in Notes 5 and 6 to the domestic utility companies and System Energy financial statements.
        -  In January 2004, Entergy Louisiana signed a definitive agreement to acquire the 718 MW Perryville power plant for $170 million. The agreement has subsequently been amended to allow the current plant owner to retain the interconnection facilities associated with the plant, resulting in a decrease in the acquisition price to $162 million. As a result of the amended terms, the FERC issued an order in October 2004 disclaiming jurisdiction over the acquisition. This order currently is subject to rehearing by the FERC. The plant is owned by a subsidiary of Cleco Corporation, which subsidiary submitted a bid in response to Entergy's Fall 2002 request for proposals for supply-side resources. The signing of the agreement followed a voluntary Chapter 11 bankruptcy filing by the plant's owner., "Entergy expects that Entergy Louisiana will own 100 percent of the Perryville plant, and that Entergy Louisiana will sell 75 percent of the output to Entergy Gulf States under a long-term cost-of-service power purchase agreement. In addition, Entergy Louisiana and Entergy Gulf States executed an interim power purchase agreement with the plant's owner through the date of the acquisition's closing (as long as that occurs by December 2005) for 100 percent of the output of the Perryville power plant. In April 2004, the'bankruptcy court approved Entergy Louisiana's agreement to acquire the plant. In March 2004, Entergy Gulf States and Entergy Louisiana filed with the LPSC for its approval of the acquisition and long-term cost-of-service power purchase agreement.
Entergy is seeking approval from the LPSC of cost recovery for the acquisition, giving consideration to the need for the power and the prudence of Entergy Louisiana and Entergy Gulf States in engaging in the transaction. Hearings are scheduled for March 2005. Assuming regulatory approval by the LPSC, Entergy Louisiana expects the Perryville acquisition to close in mid-2005.
As a wholly-owned subsidiary, Entergy Louisiana dividends its earnings to Entergy Corporation at a percentage determined monthly. In addition, all of Entergy Louisiana's retained earnings are currently available for distribution.
205

Entergy Louisiana, Inc.
Management's Financial Discussion and Analysis Sources of Capital                                                                                            -
Entergy Louisiana's sources to meet its capital requirements include:
* internally generated funds;
* cash on hand;
* debt or preferred stock issuances; and
* bank financing under new and existing facilities.
Entergy Louisiana issued $285 million of first mortgage bonds in 2004 as follows:
Issue Date             Description         Maturity                 Amount (In Thousands)
March 2004                 5.50% Series      April 2019                      $100,000 October 2004               6.40% Series      October 2034                      70,000 October 2004               5.09% Series      November 2014                    115,000
                                                                                              $285,000 Entergy Louisiana retired $187.2 million of long-term debt in 2004 as follows:
Retirement Date            Description         Mlaturity              Amount (In Thousands)
November 2004              6.50% Series      March 2008                   $115,000 November 2004              9.00% Series      September 2045                 72,165
                                                                                            $187,165    l Entergy Louisiana may refinance or redeem debt and preferred stock prior to maturity, to the extent market conditions and interest and dividend rates are favorable.
All debt and common and preferred stock issuances by Entergy Louisiana require prior regulatory approval.
Preferred stock and debt issuances are also subject to issuance tests set forth in corporate charters, bond indentures, and other agreements. Entergy Louisiana has sufficient capacity under these tests to meet its foreseeable capital needs.
In July 2004, Entergy Louisiana renewed its 364-day credit facility and Entergy New Orleans entered into a separate credit facility with the same lender. Both facilities will expire in April 2005, Entergy Louisiana can borrow up to $15 million and Entergy New Orleans can borrow up to $14 million under their respective credit facilities, but at no time can the total amount borrowed under these facilities by the two companies combined exceed $15 million. As of December 31, 2004, no bQrrowings were outstanding under these facilities. Borrowings and securities issuances by Entergy Louisiana are limited to amounts authorized by the SEC. The current short-term borrowing limitation; including borrowings under the money pool, is $225 million. Under its SEC Orders and without, firther SEC authorization; Entergy Louisiana cannot incur additional indebtedness or issue other securities unless (a) it and Entergy Corporation maintain a common equity ratio of at least 30% and (b) with the: exception of money pool borrowings, the security to be issued (if rated) and all outstanding securities of Entergy Louisiana, as well as all outstanding securities of Entergy Corporation, that are rated, are rated investment grade. See Note, 4 to the, domestic utility companies and System Energy financial statements for further discussion of Entergy Louisiana's short-term borrowing limits.                                                                          ,          .
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Management's Financial Discussion and Analysis Significant Factors and Known Trends Utility Restructuring In November 2001, the LPSC decided not to move forward with retail open access for any customers at this time. The LPSC instead directed its staff to hold collaborative group meetings concerning open access from time to time, and to have the LPSC staff monitor developments in neighboring states and to report to the LPSC regarding the progress of retail access developments in those states. In September 2004, in response to a study funded by certain industrial customers that evaluated a limited industrial-only retail choice program, the LPSC asked the LPSC staff to solicit comments and obtain information from utilities, customers, and other interested parties concerning the potential costs and benefits of a limited choice program, the impact of such a program on other customers, as well as issues such as stranded costs and transmission service. Comments from interested parties were filed with the LPSC on January 14, 2005. The LPSC has not established a procedural framework for consideration of the comments. At this time, it is not certain what further action, if any, the LPSC might take in response to the information it received.
At FERC, the pace of restructuring at the wholesale level has begun but has been delayed. It is too early to predict the ultimate effects of changes in United States energy markets. Restructuring, issues are complex and are continually affected by events at the national, regional, state, and local levels. However, these changes may result, in the long-term, in fundamental changes in the way traditional integrated utilities-and holding company systems, like the Entergy system, conduct their business. Some of these changes maybe positive for Entergy,-while others may not.
State Rate Regulation The rates that Entergy Louisiana charges for its services are an important item influencing its financial position, results of operations, and liquidity. Entergy Louisiana is closely regulated and the rates charged to its customers are determined in regulatory proceedings. A governmental agency, the LPSC, is primarily responsible for approval of the rates charged to customers.
In January 2005, Entergy Gulf States and Entergy Louisiana filed testimony with the LPSC in support of a proposed settlement with the LPSC that would resolve, among other dockets, dockets established to consider issues concerning power purchases for both Entergy Gulf States and Entergy Louisiana for the summers of 2001, 2002, 2003, and 2004. The proposed settlement currently includes an offer to refund $14 million to Entergy Louisiana's customers. The LPSC has solicited comments on -the proposed settlement from the parties to the various proceedings at issue in the proposed settlement. The proposed settlement is scheduled to be presented to the LPSC for consideration on March 23, 2005.
In January 2004, Entergy Louisiana made a rate filing with the LPSC requesting a base rate increase of approximately $167 million. In that filing, Entergy Louisiana noted that approximately $73 million of the -base rate increase was attributable to the acquisition of a generating station and certain power purchase agreements that, based on current natural gas prices, would produce fuel and. purchased power savings for customers that substantially mitigate the impact of the requested base rate increase. The filing also requested an allowed ROE of 11.4%. Entergy Louisiana's previously authorized ROE mid-point currently in effect is 10.5%. Hearings concluded in December 2004.' Based on evidence submitted at the hearing, the LPSC staff is recommending approximately a $7 million base rate increase. The LPSC staff proposed the implementation of a formula rate plan that includes a provision for the recovery 'of incremental capacity costs, including those related to the proposed Perryville acquisition, without filing a traditional base rate proceeding. A decision by the LPSC is expected in mid-to late-March 2005 on these issues.
In addition to rate proceedings, Entergy Louisiana's fuel costs recovered from customers are subject to regulatory scrutiny. This regulatory risk represents Entergy Louisiana's largest potential exposure to price changes in the commodity markets.
Entergy Louisiana's retail rate matters and proceedings, including fuel cost recovery-related issues, are discussed in Note 2 to the domestic utility companies and System Energy financial statements.
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Management's Financial Discussion and Analysis System Agreement Proceedings The domestic utility companies historically have engaged in the coordinated planning, construction, and operation of generating and transmission facilities under the terms of an agreement called the System Agreement that has been approved by the FERC. Litigation involving the System Agreement is being pursued by the LPSC at both the FERC and before itself. These proceedings include challenges to the allocation of costs as defined by the System Agreement, raise- questions of imprudence by the domestic utility companies in their execution of the System Agreement, and seek support for local regulatory authority over System Agreement issues.
In February 2004' a FERC ALU issued an Initial Decision in the LPSC-initiated proceeding at the FERC.
The Initial Decision decided some issues in favor of the relief sought by the LPSC, and decided some issues against the 'relief sought by the LPSC. Several parties, including Entergy, the LPSC, the APSC, the MPSC, the City Council, and the FERC Staff, filed briefs on exceptions in response to the ALUs Initial Decision. Entergy's exceptions to the ALUs Initial Decision include: the practical effect of the Initial Decision is full production cost equalization, which was rejected in the Initial Decision and previously has been rejected by the FERC; resource planning for the Entergy System would be impeded if the Initial Decision were adopted; the remedy in the Initial Decision is inconsistent with the history, structure, and precedent regarding the' System Agreement; the Initial Decision's remedy ignores the historical pattern of production cost disparities on the Entergy System and would result in substantial, sudden transfers of costs between groups of Entergy customers; the numerical standards proposed in the Initial Decision are arbitrary and are so complex that they will be'difficult to implement; the Initial Decision improperly rejected Entergy's resource planning remedy; the Initial Decision erroneously determined that the full costs of the Vidalia project should be included in Entergy Louisiana's production costs for purposes of calculating relative production costs; and the Initial Decision erroneously adopted a new method of calculating reserve sharing costs rather than the current method.
If the FERC grants the relief requested by the LPSC in the proceeding, 'the relief may result in a material increase in the total production costs the FERC allocates to companies whose costs currently are projected to be less than the Entergy System average, and a material decrease in the total production costs the FERC allocates to companies'.whose costs currently are projected to; exceed that average. If the FERC adopts the AL's Initial Decision, the amount of production costs that would be reallocated among the domestic utility companies would be determined through consideration of each domestic utility company's relative total production cost expressed as a percentage of EntergySystem average total production cost. The ALUs Initial Decision would reallocate production costs of the domestic utility companies whose percent of Entergy System average production cost are outside an upper or lower bandwidth. This would be- accomplished by payments from domestic utility companies whose production costs are below Entergy System average production cost to domestic utility companies whose production costs are above Entergy System average production cost.
                               !       j  ,   ,,,,                            ' ,   :  '  .'
An assessment of:the potential effects of the ALJ's Initial Decision requires assumptions iegarding the future total; production cost of each domestic utility company, which assumptions include the mix of solid fuel and gas-fired generation available to each company and the costs of natural gas and purchased power. Entergy Louisiana and; Entergy Gulf States are more dependent upon gas-fired generation than Entergy Arkansas, Entergy Mississippi, or Entergy New Orleans. Of these, Entergy Arkansas is the least dependent upon gas-fired generation.
Therefore, increases in natural gas prices likely will increase the amount by which Entergy 'Arkansas" total production costs are below the average production costs of the domestic utility companies. Considerable uncertainty exists regarding future gas prices. Annual average Henry Hub gas prices have varied significantly over recent: years, ranging from $1.72/mmBtu to $5.85/mmBtu for the 1995-2004 period, and averaging $3.43/mmBtu during the ten-year period 1995-2004 and $4.58/mmBtu during the five-year period 2000-2004. &#xa2; Recent market conditions have resulted in gas prices that have averaged $5.85/mmBtu for the twelve months ended December 2004. Based upon analyses considering the effect on future production costs if the FERC adopts the ALrs Initial Decision, the following potential annual production cost reallocations among the domestic utility companies could result assuming annual average gas prices range from $6.39/mmBtu in 2005 declining to $4.97/mmBtu by 2009:
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Management's Financial Discussion and Analysis Average Annual Range of Annual Payments         Payments or (Receipts) or (Receipts)               for 2005-2009 Period (In Millions)                   (In Millions)
Entergy Arkansas                   $154 to $281                        $215 Entergy Gulf States              ($130) to ($15)                       ($63)
Entergy Louisiana                ($199) to ($98)                      ($141)
Entergy Mississippi                  ($16) to $8                          $1 Entergy New Orleans                 ($17) to ($5)                       ($12)
  .      Management believes that any changes in the allocation of production costs resulting from a FERC decision and related retail proceedings'should result in similar rate changes for retail customers. Although the outcome and timing of the FERC, APSC, and other proceedings cannot be predicted at this time, Entergy Louisiana does not believe that the ultimate resolution of these proceedings will have a material 'effect on its financial condition or results of operation.                                                                     I In February 2004, the APSC issued an "Order of Investigation," in which it discusses the negative effect that implementation of the FERC AL's Initial Decision would have on Entergy Arkansas' customers. The APSC order establishes an investigation into whether Entergy Arkansas' continued participation in the System Agreement is in the best interest of its customers, and whether there are steps that Entergy Arkansas or the APSC can take "to protect [Entergy Arkansas' customers] from future attempts by Louisiana, or any other Entergy retail regulator, to shift its high costs to Arkansas." Entergy Arkansas filed testimony in response to the APSC's Order of Investigation. The testimony emphasizes that the AL's Initial Decision is not a final order by the FERC; briefly discusses some of the aspects of the Initial Decision that are included in Entergy's exceptions filed with the FERC; emphasizes that Entergy will seek to reverse the production' cost-related portions of the Initial Decision; and states that Entergy Arkansas believes that it is premature, before the FERC makes a decision, for Entergy Arkansas to determine whether its continued participation in the System Agreement is appropriate.
In April 2004, the APSC commenced the investigation into Entergy Louisiana's Vidalia purchased power contract and requested historical documents, records, and information from Entergy Arkansas, which Entergy Arkansas has provided to the APSC. Also in April 2004, the APSC issued an order directing Entergy Arkansas to show cause why Entergy Arkansas should not have to indemnify and hold its customers harmless from any adverse financial effects related to Entergy Louisiana's pending acquisition of the Perryville power plant, or show that the Perryville unit will produce economic benefits for Entergy Arkansas' customers. Entergy Arkansas filed a response in May 2004 stating that Entergy will seek to reverse the production cost-related portions of the AL's Initial Decision in the System Agreement proceeding at the FERC, that the Perryville acquisition is part of Entergy's request for proposal generation planning process, that Entergy Arkansas is not in a position to indemnify its retail customers from actions taken by the FERC, and that the Perryville acquisition is expected to reduce the domestic utility companies' overall production costs. Procedural schedules have not been established in these APSC investigations.                   -
In April 2004, the City Council issued a resolution directing Entergy New Orleans and Entergy Louisiana to notify the City Council and obtain prior approval for any action that would materially modify, amend, or terminate the System Agreement for one or more of the domestic, utility "companies. Entergy New Orleans and Entergy Louisiana appealed to state court the City Council's resolution on the basis that the imposition of this requirement with respect to the System Agreement, a FERC-approved tariff, exceeds the City Council's jurisdiction and authority: In July 2004, the City Council answered the appeal and filed a third party demand and counterclaim against Entergy, the domestic utility companies, Entergy Services, and System Energy, seeking a declaratory judgment that Entergy and its subsidiaries cannot terminate the System Agreement until obligations owed under a March '2003 rate case settlement are satisfied. In August 2004, Entergy New Orleans and Entergy Louisiana, as well as the named third party defendants, filed pleadings objecting to the City Council's third party demand and counterclaim on various grounds, including federal preemption. In February 2005, the state court issued 'an oral decision dismissing the City Council's claims for lack of subject matter jurisdiction and prematurity.
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Management's Financial Discussion and Analysis The LPSC instituted a companion ex-parte System Agreement investigation to litigate several of the System Agreement issues that the LPSC is litigating before the FERC in the previously discussed System Agreement proceeding. This companion proceeding will require the LPSC to interpret various provisions of the System Agreement, including those relating to minimum-run and must-run units, the propriety of the methods used for billing and dispatch on the Entergy System, and the use of a rolling, twelve-month average of system peaks for allocating certain costs. In addition, by this companion proceeding the LPSC is questioning; whether Entergy Louisiana and Entergy Gulf States were prudent for not seeking changes to the System Agreement previously, so as to lower costs imposed upon their ratepayers and to increase costs imposed upon ratepayers of other domestic utility companies. The LPSC staff has filed testimony suggesting that the remedy for the alleged imprudence of Entergy Louisiana and Entergy Gulf States should be a reduction in allowed rate of return on common equity of 100 basis points. The domestic utility companies have challenged the propriety of the LPSC's litigating System Agreement issues. Nevertheless, on January 16, 2002 the LPSC affirmed a decision of its ALI upholding the LPSC staffs right to litigate System Agreement issues at the LPSC, rather than before the FERC. The procedural schedule is suspended at this time and an evidentiary hearing is not scheduled. An unrelated case between the LPSC and Entergy Louisiana raised the question of whether a state regulator is preempted by federal law from reviewing and interpreting FERC rate schedules that are part of the System Agreement, and from subsequently enforcing that interpretation. The LPSC interpreted a System Agreement rate schedule in the unrelated case, and then sought to enforce its interpretation. The Louisiana Supreme Court affirmed. In 2003, the U.S. Supreme Court ruled in Entergy Louisiana's favor and reversed the decisions of the LPSC and the Louisiana Supreme Court.
Transmission In 2000, FERC issued an order encouraging utilities to voluntarily 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, and 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. Assuming applicable regulatory support and approvals can be obtained, Entergy proposed to contract with the ICT to oversee the granting of transmission service on the, Entergy system as well as the implementation of the proposed weekly procurement process (WPP). 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.
Entergy also proposed to have the ICT administer a transmission expansion pricing protocol that will increase the efficiency of transmission pricing on the Entergy system and that will be designed.to protect Entergy's native load customers from bearing the cost of transmission upgrades not required to reliably, serve these customers' needs.
Entergy intends for the ICT to determine whether transmission upgrades associated with new requests for service should be funded directly by the party requesting such service or by a broader group of transmission customers, including Entergy's native load customers. This determination would be made in accordance with protocols approved by the FERC, and any party contesting such determination, including Entergy, would be required to seek review at the FERC. Several technical conferences regarding the ICT proposal, or various components thereof, were held in 2004.
Entergy has also responded to discovery requests that resulted from these conferences.
In January 2005, Entergy filed a petition for declaratory order with the FERC requesting that the FERC provide guidance, on two important issues: (1) whether the fuanctions.performed by the ICT will cause it to become a "public utility" under the Federal Power Act or the "transmission provider" under Entergys open access transmission tariff; and (2) whether Entergy's transmission pricing proposal, as administered by the ICT, satisfies the FERC's transmission pricing policy. The petition also indicates that, subject to the outcome of the petition and, obtaining support of Entergy's retail regulators, Entergy would be willing to have the ICT perform the following additional functions: (a) grant or deny requests for transmission service; (b) calculate available flowgate capacity; (c) administer 210

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Management's Financial Discussion and Analysis Entergy's OASIS; and (d) perform an enhanced planning function (integratingthe plans of Entergy and other potential transmission owners to identify regional synergies.) Comments and interventions on the petition were filed by market participants and retail regulators on February 4, 2005. In their, individual comments, the APSC, LPSC, and City Council supported Entergy's position that the ICT would not become a "public utility" or "transmission provider" and that the transmission pricing proposal satisfies the FERC's transmission pricing policy. Certain other parties urged the FERC to reject the petition for declaratory order or, in the alternative, that the FERC assert jurisdiction over the ICT and determine that Entergy's proposed pricing policy is inconsistent with FERC's current pricing policy. FERC action on the petition is expected during the first half of 2005.
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 comments 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.
Additionally, Entergy Louisiaha 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 on the transmission pricing aspects of the ICT proposal is scheduled for May 2005, with a separate hearing on the WPP portion of the proposal currently scheduled for August 2005.
Interconnection Orders The domestic utility companies (except Entergy New Orleans) are currently defendants to several complaints and rehearing requests before the FERC in which independent generation entities (GenCos) are seeking a refund of monies that the GenCos had previously paid to the Entergy companies for facilities necessary to connect their generation facilities to Entergy's transmission system. The FERC has issued initial orders in response to two of the complaints and in certain other dockets ordering Entergy to refund approximately $100 million in expenses and tax obligations previously paid by, the GenCos, including $3 million for Entergy Louisiana. The refunds will be in the form of transmission credits that will be utilized over time as the GenCos take transmission service from Entergy.
In addition, Entergy Louisiana was recently directed, effective as of March 2001, to provide transmission credits, with interest, associated with a specific generator that asserted to the FERC that it retained in its contract for interconnection a right to execute the latest form of Entergy's standard interconnection agreement in lieu of its existing contract, which thereby would apply FERC's most recent interconnection cost allocation policies to that generator.
Following an ALls Initial Decision and an order affirming such decision by FERC, approximately $15 million in expenses and tax obligations previously paid by the generator have been ordered refunded in the form of transmission credits, to be utilized over time and applied to Entergy transmission, service bills incurred after March 2001. Entergy Louisiana has sought rehearing of the FERC's order.
To the extent the Entergy companies are ordered to provide such refunds, these costs will qualify for inclusion in the Entergy companies' rates. The recovery of these costs is not automatic, however, especially at the retail level, where the majority of the cost recovery would occur. Entergy. intends to pursue all regulatory and legal avenues available to it in order to have these orders reversed and have the affected interconnection agreements reinstated as agreed to originally by the generators.          ,                                              .
Available Flowgate Capacity Proceeding On December 17, 2004, the FERC issued an order initiating a hearing and investigation concerning the justness and reasonableness of the Available Flowgate Capacity (AFC) methodology, the methodology used to evaluate short-term transmission service requests under the domestic utility companies' open access transmission tariff, and establishing a refund effective date. In its order, the FERC indicated that although it "appreciates that Entergy is attempting to explore ways to improve transmission access on its system," it believed that an investigation was warranted to gather more evidence in light of the concerns raised by certain transmission customers and certain issues raised in a FERC audit report finding errors and problems with the predecessor methodology used by Entergy for evaluating short-term transmission requests, the. Generator Operating Limits methodology. The FERC order 211

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Managemenfts Financial Discussion and Analysis indicates that the investigation will include an examination of (i) Entergy's implementation of the AFC program, (ii) whether Entergy's implementation has complied with prior FERC orders and open access transmission tariff provisions addressing the AFC program, and (iii) whether Entergy's provision of access to short-term transmission on its transmission system was just, reasonable, and not unduly discriminatory.
Entergy has submitted an Emergency Interim Request for Rehearing requesting the FERC to defer the hearing process and instead proceed initially with an independent audit of the AFC program and the expansion of the current process involving other market participants to address a broader range of issues. Entergy believes that this type of approach is a more efficient and effective mechanism for evaluating the AFC program. Following the completion of the independent audit and process involving other market participants, the FERC could determine whether other procedural steps are necessary. The FERC has not yet ruled on the Emergency Interim Request for Rehearing submitted by Entergy.
Entergy believes that it has complied with the provisions of its open access transmission tariff, including the provisions addressing the implementation of the AFC methodology; however, the ultimate scope of this proceeding cannot be predicted at this time. A hearing in the AFC proceeding is currently scheduled to commence in August 2005.
Industrial and Commercial Customers Entergy Louisiana's large industrial and commercial customers continually explore ways to reduce their energy costs. In particular, cogeneration is an option available to a portion of Entergy Louisiana's industrial customer base. Entergy Louisiana responds by working with industrial and commercial customers and negotiating electric service contracts to provide competitive rates that match specific customer needs and load profiles., Despite these actions, Entergy Louisiana lost a large industrial customer to cogeneration in late 2002. The customer accounted for approximately 2% of its net revenue in 2001. Entergy Louisiana actively participates in economic development, customer retention, and reclamation activities to increase industrial and commercial energy demand, from both existing and new customers. Entergy Louisiana does not currently expect additional significant losses to cogeneration because of the current economics of the electricity markets and Entergy Louisiana's marketing efforts in retaining industrial customers.
Market and Credit Risks Entergy Louisiana has certain market and credit risks inherent in its business operations. Market risks represent 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. Credit risk is risk of loss from nonperformance by suppliers, customers, or financial counterparties to a contract or agreement.
Interest Rate and Equity Price Risk - Decommissioning Trust Funds Entergy Louisiana's nuclear decommissioning trust funds expose it to fluctuations in equity prices and interest rates. Tfie'NRC requires Entergy Louisiana to maintain trusts to fund the costs of decommissioning Waterford 3.
The funds are invested primarily in equity securities; fixed-rate, fixed-income securities; and cash and cash equivalents. Management believes that its exposure to market fluctuations will not affect results of operations for the Waterford 3 trust funds because of the application of regulatory accounting principles. The decommissioning trust funds are discussed more thoroughly in Notes 1, 8, and 12 to the domestic utility companies and System Energy financial statements.
Nuclear Matters Entergy Louisiana owns and operates, through an affiliate, the Waterford 3 nuclear power plant. Entergy Louisiana is, therefore, subject to the risks related to owning and operating a nuclear plant. These include risks from the use, storage, handling and disposal of high-level and low-level radioactive materials, limitations on the amounts and types of insurance commercially available for losses in connection with nuclear operations, and technological and financial uncertainties related to decommissioning nuclear plants at the end of their licensed 212

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Management's Financial Discussion and Analysis lives, including the sufficiency of funds in decommissioning trusts. In the event of an unanticipated early shutdown of Waterford 3, Entergy Louisiana may be required to provide additional funds or credit support to satisfy regulatory requirements for decommissioning.
In August 2001, the NRC issued a bulletin requesting all pressurized water reactor owners and operators to report on the structural integrity of their reactor vessel head penetration nozzles to justify continued operations past December 31, 2001. These types of reactors are susceptible to stress corrosion cracking of the reactor vessel head nozzles. Waterford is a pressurized water reactor. To date, there has been no primary side stress corrosion cracking identified in the Waterford reactor vessel head. Inspections of the Waterford reactor vessel head will continue during planned refueling outages.
Environmental Risks Entergy Louisiana's facilities and operations are subject to regulation by various governmental authorities having jurisdiction over air quality, water quality, control of toxic substances and hazardous and solid wastes, and other environmental matters. Management believes that Entergy Louisiana is in substantial compliance with environmental regulations currently applicable to its facilities and operations. Because environmental regulations are subject to change, future compliance costs cannot be precisely estimated.
Litigation Risks The state of Louisiana has proven to be an unusually litigious environment. Judges and juries in Louisiana have demonstrated a willingness to grant large verdicts, including punitive damages, to plaintiffs in personal injury, property damage, and business tort cases. Entergy Louisiana uses legal and appropriate means to contest litigation threatened or filed against it, but the litigation environment poses a business risk.
Critical Accountiniz Estimates The preparation of Entergy Louisiana'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 could produce estimates that would have a material effect on the presentation of Entergy Louisiana's financial position or results of operations.
Nuclear Decommissioning Costs Regulations require Entergy Louisiana to decommission the Waterford 3 nuclear power plant after the facility is taken out of service, and money is collected and deposited in trust funds during the facility's operating life in order to provide for this obligation. Entergy Louisiana conducts periodic decommissioning cost studies (typically updated every three to five years) to estimate the costs that will be incurred to decommission the facility.
The following key assumptions have a significant effect on these estimates:
* Cost Escalation Factors - Entergy Louisiana's decommissioning studies include an assumption that decommissioning costs will escalate over present cost levels by an annual factor averaging approximately 4.4%. A 50 basis point change in this assumption could change the ultimate cost of decommissioning a facility by as much as 11%.
* Timing - The date of the plant's retirement must be estimated and 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 decrease the present value of these obligations.
* Spent Fuel Disposal - Federal regulations require the 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 213

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Management's Financial Discussion and Arialysis Yucca Mountain, Nevada. Until this site is available, however, nuclear plant operators must provide for interim spent fuel storage 'on the nuclear plant'site, which can require the construction and maintenance of dry cask storage sites or other facilities. The costs of developing and maintaining these-facilities can have a significant effect (as much as 16% of estimated decommissioning costs). Entergy Louisiana's decommissioning studies include cost estimates for spent fuel storage. However, these estimates could change in the future based on the timing of the opening of the Yucca Mountain facility, the schedule for shipments to that facility when it is opened, or other factors.
Technoloev and Regulation - To date, there is limited practical experience in the United States with actual decommissioning of large nuclear facilities. As experience is gained and technology changes, cost estimates could also change. If regulations regarding nuclear decommissioning were to change, this could have a potentially significant effect on cost estimates. The effect of these potential changes is not presently determinable. Entergy Louisiana's decommissioning cost studies assume current technologies and regulations.
Entergy Louisiana collects substantially all 'of the projected costs of decommissioning Waterford 3 through rates charged' to customers. The amounts collected through rates, which'are based upon decommissioning cost studies, are deposited in decommissioning trust fuinds. These collections plus earnings on the trust fund investments are estimated to be sufficient to fuind the future decommissioning costs. If decommissioning cost study estimates are changed and approved by regulators, collections from customers would also change.
SFAS 143 Entergy 'Louisiana implemented' SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. Nuclear decommissioning costs comprise substantially all of Entergy Louisiana's asset retirement obligations, and the measurement and recording of Entergy Louisiaii's" decommissioning obligations changed significantly with the implementation of SFAS 143. The most significant differences in the measurement of these obligations are outlined below:
     * 'Recordinn of full obligation - SFAS 143 requires that the fair value of an'asset retirement obligation be recorded when it is incurred. This caused'the recorded decommissioning obligation of Entergy Louisiana to increase significantly,' as Entergi Louisiana had previously only recorded this obligation ag thie related costs were collected from customers, and as earnings were recorded on the related trust funds.
* Fair valtie approacl - SFAS 143 requires that these obligations be measured using a fair value'approach.
Among other things, this entails the assumption'that the costs'will be incurred by a third party and will therefore include appropriate profit margins and risk piemiuims. Entergy Louisiana!s decommissioning studies had been based on Entergy Louisiana performing the work, and did not include any such margins or premiums.                                                                                       I ''
* Discount rate - SFAS 143 requires that these obligations be discounted using a credit-adjusted risk-free rate.
The net effect of implementing SFAS 143 for Entergy Louisiana was recorded as a regulatory asset, with no resulting impact on Entergy' Louiiana's net income." Entergy Louisiana' recorded this regulatory asset because its existing rate mechanism is based on the original br historical cbst standard that allows Entergy Louisiana to recover all ultimate costs of decommissioning existing assets from current and future customers. Upon implementation of SFAS 143 in 2003, assets and liabilities increased by $305 million as a result of recording the asset retirement obligation at its fair value of $305 million as determined under SFAS 143, increasing total utility plant by $99 millioi4'reducing accumulated depreciation by $82 million, and recording the related regulatory asset of $124 million.
Unbilled Revenue                                  '  -
As discussed in Note I to the domestic utility companies and System Energy financial statements, Entergy Louisiana records an estimate of the revenues earned' for energy delivered since the latest'customer billing. Each month the estimated unbilled revenue amounts are recorded as revenue and a receivable, and the prior month's estimate is reversed. Thee difference between the estimate of the unbilled receivable' at the beginning of the period and the end' of the period is the amount' of unbilled revenue recognized during the period. The'estimate recorded is 214

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Management's Financial Discussion and Analysis primarily based upon an estimate of customer usage during the unbilled period and the billed price to customers in that month, including fuel price. Therefore, revenue recognized may be affected by the estimated price and usage at the beginning and end of each period and fuel price fluctuations, in addition to changes in certain components of the calculation including changes to estimates such as line loss, which affects the estimate of unbilled customer usage, and assumptions regarding price such as the fuel cost recovery mechanism.
Pension and Other Postretirement Benefits' Entergy sponsors 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 domestic -utility companies and System Energy financial statements, 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.
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 obligations, Enttrgy reviews market yields on high-quality corporate debt and matches these rates with' Entergy's projected stream of benefit payments. Based on recent market trends, Entergy reduced its discount rate used to calculate benefit obligations from 6.75% in 2002 to 6.25% in 2003 'and to 6% 'in 2004.' '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,' 2004 accumulated postretirement beneifit obligation to a 10%
increase in health care costs 'in 2005 graddally'decreasing each successive year, until it reaches a 4.5% annual increase in health care costs in 2011 and beyond:
In determining its expected long-term rate of return on plan assets, Entergy reviews past long-term performance, asset allocations, and long-term inflation assumptions. Entergy targets an asset allocation for its pension plan assets of roughly 65% equity securities, 31% fixed income securities, and 4% other investments. The target allocation for Entergy's other postretirement'benefit assets is 5,1% 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 io calculate benefit obligations from'8.75% f6r 2002'and 2003 to 8.5% in'2004. The assumed rate of increase in future compensation levels used to calculate benefit obligations was 3.25%
in 2002, 2003; and 2004.
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Management's Financial Discussion and Analysis Cost Sensitivity The following chart reflects the sensitivity of pension cost to changes in certain actuarial assumptions (dollars in thousands):
Change in            Impact on 2004        Impact on Projected Actuarial Assumption                  Assumption               Pension Cost,        Benefit Obligation Increase/(Decrease)
Discount ratei                                  (0.25%)                   $1,061                  $12,385 Rate of return on plan assets                  (0.25%)                     $786 Rate of increase in compensation                0.25%-                     $523                   $3,018 The following chart reflects the sensitivity of postretirement benefit cost to changes in certain actuarial assumptions (dollars in thousands):                                      -,
Impact on Accumulated Change in               Impact on 2004             Postretirement Benefit Actuarial Assumption               Assumption         Postretirement Benefit Cost            Obligation Increase/(Decrease)
Health care cost trend                    0.25%                          $416                         $2,407 Discount rate                            (0.25%)                         $234                         $3,033 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 utilizes a number, of accounting mechanisms that reduce the volatility 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 necessary, the excess is amortized over the average remaining service period of active employees.,,,
Additionally, Entergy accounts for the impact of asset performance on pension expense oyer a twenty<-
quarter phase-in period through a. "market-related" value of assets calculation, Since the market-related yalue of assets recognzes 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 pension 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 accordance with SFAS 87.
Costs and Funding Total pension cost for Entergy Louisiana in 2004 was $3.3 million. Entergy Louisiana anticipates 2005 pension cost to increase, to $6.8 million due to decrease in the discount rate (from 6.25% to. 6.00%) and the expected rate of return (from 8.75% to 8.5%) used to calculate benefit obligations. Entergy Louisiana contributed
$3.9 million to its pension plan in 2004 and anticipates making $2.6 million in contributions in 2005. The decrease in pension funding requirements is due to the Pension Funding Equity Act relief passed in April 2004, partially offset by declining interest rates and the phased-in effect of asset underperformance from 2000 to 2002.
Entergy Louisiana's accumulated benefit obligation at December 31, 2004, and 2002 exceeded plan assets.
As a result, Entergy Louisiana was required to recognize an additional minimum liability as prescribed by SFAS 87 in those years. At December 31, 2003, Entergy Louisiana's accumulated benefit obligation was less than plan assets, therefore there was no additional minimum pension liability required to be recognized. At December 31, 2004, Entergy Louisiana recorded an additional pension minimum liability of $38.9 million; an offsetting intangible 216

Entergy Louisiana, Inc.
Management's Financial Discussion and Analysis asset of $4.8 million, and a regulatory asset of $34.1 million. Net income for 2004, 2003, and 2002 was not impacted by the additional minimum pension liability.
Total postretirement health care and life insurance benefit costs for Entergy Louisiana in 2004 were $12.3 million, including $2.8 million in savings due to the estimated effect of future Medicare Part D subsidies. Entergy Louisiana expects 2005 postretirement health care and life insurance benefit costs to approximate $12.7 million, including $3.2 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 discount rate (from 6.25% to 6.00%) and an increase in the health care cost trend rate used to calculate benefit obligations.
217

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Entergy Louisiana, Inc.:
We have audited the accompanying balance sheets of Entergy Louisiana, Inc. as of December 31, 2004 and 2003, and the related statements of income, retained earnings, and cash flows (pages 219 through 224 and applicable items in pages 284 through 348) for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing 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 provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Entergy Louisiana, Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 5 and Note 8 to the notes to respective financial statements, in 2003 Entergy Louisiana, Inc.
adopted the provisions of Statement of Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, and Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, 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 8, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP New Orleans, Louisiana March 8, 2005 218

ENTERGY LOUISIANA, INC.
INCOME STATEMENTS For the Years Ended December 31, 2004              2003           2002 (In Thousands)
OPERATING REVENUES Domestic electric                                          $2,226,986        $2,165,570    $1,815,352 OPERATING EXPENSES Operation and Maintenance:
Fuel, fuel-related expenses, and gas purchased for resale                                   671,549           525,645        436,568 Purchased power                                             667,893           668,337        438,627 Nuclear refueling outage expenses                             13,633            11,130         11,502 Other operation and maintenance                             367,824           376,770        340,803 Decommissioning                                                 21,958           20,569          10,422 Taxes other than income taxes                                   68,999            70,084         60,698 Depreciation and amortization                                 197,380           192,972         182,871 Other regulatory charges (credits) - net                      (43,765)            (2,860)        17,219 TOTAL                                                       1,965,471         1,863,347      1,498,710 OPERATING INCOME                                              261,515           302,223        316,642 OTHER INCOME Allowance for equity funds used during construction              7,494              6,900          5,195 Interest and dividend income                                     8,209              8,820          7,668 Miscellaneous - net                                               (929)           (3,100)        (3,244)
TOTAL                                                           14,774            12,620           9,619 INTEREST AND OTHER CHARGES Interest on long-term debt                                      70,210            73,227         98,242 Other interest - net                                             3,931              3,529          2,425 Allowance for borrowed funds used during construction           (4,822)            (5,475)        (3,880)
TOTAL                                                           69,319            71,281         96,787 INCOME BEFORE INCOME TAXES                                    206,970           243,562         229,474 Income taxes                                                    79,475            97,408         84,765 NET INCOME                                                     127,495           146,154        144,709 Preferred dividend requirements and other                        6,714              6,714          6,714 EARNINGS APPLICABLE TO COMMON STOCK                                                $120,781          $139,440       $137,995 See Notes to Respective Financial Statements.
219

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                                , j 220

ENTERGY LOUISIANA, INC.
STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2004                    2003              2002 (In Thousands)
OPERATING ACTIVITIES Net Income                                                                      $127,495                $146,154          $144,709 Adjustments to reconcile net income to net cash flow provided by operating activities:
Reserve for regulatory adjustments                                                 14,076                    1,858 Other regulatory charges (credits) - net                                         (43,765)                   (2,160)          17,219 Depreciation, amortization, and decommissioning                                 219,338                  213,541           193,293 Deferred income taxes and investment tax credits                                  75,078                 859,157             39,849 Changes in working capital:
Receivables                                                                    (36,185)                   (4,418)         (68,936)
Accounts payable                                                               (36,862)                  49,028              7,370 Taxes accrued                                                                    89,079               (804,805)          779,590 Interest accrued                                                                 (1,791)                (10,324)            (3,971)
Deferred fuel costs                                                             21,955                  (56,211)          (41,891)
Other working capital accounts                                                   20,693                   10,395        (118,718)
Provision for estimated losses and reserves                                        6,119                   12,194             5,818 Changes in other regulatory assets                                               (14,456)                  59,169           (23,879)
Other                                                                           (16,056)                 (59,639)          105,324 Net cash flow provided by operating activities                                    424,718                  413,939        1,035,777 INVESTING ACTIVITIES Construction expenditures                                                        (240,283)               (257,754)         (209,826)
Allowance for equity funds used during construction                                   7,494                    6,900            5,195 Nuclear fuel purchases                                                                                     (41,525)          (50,473)
Proceeds from the sale/leaseback of nuclear fuel                                                            41,525            50,473 Decommissioning trust contributions and realized change in trust assets                                                          (12,615)                (17,506)          (13,854)
Changes in other investments - net                                                    2,173                      (12)           6,152 Net cash flow used in investing activities                                      (243,231)                (268,372)        (212,333)
FINANCING ACTIVITIES Proceeds from the issuance of long-term debt                                     282,745                                    144,679 Retirement of long-term debt                                                    (203,756)                (296,366)         (300,617)
Repurchase of common stock                                                                                                 (120,000)
Dividends paid.
Common stock                                                                   (116,500)                (145,500)         (271,400)
Preferred stock                                                                    (6,714)                  (6,714)          (6,714)
                                                                                  .(44,225)               (448,580)         (554,052)
Net cash flow used In financing activities Net increase (decrease) in cash and cash equivalents                              137,262                (303,013)          269,392 Cash and cash equivalents at beginning of period                                     8,787                311,800             42,408 Cash and cash equivalents at end of period                                      $146,049                     $8,787       $311,800 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid/(received) during the period for Interest - net of amount capitalized                                             $73,170                  $84,089           $99,998 Income taxes                                                                    ($70,650)                 $35,128       ($781,540)
See Notes to Respective Financial Statements.
221

ENTERGY LOUISIANA, INC.
                                                - BALANCE SHEETS ASSETS December 31, 2004                 2003 (In Thousands)
CURRENT ASSETS Cash and cash equivalents:
Cash                                                                           $3,875                 $8,787 Temporary cash investments - at cost, which approximates market
* 142,174     __       _     _   _
Total cash and cash equivalents. I                                        146,049                   8,787 Accounts receivable:
Customer                                                                       88,154                 93,393 Allowance for doubtful accounts                                                 (3,135)                (4,487)
Associated companies                                                           43,121                   9,074 Other                                                                          13,070                 12,334 Accrued unbilled revenues                                                     143,453                138,164 Total accounts receivable                                                    284,663               248,478 Deferred fuel costs                                                               8,654                30,609 Accumulated deferred income taxes                                               12,712 Materials and supplies - at average cost                                        77,665                 74,349, Deferred nuclear refueling outage costs                                           5,605                19,226 Prepayments and other                                                             6,861                67,623 TOTAL                                                                          542,209               449,072 OTHER PROPERTY AND INVESTMENTS Investment in affiliates - at equity -                                           14,230                14,230 Decommissioning trust funds                                                    172,083               151,996 Non-utility property - at cost (less accumulated depreciation)                  21,176                 21,307 Other                                                                                 4                  2,177 TOTAL                                                                          207,493               189,710 UTILITY PLANT Electric                                                                     5,985,889           5,836,914 Property under capital lease                                                   250,964               250,102 Construction work in progress                                                  188,848                172,405 ,
Nuclear fuel under capital lease                                                31,655                 65,066 TOTAL UTILITY PLANT                                                          6,457,356            6,324,487 Less - accumulated depreciation and amortization                             2,799,936            2,686,778 UTILITY PLANT - NET                                                          3,657,420           3,637,709 1  . .    .
DEFERRED DEBITS AND OTHER ASSETS Regulatory assets:
SFAS 109 regulatory asset - net                                               132,686                156,111 Other regulatory assets                                                       302,456               217,689 Long-tern receivables                                                           10,736                   1,511 Other                                                                !i         25,994                 22,737 TOTAL                                                                          471,872               398,048 TOTAL ASSETS                                                               $4,878,994           $4,674,5~    9 See Notes to Respective Financial Statements.
222

ENTERGY LOUISIANA, INC.
BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY December 31, 2004                  2003 (In Thousands)
CURRENT LIABILITIES Currently maturing long-term debt                                           $55,000               $14,809 Accounts payable:
Associated companies                                                        57,681              101,191 Other                                                                       128,523              121,875    -
Customer deposits                                                             66,963                61,215 Accumulated deferred income taxes                                                                       566 Taxes accrued                                                                   7,268 18,438                20,229 Interest accrued Obligations under capital leases                                              22,753                35,506 Other                                                                         10,428                  5,110 TOTAL                                                                       367,054               360,501 NON-CURRENT LIABILITIES Accumulated deferred income taxes and taxes accrued                       1,805,410             1,728,156 Accumulated deferred investment tax credits                                   96,130              101,258 Obligations under capital leases                                                8,903               29,560 Other regulatory liabilities                                                  51,260                39,026 Decommissioning liabilities                                                  347,255              325,298 Accumulated provisions                                                        92,653                86,534 Long-term debt                                                               930,695              887,687 Other                                                                        106,815                47,981 TOTAL                                                                     3,439,121            3,245,500 SHAREHOLDERS' EQUITY Preferred stock without sinking fund                                        100,500               100,500 Common stock, no par value, authorized 250,000,000 shares; issued 165,173,180 shares in 2004 and 2003                       1,088,900            1,088,900 Capital stock expense and other                                                (1,718)               (1,718)
Retained earnings                                                              5,137                    856 Less - treasury stock, at cost (18,202,573 shares in 2004 and 2003)         120,000               120,000 TOTAL                                                                     1,072,819            1,068,538 Commitments and Contingencies TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                              $4,878,994           $4,674,539 See Notes to Respective Financial Statements.
223

ENTERGY LOUISIANA, INC.
STATEMENTS OF RETAINED EARNINGS For the Years Ended December 31, 2004          2003       2002 (In Thousands)
Retained Earnings, January I                                      $856         $6,916  $140,321 Add:
Net income                                                    127,495       146,154    144,709 Deduct:
Dividends declared:
Preferred stock                                                6,714         6,714      6,714 Common stock                                                 116,500       145,500   271,400 Total                                                      123,214       152,214   278,114 Retained Earnings, December 31                                  .$5,137         $856      $6,916 See Notes to Respective Financial Statements.
224

ENTERGY LOUISIANA, INC.
SELECTED FINANCIAL DATA - FIVE-YEAR COMPARISON 2004           2003             2002           2001         2000 (In Thousands)
Operating revenues                        $2,226,986      $2,165,570      $1,815,352     $1,901,913    $2,062,437 Net Income                                  $127,495        $146,154        $144,709        $132,550     $162,679 Total assets                              $4,878,994      $4,674,539      $4,753,704     $4,149,701    $4,289,409 Long-term obligations (1)                   $939,598        $917,247        $919,319     $1,197,473    $1,411,345 (1) Included long-term debt (excluding currently maturing debt), preferred stock with sinking fund (for the year 2000 only), and noncurrent capital lease obligations.
2004           2003             2002           2001         2000 (Dollars In Millions)
Electric Operating Revenues:
Residential                                     $770            $739            $638           $658          $717 Commercial                                        501            473             403             429          441 Industrial                                        779            723             637             760          767
                                                                                                             . jq Governmental                                        38            41               36             39           39 Total retail                                 2,088           1,976           1,714           1,886        1,964 Sales for resale:
Associated companies                              96           102                8             25           21 Non-associated companies                          13            12               11             23           40 Other                                               30            76               82            (32)          38 Total                                       $2,227         $2,166           $1,815         $1,902        $2,063 Billed Electric Energy Sales (GWh):
Residential                                    8,842           8,795           8,780          8,255         8,648 Commercial                                     5,762           5,622           5,538          -5,369        5,367 Industrial                                    13,140          12,870          14,738         14,402        15,184 Governmental                                      439            491             510             498          481 Total retail                                28,183         27,778           29,566         28,524        29,680 Sales for resale:                                 . 1 Associated companies                          1,129          1,344              146            381          228 Non-associated companies                      - 122            132              139            334          554 Total                                       29,434         29,254           29,851         29,239       -30,462i 225

ENTERGY MISSISSIPPI, INC                        .       .
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS Results of Operations Net Income
                ,~~,               LLL ,i-.v.l
                                          <; $,-i. i     O\V-   ;:F.. 5      a                                 Kt-  Ars'     1iL'.          :j',:-.
2004 Compared to 2003                                       .i Net' income increased $6.4 milfion pimariy d ie to highr'At revenue, partially offset by higher other operation and maintefianc6'bxpefses 'ahd higher taxes other than iico6fiitaxes.
2003 Compared to 2002           .                          ,('          idib        ,   . ni              F. TT2   ei          ViJ'i Net income increased $14.7 million primarily due to highfer net revenue, partially offset by higher other operation and maintenance expenses and depreciation and amortization expenses, and lower interest income.
Net Revenue 2004 Compared to 2003                                                                                                              .-       Ks.
Net revenue, which is Entergy Mississippi's measure of gross margin, consists of operating revenues net of. 1) fuel, fuel-related, and purchased power expenses and 2) other regulatory charges (credits). Following is an analysis of the change in net revenue comparing 2004 to 2003.                     .                                                         '             .'
i                     ( In   Millions)                              --'
2003 net revenue"-                                     $426.6          ..
Volume/weather                                               6.4 . iA       .         -
Net wholesale revenue                        .                5.0 Other               ...                       --             5.5 2004 net revenue                                        $443.5
                                                                                                    . ii,!. ;_ix lt     .i  s      I ..t1s if      Ui The volume/weather variance resulted from an increase of 247 GWh in weather-adjusted usage, partially offset by the effect of milder weather on billed sales.                 C The net wholesale revenue variance resulted from an increase in energy available for resale sales, partially offset by a decrease in the average price of energy supplied for affTliated sales.
Gross operatingrevenues, fuel andpurchasedpower expenses, and other regulatory charges (credits)
Gross operating revenues increased primarily due to an increase of $174.0 million in fuel cost recovery revenues due to higher fuel rates and an increase of $26;3 nmillion in gross wholesale revenue. The increase was partially offset by a decrease of $37.6 million in Grand Gulf revenueasa result of the cessation of the Grand Gulf Accelerated Tariff in July 2003.
Fuel and purchased power expenses increased primarily due to the over-recovery of fuel and purchased power costs as a result of higher fuel rates. Entergy Mississippi's fuel rates include an energy cost recovery rider to recover projected energy costs. Actual fuel and purchased power costs were lower than those projected in the computation of the energy cost factors for the third quarter of 2004 which contributed to the over-recovery of fuel and purchased power costs. The MPSC has allowed Entergy Mississippi to refund these over-recoveries in the second and third quarters of 2005. The energy cost recovery rider is discussed in more detail in Note 2 to the domestic and System Energy financial statements.
226

Entergy Mississippi, Inc.
Management's Financial Discussion and Analysis Other regulatory charges (credits) have no material effedf on net income due to recovery and/or refund of such expenses. Other regulatory credits increased primarily due to the under-recovery through the Grand Gulf rider of Grand Gulf capacity charges.
2003 Compared to 2002
       ....     ~~~~~~        .~. .v     i..r       >                i Jimi:.pi&fN4.j.i- <s,> . .i';tL';
s             ~.;jX?.b.i1 9.3
                                                                                           ~ill*iJ,,,ij            .ik!'i-.::                  . is)-    Lji: js.,vi Net revenue, which is Entergy Mississippi's measure of gross margin, consists of operating revenues net of: 1) fuel, fuel-related, and purchased power expenses and 2) other regulatory charges (credits). Following is an analysis of the change in net revenue comparing 2003 to 2002.
:,;.' E        L          . :.'. iA.                               . ii in  ;., ai tJ      8.          (InlMillions)               :;
i hi-~a~i                2002 net revenue -                                          ;j; r>tti'                 $380.2              -                 ..      ii; s Base rates                                                   ;X')ti                    /48.3 i,;
Other                                                                                       (1.9) 2003 net revenue                                                                       $426.6
* t.
The increase in base rates was effective January 2003 as approved by the MPSC.
Gross operatingrevenue, fuel andpurchase^dpowerexpeA ss, and6Kherregutatorycharges credits)
Gross operating eivenues increased primarily due to an increase in base rates effective January 2003 and an increase of $29.7 million in fuef cost recovery revenues due to quarterly changes in the fuel factor resulting from the increases in market prices of natural gas and purchased power. This increase was partially offset by a decrease of
 $35.9 million in gross' wholesale reveilue as a result of decreasedgen6iation and purchasesthat resulted inless' energy available for resale sales.
Fuel and fuel-related expenses decreased primarily due to the decreased recovery of fuel and purchased power costs and decreasedgeiieration, partially offset by an increase in the market price of purchased power.                                                                             i Other regulatory' charges increased primarily due to ov-reeioV6ry of capacity charges'-related to the Grand Gulf rate rider and the cessation of the Grand Gulf Accelerated Recovery Tariff that was suspended in July 2003.
Other Income Statement Variances 2004 Compared to 2003 jij a
C~v            tL     ;     JlL-ilL' 1fl               ..      b;                                                                          j I Other operation and maintenance expenses increased primarily due to:                                                                                              -A.o
* an increase of $6.6 million in customer service support ccsts; and                                                         i             ..    .   .   .,i     ,.      ,...i,.
* an increase of $3.7 million in benefit costs.
The increase was partially offset by the absence of the voluntary'                                                           tvfihe frorgraff accfrials of $7.1 million that occurred in 2003.
Taxes other than income taxes increased primarily due to a higher assessment of ad valorem and franchise taxes compared to the same period in 2003.
2003 Compared to 2002 Other operation and maintenance expenses increased' primarily due to:
* voluntary severance program accruals of $7.1 million; and " '"
* anincreage of $4.4 million in benefit costs.                                                                               h  ,     i ;   .                                    ,    e -
227

Entergy Mississippi, Inc.
Management's Financial Discussion and Analysis The increases were partially offset by a decrease of $4.0 million in plant maintenance expense due to outage costs at a fossil plant in 2002.
Depreciation and amortization expense increased due to an increase in plant in service.
Interest and dividend income decreased as result of carrying charges associated with under-recovery of fuel and purchased power costs during 2002.
Income Taxes The effective income tax rates for 2004, 2003, and 2002 were 33.5%, 33.9%, and 25.4%, respectively. See Note 3 to the domestic utility companies and System Energy financial statements for a reconciliation of the federal statutory rate of 35.0% to the effective income tax rate. Tax reserves not expected to reverse within the next year are reflected as non-current taxes accrued on the balance sheet.
Liquidity and Capital Resources Cash Flow Cash flows for the years ended December 31, 2004, 2003, and 2002 were as follows:
2004             2003            2002 (In Thousands)
Cash and cash equivalents at beginning of period                       $63,838         $147,721         $54,048 Cash flow provided by (used in):
Operating activities                                              258,179          253,288         156,868 Investing activities                                             (151,505)        (264,495)       (35,122)
Financing activities                                              (90,116)         (72,676)          71,927 Net increase (decrease) in cash and cash equivalents             16,558          (83,883)          93,673
                                                                                                                   $7.2 Cash and cash equivalents at end of period                             $80,396          $63,838        $147,721
                                                                                    . i .1     i .   ;,  ;  ., .
Operating Activities Cash flow from operations increased by $4.9 million in 2004 primarily due to money pool activity and an increase in recovery of deferred fuel and purchased power costs, partially offset by an $12 million income tax payment in 2004 compared to a $78 million income tax refund in 2003 and an increase in the account receivable balance as a result of the timing of customer collections..
Cash flow from operations increased by $96.4 million in 2003 primarily due to a $78 million income tax refund and increased net income, partially offset by money pool activity.
Entergy Mississippi's receivables from or (payables to) the money pool were as follows as of December 31 for each of the following years:.
2004          2003            2002              2001 (In Thousands)
                                         $21,584       $22,076          $8,702            $11,505 Money pool activity provided $0.5 million of Entergy Mississippi's operating cash flows in 2004, used
 $13.4 million of its operating cash flows in 2003, and provided $2.8 million of its operating cash flows in 2002.
228

Entergy Mississippi, Inc.
Management's Financial Discussion and AMalysis See Note 4 to the domestic utility companies and System Energy financial statements for a description of the money pool.
Investing Activities Net cash used in investing activities decreased $113.0 million in 2004 primarily due to:
* cash used in 2003 for other regulatory investments of $72.6 million as a result of under-recovered fuel and purchased power costs;
* a decrease of $25.6 million in capital expenditures in 2004 due to decreased spending on customer care projects and less transmission upgrade work requested by merchant generators; and -'
* the maturity in 2004 of $7.5 million of other temporary investments that had been made in 2003, which provided cash in 2004.
Net cash used in investing activities increased $129.4 in 2003 primarily due to cash used for other regulatory investments of $72.6 million as a result of under-recovered fuel and purchased power costs and other temporary cash investments of $18.6 million that provided cash in 2002 upon maturity.
In May 2003, Entergy Mississippi filed and the MPSC approved a change in Entergy Mississippi's energy cost recovery rider. Under the MPSC's order, Entergy Mississippi deferred until 2004 the collection of fuel under-recoveries for the first and second quarters of 2003 that would have been collected in the third and fourth quarters of 2003, -respectively. The deferred amount of-$77.6 million plus carrying charges was collected over a twelve-month period that began in January 2004.
Financing Activities Net cash used in financing activities increased $17.4 million in 2004 primarily due to an increase of $15.1 million in dividends paid.
Net cash used in financing activities increased $144.6 million in 2003 primarily due to a decrease in net issuances of long-term debt.
See Note 5 to the domestic utility companies and System Energy financial statements for details on long-term debt.
Uses of Capital Entergy Mississippi requires capital resources for:
* construction and other capital investments;
* debt and preferred stock maturities;
* working capital purposes, including the financing of fuel and purchased power costs; and
* dividend and interest payments.
Following are the amounts of Entergy Mississippi's planned construction and other capital investments, and existing debt obligations:
2005        2006-2007        2008-2009        Afteri 2009         Total (In Millions)
Planned construction and capital investment (1)                        $147           $381-             N/A                N/A             $528 Long-term debt                                     -              -           $100                $595             $695 Operating leases                                 $7            $10               $6                $11               $34 Purchase obligations (2)                       $190           $361            $336             $2,059            $2,946 229

Entergy Mississippi, Inc.
Managements Financial Discussion and Analysis (1)     Includes approximately $120 to 140 million annually for maintenance capital, which is planned spending on routine capital projects that are necessary to support reliability of service, equipment or systems, and to support normal customer growth.
(2)     Purchase obligations represent the minimum purchase obligation or cancellation charge for contractual obligations to purchase goods or services. For Entergy Mississippi almost all of the total consists of unconditional fuel and purchased power obligations, including its obligations under the Unit Power Sales Agreement, which is discussed in Note 8 to the domestic utility companies and System Energy financial statements.
In addition to these contractual obligations, Entergy Mississippi expects to contribute $3.4 million to its pension plans and $4.2 million to other postretirement plans in 2005 The planned capital investment estimate for Entergy Mississippi reflects capital required to support existing business, customer growth, and the anticipated acquisition of additional generation supply resources. The estimated capital expenditures are subject to periodic review and modification and may, vary based on the ongoing effects of regulatory constraints, environmental compliance, market volatility, economic trends, and the ability to access capital.
Management provides more information on long-term debt and preferred stock maturities in Notes 5 and 6 to the domestic utility companies and System Energy financial statements.
As a wholly-owned subsidiary, Entergy Mississippi dividends its earnings to Entergy Corporation at a percentage determined monthly. Entergy Mississippi's long-term-debt indentures, restrict the amount of retained earnings available for the payment of cash dividends or other distributions on its common and preferred stock. As of December 31, 2004, Entergy Mississippi had restricted retained earnings unavailable for distribution to Entergy Corporation of $68.5 million.
Sources of Capital-Entergy Mississippi's sources to meet its capital requirements include:
s r     -       '       H                         ,                       H                      3      .
* internally generated funds;
* cash on hand;
 --
* debt or preferred stock issuances; and
* bank financing under new or existing facilities.
The following table lists First Mortgage Bonds issued by Entergy Mississippi in 2004:
Issue Date             Description          Maturity               Amount (In Thousands)
April 2004                6.25% Series        April 2034                     $100,000 April 2004                4.65% Series        May 2011                          80,000
                                                                                              $180,000 The following table lists First Mortgage Bonds retired by Entergy Mississippi in 2004-Retirement Date          Description          Maturity              Amount (In Thousands)
May 2004                  6.20% Series       May 2004                      $75,000 May 2004                  6.45% Series       April 2008                     80,000 May 2004                  7.70% Series       July 2023                      60,000
                                                                                           $215,000 230

Entergy Mississippi, Inc.
Management's Financial Discussion and Analysis In September 2004, Entergy Mississippi arranged the issuance of $16 million of Mississippi Business Finance Corporation 4.60% Series Pollution Control Revenue Refunding Bonds (Entergy Mississippi, Inc. Project)
Series 2004 due April 2022. The proceeds from this issuance were used to redeem prior to maturity, $7.9 million of 7.0% Series Washington County Bonds due April 2022 and $8.1 million of 7.0% Series Warren County, Mississippi Bonds due April 2022.
Entergy Mississippi may refinance or redeem debt and preferred stock prior to maturity, to the extent market conditions and interest and dividend rates are favorable.
All debt and common and preferred stock issuances by Entergy Mississippi require prior regulatory approval. Preferred stock and debt issuances are also subject to issuance tests set forth in corporate charters, bond indentures, and other agreements. Entergy Mississippi has sufficient capacity under these tests to meet its foreseeable capital needs.
Entergy Mississippi has a 364-day credit facility available expiring May 2005 in the amount of $25 million of which none was drawn at December 31, 2004. Borrowings and securities issuances by Entergy Mississippi are limited to amounts authorized by the SEC. The current short-term borrowing limitation, including borrowings under the money pool, is $160 million. Under its SEC Orders and without further SEC authorization, Entergy Mississippi cannot incur additional indebtedness or issue other securities unless (a) it and Entergy Corporation maintain a common equity ratio of at least 30% and (b) with the exception of money pool borrowings, the security to be issued (if rated) and all outstanding securities of Entergy Mississippi, as well as all outstanding securities of Entergy Corporation, that are rated, are rated investment grade. See Note 4 to the domestic utility companies and System Energy financial statements for further discussion of Entergy Mississippi's short-term borrowing limits.
Significant Factors and Known Trends Utility Restrueturing The'MPSC has recommended not pursuing open access at this time. At FERC, the pace of restructuring at the wholesale level has begun but has been delayed. It is too early to predict the ultimate effects of changes in U.S.
energy markets. Restructuring issues are complex and are continually affected by events at the national, regional, state, and local levels. However, these changes may result, in the long-term, in fundamental changes in the way traditional integrated utilities and holding company systems, like the Entergy system, conduct their business. Some of these changes may be positive for Entergy, while others may not be.
State and Local Rate Regulation The rates that Entergy Mississippi charges for electricity significantly influence its financial position, results of operations, and liquidity. Entergy Mississippi is closely regulated and the rates charged to its customers are determined in regulatory proceedings. A governmental agency, the MPSC, is primarily responsible for approval of the rates charged to customers.
As discussed in Note 2 to the domestic utility companies and System Energy financial statements, Entergy Mississippi made its annual formula rate plan filing with the MPSC in March 2004 based on a 2003 test year. In April 2004, 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 an adjusted return on common equity' mid-point of 10.77%, establishing an allowed annual regulatory earnings range of 9.3% to 12.2%.
In December 2002, the MPSC issued a final order approving a joint stipulation entered into by Entergy Mississippi and the Mississippi Public Utilities Staff in October 2002. The final order resulted in a $48.2 million rate increase effective January 2003.
Entergy Mississippi's fuel costs recovered from customers are subject to regulatory scrutiny. Entergy Mississippi's retail rate matters and proceedings, including fuel cost recovery-related issues are discussed more thoroughly in Note 2 to the domestic utility companies and System Energy financial statements.
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Entergy Mississippi, Inc.
Managemenfs Financial Discussion and Analysis System Agreement Proceedings The domestic utility companies historically have engaged in the coordinated planning, construction, and operation of generating and transmission facilities under the terms of an agreement called the System Agreement that has been approved by the FERC. Litigation involving the System Agreement is being pursued by the LPSC at both the FERC and before itself. These proceedings include challenges to the allocation of costs as defined by the System Agreement, raise questions of imprudence by the domestic utility companies in their execution of the System Agreement, and seek support for local regulatory authority over System Agreement issues. Regarding the proceeding at the LPSC, Entergy believes that state and local regulators are preempted by federal law from reviewing and deciding System Agreement issues for themselves. An unrelated case between the LPSC and Entergy Louisiana raised the question of whether a state regulator is preempted by federal law from reviewing and interpreting FERC rate schedules that are part of the System Agreement, and from subsequently enforcing that interpretation. The LPSC interpreted a System Agreement rate schedule in the unrelated case, and then sought to enforce its interpretation. The Louisiana Supreme Court affirmed the LPSCs decision. In 2003, the U.S. Supreme Court ruled in Entergy Louisiana's favor and reversed the decisions of the LPSC and the Louisiana Supreme Court.
In February 2004, a FERC ALJ issued an Initial Decision in the LPSC-initiated proceeding at the FERC.
The Initial Decision decided some issues in favor of the relief sought by the LPSC, and decided some issues against the relief sought by the LPSC. Several parties, including Entergy, the LPSC, the APSC, the MPSC, the City Council, and the FERC Staff, filed briefs on exceptions in response to the AL's Initial Decision. Entergy's exceptions to the AL's Initial Decision include: the practical effect of the Initial Decision is full production cost equalization, which was rejected in the Initial Decision and previously has been rejected by the FERC; resource planning for the Entergy System would be impeded if the Initial Decision were adopted; the remedy in the Initial Decision is inconsistent with the history, structure, and precedent regarding the System Agreement; the Initial Decision's remedy ignores the historical pattern of production cost disparities on the Entergy System and would result in substantial, sudden transfers of costs between groups of Entergy customers; the numerical standards proposed in the Initial Decision are arbitrary and are so complex that they will be difficult to implement; the Initial Decision improperly rejected Entergy's resource planning remedy; the Initial Decision erroneously determined that the full costs of the Vidalia project should be included in Entergy Louisiana's production costs for purposes of calculating relative production costs; and the Initial Decision erroneously adopted a new method of calculating reserve sharing costs rather than the current method.
If the FERC grants the relief requested by the LPSC in the proceeding, the relief may result, in a material increase in the total production costs the FERC allocates to companies whose costs currently are projected to be less than the Entergy System average, and a material decrease in the total production costs the FERC allocates to companies whose costs currently are projected to exceed that average. If the FERC adopts the ALJ's Initial Decision, the amount of production costs that would be reallocated among the domestic utility companies would be determined through consideration of each domestic utility company's relative total production cost expressed as a percentage of Entergy System average total production cost. The AL's Initial Decision would reallocate production costs of the domestic utility companies whose percent of Entergy System average production cost are outside an upper or lower bandwidth. This would be accomplished by payments from domestic utility companies whose production costs are below Entergy System average production cost to domestic utility companies whose production costs are above Entergy System average production cost.
An assessment of the potential effects of the ALUs Initial Decision requires assumptions regarding the future total production cost of each domestic utility company, which assumptions include the mix of solid fuel and gas-fired generation available to each company and the costs of natural gas and purchased power. Entergy Louisiana and Entergy Gulf States are more dependent upon gas-fired generation than Entergy Arkansas, Entergy Mississippi, or Entergy New Orleans. Of these, Entergy Arkansas is the least dependent upon gas-fired generation.
Therefore, increases in natural gas prices likely will increase the amount by which Entergy Arkansas' total production costs are below the average production costs of the domestic utility companies. Considerable uncertainty exists regarding future gas prices. Annual average Henry Hub gas prices have varied significantly over recent years, ranging from $1.72/mmBtu to $5.85/mmBtu for the 1995-2004 period, and averaging $3.43/mmBtu during the ten-year period 1995-2004 and $4.58/mmBtu during the five-year period 2000-2004. Recent market conditions have resulted in gas prices that have averaged $5.85/mmBtu for the twelve months ended December 232

Entergy Mississippi, Inc.
Management's Financial Discussion and Analysis 2004. Based upon analyses considering the effect on future production costs if the FERC adopts the ALJ's Initial Decision, the following potential annual production cost reallocations among the domestic utility companies could result assuming annual average gas prices range from $6.39/mmBtu in 2005 declining to $4.97/mmBtu by 2009:
Average Annual Range of Annual Payments         Payments or (Receipts) or (Receipts)               for 2005-2009 Period' (In Millions)                   (In Millions)
Entergy Arkansas                   $154to$281                          $215 Entergy Gulf States              ($130) to ($15)                       ($63)
Entergy Louisiana                ($199) to ($98)                      ($141)
Entergy Mississippi                  ($16) to $8                          $1 Entergy New Orleans                 ($17) to ($5)                      ($12)
Management believes that.any changes in the allocation of production costs resulting from a FERC decision and related retail proceedings should result in similar rate changes for retail customers. Although the outcome and timing of the FERC,; APSC, and other proceedings cannot be predicted at this time, Entergy Mississippi does not believe that the ultimate resolution of these proceedings will have a material effect on its financial condition or results of operation.
In February 2004, the APSC issued an "Order of Investigation," in which it discusses the negative effect that implementation of the FERC AL's Initial Decision would have on Entergy Arkansas' customers. The APSC order establishes an investigation into whether Entergy Arkansas' continued participation in the System Agreement is in the best interest of its customers, and whether there are steps that Entergy Arkansas or the APSC can take "to protect [Entergy Arkansas' customers] from future attempts by Louisiana, or any other Entergy retail regulator, to shift its high costs to Arkansas." Entergy Arkansas filed testimony in response to the APSC's Order of Investigation. The testimony emphasizes that the AL's Initial Decision is not a final order by the FERC; briefly discusses some of the aspects of the Initial Decision that are included in Entergy's exceptions filed with the FERC; emphasizes that Entergy will seek to reverse the production cost-related portions of the Initial Decision; and states that Entergy Arkansas believes that it is premature, before the FERC makes a decision, for Entergy Arkansas to determine whether its continued participation in the System Agreement is appropriate.
In April 2004, the APSC commenced the investigation into Entergy Louisiana's Vidalia purchased power contract and requested historical documents, records, and information from Entergy Arkansas, which Entergy Arkansas has provided to the APSC. Also in April 2004, the APSC issued an order directing Entergy Arkansas to show cause why Entergy Arkansas should not have to indemnify and hold its customers harmless from any adverse financial effects related to Entergy Louisiana's pending acquisition of the Perryville power plant, or show that the Perryville unit will produce economic benefits for Entergy Arkansas' customers. Entergy Arkansas filed a response in May 2004 stating that Entergy will seek to reverse the production cost-related portions of the ALUs Initial Decision in the System Agreement proceeding at the FERC, that the Perryville acquisition is part of Entergy's request for proposal generation planning process, that Entergy Arkansas is not in a position to indemnify its retail customers from actions taken by the FERC, and that the Perryville acquisition is expected to reduce the domestic utility companies'; overall production costs. Procedural schedules have not been established in these APSC investigations.
In April 2004, the City Council issued a resolution directing Entergy New Orleans and Entergy Louisiana to notify the City Council and obtain prior approval for any action that would materially modify, amend, or terminate the System Agreement for one or more of the domestic utility companies. Entergy New Orleans and Entergy Louisiana appealed to state court the City Council's resolution on the basis that the imposition of this requirement with respect to the System Agreement, a FERC-approved tariff, 'exceeds the City Council's jurisdiction 'and authority. In July 2004, the City Council answered the appeal and filed a third party demand and counterclaim against Entergy, the domestic utility companies, Entergy Services, and System Energy, seeking a declaratory judgment that Entergy and its subsidiaries cannot terminate the System Agreement until obligations owed under a March 2003 rate case settlement are satisfied. In August 2004, Entergy New Orleans and Entergy Louisiana, as 233

Entergy Mississippi, Inc.
Managemenfs Financial Discussion and Analysis well as the named third party defendants, filed pleadings objecting to the City Council's third party demand and counterclaim on various grounds, including federal preemption. In February 2005, the state court!issued an oral decision dismissing the City Council's claims for lack of subject matter jurisdiction and prematurity.
Transmission In 2000, FERC issued an order encouraging utilities to voluntarily 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, and 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. Assuming applicable regulatory support and approvals can be obtained, Entergy proposed to contract with the ICT to oversee the granting of transmission service on the Entergy system as well as the implementation of the proposed weekly procurement process (WPP). 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.
Entergy also proposed to have the ICT administer a transmission expansion pricing protocol that will increase the efficiency of transmission pricing on the Entergy system and that will be designed to protect Entergy's native load customers from bearing the cost of transmission upgrades not required to reliably serve these customers' -needs.
Entergy intends for the ICT to determine whether transmission upgrades associated with new requests for service should be funded directly by the party requesting such service or by a broader group of transmission customers, including Entergy's native load customers. This determination would be made in accordance with protocols approved by the FERC, and any party contesting such determination, including Entergy, would be required to seek review at the FERC. Several technical conferences regarding the ICT proposal, or various components thereof, were held in 2004.
Entergy has also responded to discovery requests that resulted from these conferences.
In January 2005, Entergy filed a petition for declaratory order with the FERC requesting that the FERC provide guidance on two important issues: (1) whether the functions performed by the ICT will cause it to become a "public utility" under the Federal Power Act or the "transmission provider" under Entergy's open access transmission tariff; and (2) whether Entergy's transmission pricing proposal, as administered by the ICT, satisfies the FERC's transmission pricing policy. The petition also indicates that, subject to the outcome of the 'petition and obtaining support of Entergy's retail regulators, Entergy would be willing to have the ICT perform the following additional functions: (a) grant or deny requests for transmission service; (b) calculate available flowgate capacity; (c) administer Entergy's OASIS; and (d) perform an enhanced planning function (integrating the plans of Entergy and other potential transmission owners to identify regional synergies.) Comments and interventions on the petition were filed by market participants and retail regulators on February 4, 2005. In their individual comments, the APSC, LPSC, and City Council supported Entergy's position that the ICT would not become a "public utility" or "transmission provider" and that the transmission pricing proposal satisfies the FERC's transmission pricing policy. Certain other parties urged the FERC to reject the petition for declaratory order or, in the alternative, that the FERC assert jurisdiction over the ICT and determine that Entergy's proposed pricing policy is inconsistent with FERC's current pricing policy. FERC action on the petition is expected during the first half of 2005.
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 comments 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. Additionally, 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 on the 234

Entergy Mississippi, Inc.
Management's Financial Discussion and Analysis transmission pricing aspects of the ICT proposal is scheduled for May 2005, with a separate hearing on the WPP portion of the proposal currently scheduled for August 2005.
Interconnection Orders The domestic utility companies (except Entergy New Orleans) are currently defendants to several complaints and rehearing requests before the FERC in which independent generation entities (GenCos) are seeking a refund of monies that the GdnCos had previously paid to the Entergy companies 'for facilities necessary to connect their generation facilities to Entergy's transmission system. 'The FERC has issued initial orders in response to two of the complaints and in certain other dockets ordering Entergy to refund approximately $100 million in expenses and tax obligations previously paid by the GenCos, including $27 million for Entergy Mississippi. The refunds will be in the form of transmission credits that will be utilized over time as the GenCos take transmission service from Entergy. To the extent the Entergy companies are ordered to provide such refunds, these costs will qualify for inclusion in the Entergy companies' rates. The recovery of these costs is not automatic, however, especially at the retail level, where the majority of the cost recovery would occur. Entergy intends to pursue all regulatory and legal avenues available to it in order to have these orders reversed and have the affected interconnection agreements reinstated as agreed to originally by the generators.                                     '
Available Flowgate Capacity Proceeding On December 17, 2004, the FERC issued an order initihting a hearing and investigation concerning the justness and reasonableness of the Available Flowgate Capacity (AFC) methodology, the methodology used to evaluate short-term transmission service requests under the domestic utility companies' open access transmission tariff, and establishing a refund effective date. In its order, the FERC indicated that although it "appreciates that Entergy is attempting to explore ways to improve transmission access on its system," it believed that an investigation was warranted to gather more evidence in light of the concerns raised by certain transmission customers and certain issues raised 'in a FERC audit report finding errors and problems with the predecessor methodology used by Enteigy for evaluating short-term' transmission requests, the Generator Operating Limits methodology. The FERC order indicates that the investigation will include an examination of (i) Entergy's implementation of the AFC program, (ii) whether Entergy's implementation has complied with prior FERC orders and open access transmission tariff provisions addressing the AFC program, and'(iii) whether Entergy's provision of access to short-term transmission on its transmission system was just, reasonable, and not unduly discriminatory.'
Entergy has submitted an Emergency Interim Request for Rehearing requesting the FERC to defer the hearing process and instead proceed initially with an independent audit of the AFC program and the expansion of the current process involving other market participants to address a broader range of issues. Entergy believes that this type of approach is a more efficient and effective mechanism for evaluating the AFC program: Following the completion of the independent audit and process involving other market participants, the FERC could determine whether other procedural steps are necessary. The FERC has not yet ruled on the Emergency Interim Request for Rehearing submitted by Entergy.
Entergy believes that it has complied with the provisions of its open access transmission tariff, including the provisions addressing the implementation of the AFC methodology; however, the ultimate scope of this proceeding cannot be predicted at this time. A hearing in the AFC proceeding is currently scheduled to commence in August 2005.'
Market and Credit Risks Entergy Mississippi has certain market and credit risks inherent in its business operations. Market risks represent 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. Credit risk is risk of loss from nonperformance by suppliers, customers, or financial counterparties to a contract or agreement.
235

Entergy Mississippi, Inc.
Management's Financial Discussion and Analysis Critical Accounting Estimates                             .
The preparation of Entergy Mississippi'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 there is the potential, for future changes in the assumptions and measurements could produce estimates that would have a material impact on the presentation of Entergy Mississippi's financial position or results of operations.
Unbilled Revenue As discussed in Note I to the domestic utility companies and System Energy financial statements, Entergy Mississippi records an estimate of the revenues earned for energy delivered since the latest customer billing. Each month the estimated unbilled revenue amounts are recorded as revenue and a receivable, and the prior month's estimate is reversed. The difference between the estimate of the unbilled receivable at the beginning of the period and the end of the period is the amount of unbilled revenue recognized during the period. The estimate recorded is primarily based upon an estimate of customer usage during the unbilled period and the billed price to customers in that month. Therefore, revenue recognized may be affected by the estimated price and usage at the beginning and end of each period, in addition to changes in certain components of the calculation including changes to estimates such as line loss, which affects the estimate of unbilled customer usage, and assumptions regarding price such as the fuel cost recovery mechanism.
Pension and Other Postretirement Benefits Entergy sponsors 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 domestic utility companies and System Energy financial statements, 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.
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 obligations, Entergy reviews market yields on high-quality corporate debt and matches these rates with Entergy's projected streamii of benefit payments. Based on recent market trends, Entergy reduced its discount rate used to 'calculate benefit obligations from 6.75% in 2002 to 6.25% in 2003 and to 6% in 2004. 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, 2004 accumulated postretirement benefit obligation to a 10%
236

Entergy Mississippi, Inc.
Managemenfs Financial Discussion and Analysis increase in health care costs in 2005 gradually decreasing each successive year, until it reaches a 4.5% annual increase in health care costs in 2011 and beyond.
In determining its expected long-term rate of return on plan assets, Entergy reviews past, long-term performance, asset allocations, and long-term inflation assumptions. Entergy targets an asset allocation for its pension plan assets of roughly 65% equity securities, 31% fixed incomre 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 2002 and 2003 to 8.5% in 2004. The assumed rate of increase in future compensation levels used to calculate benefit obligations was 3.25% in 2002,.2003, and 2004.
Cost Sensitivity The following chart reflects the sensitivity of pension cost to changes in certain actuarial assumptions (dollars in thousands):                -
Change in             Impact on 2004          Impact on Projected Actuarial Assumption                Assumption               Pension Cost           Benefit Obligation Increase/(Decrease)
Discount rate                                 (0.25%)                     $598                       $6,213 Rate of return on plan assets                 (0.25%)                     $420 Rate of increase in compensation               0.25%                      $271                       $1,463 The following chart reflects the sensitivity of postretirement benefit cost to changes in certain actuarial assumptions (dollars in thousands):
Impact on Accumulated Change in               Impact on 2004               Postretirement Benefit Actuarial Assumption            Assumption         Postretirement Benefit Cost                Obligation Increase/(Decrease)
Health care cost trend                 0.25%                          $174                             $1,161 Discount rate                        (0.25%)                          $110                             $1,519 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 utilizes a number of accounting mechanisms that reduce the volatility 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 necessary, the excess is amortized over the average remaining service period of active employees.
Additionally, Entergy accounts for the impact of asset performance on pension expense over a twenty-quarter phase-in period through a "market-related" value 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 pension 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 accordance with SFAS 87.
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Entergy Mississippi, Inc.
Managements Financial Discussion and Analysis Costs and Funding                                                    .      l . . ,
Total pension cost for Entergy Mississippi in 2004 was $2.1 million. Entergy anticipates 2005 pension cost to increase to $4.4 million due to decrease in the discount rate (from, 6.25% to 6.00%) and the expected rate of return (from 8.75% to 8.5%) used to calculate benefit, obligations, Entergy Mississippi contributed $1.8 million to its pension plan in 2004, and anticipates making $3.4 million incontributions in 2005, The rise in pension funding requirements is due to declining interest rates and the phased-in effect of asset underperformance from 2000 to 2002, partially offset by the Pension Funding Equity Act relief passed in April 2004.
Entergy Mississippi's accumulated benefit obligation at December 31, 2004, 2003, and 2002 exceeded plan assets. As a result, Entergy Mississippi was required to recognize an additional minimum liability as prescribed by SFAS 87. At December 31, 2004, Entergy Mississippi increased its additional minimum liability to $23.5 million from $7.3 million at December 31, 2003. Entergy Mississippi increased its intangible asset for the unrecognized prior service cost to $3.3 million at December 31, 2004 from $0.9 million at December 31, 2003. Entergy Mississippi also increased the regulatory asset to $20.2 million at December 31, 2004 from $6.4 million at December 31, 2003. Net income for 2004, 2003, and 2002 was not impacted.
Total postretirement health care and iife insurance benefit costs for Entergy Mississippi in 2004 were $3.8 million, including $1.7 million in savings due to the estimated effect of future Medicare Part D subsidies. Entergy Mississippi expects 2005 postretirement health care and life insurance benefit costs to approximate $4.2 million, including $1.9 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 discount rate (from 6 .25% to 6.00%) and an increase in the health care cost trend rate used to calculate benefit obligations.
                'i   :'           :                  .         '  '1   . .:           ':''             '     . '
J I : I        I
                                                                                                           . i; I 238

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Entergy Mississippi, Inc.:
We have audited the accompanying balance sheets of Entergy Mississippi, Inc. as of December 31, 2004 and 2003, and the related statements of income, retained earnings, and cash flows (pages 240 through 244 and applicable items in pages 284 through 348) for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing 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 provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Entergy Mississippi, Inc., as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, 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 8, 2005 expressed an unqualified opinion on management's -assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP New Orleans, Louisiana March 8, 2005 239

ENTERGY MISSISSIPPI, INC.
INCOME STATEMENTS              . -,              ; ;                  f     -
For the Years Ended December 31, 2004                   2003                      20022 (In Thousands)
            - OPERATING REVENUES                                 ! I .,      .             I,                ,, 1        ,
Domestic electric                                       $1,1213,629.         . 1,035,360         ,      $991,095 OPERATING EXPENSES                                      I   -,
Operation and Maintenance:                                                   !.                             X        I Fuel, fuel-related expenses, and gas purchased for resale                                 335,271                 155,168                  318,350 Purchased power                                           436,013                .449,971                  315,963 Other operation and maintenance                            178,007                174,192                  170,052 Taxes other than income taxes                                 53,443                  47,734                   47,093 Depreciation and amortization                                 65,452                  62,984                   55,409 Other regulatory charges (credits) - net                      (1,171)                  3,664                  (23,432)
TOTAL                                                     1,067,01o                 893,713                  884,32a OPERATING INCOME                                            146,614                 141,647                  106,766 OTHER INCOME Allowance for equity funds used during construction            4,402          '        4,576 1                   3,844'-
Interest and dividend income                                 : 2,550                 : 1,030.
                                                                                         .              ,        4,213 Miscellaneous - net                                           (1,508)                 (2,242) .               . (2,572)
TOTAL                                                          5,444                   3,364                     5,485 I      I' I*   ,                       ;
INTEREST AND OTHER CHARGES
                                                                                                                            " I .             . C .
Interest on long-term debt                                   :41,681            i     43,879-               !42,580 Other interest - net                                           2,956                   3,585             l     : 2,884 '-         . .   ,I       -1 :
Allowance for borrowed funds used during construction         (3,116) .               (3,942)                   (3,'467) :. '         7. ;1. 4        -[ '
TOTAL                                                         41,521                  43,522                   ;41,9970          :     : ':;. fi. - ,
1      3                10.,4.9                                     ;. ,   ! i .1     : (1 1 1 INCOME BEFORE INCOME TAXES                                . 11,537                  101,499                   '70,254
                                                                                                                                      , ";     I m , .'
Income taxes                                                  37,040                  34,431                   17,846 NET INCOME                                                    73,497                  67,058k                  52,408            .    . . I                .
Preferred dividend requirements and other                      3,369                   3,369                     3,369 i
                                                                                                                            . ,&#xa2;         I     .      ;.
EARNINGS APPLICABLE TO COMMON STOCK                                                $70,128                 $63,689                  $49,039 See Notes to Respective Financial Statements.
240

ENTERGY MISSISSIPPI, INC.
STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2004                    2003               2002 (In Thousands)
OPERATING ACTIVITIES Net income                                                                     $73,497                 $67,058            $52,408 Adjustments to reconcile net income to net cash flow provided by  - -
operating activities:
Other regulatory charges (credits) - net                                         (1,171)                 3,664            (23,438)
Depreciation and amortization                                                   65,452                  62,984
* 55,409 Deferred income taxes and investment tax credits                                61,829                  34,836              (7,940)
Changes in working capital:
Receivables                                                                   (14,894)                (23,179)      *      (2,000)
Fuel inventory                                                                     940                    575                (828)
Accounts payable                                                                    432                  1,244             16,736 Taxes accrued                                                                (27,759)                 74,487          ; (2,670)
Interest accrued                                                               (1,285)                (5,922)               2,027 Deferred fuel costs                                                          111,871                  21,669              67,981 Other working capital accounts                                                  2,684                 11,255            (22,897)
Provision for estimated losses and reserves                                        2,789                (1,i37)                 386 Changes in other regulatory assets                                                 9,401                (9,061)             (6,028)
Other                                                                          (25,607)                 14,815
* 27,722 Net cash flow provided by operating activities                                  258,179                253,288             156,868 INVESTING ACTIVITIES Construction expenditures                                                     (163,413)               (188,995)          (157,532)
Allowance for equity funds used during construction                                 4,402                  4,576               3,844 Changes in other temporary investments - net                                        7,506                 (7,506)            18,566 Other regulatory investments                                                                            (72;570)
Net cash flow used in investing activities                                    (151,505)               (264,495)           (135,122)
FINANCING ACTIVITIES Proceeds from the issuance of long-temri debt                                   178,510                 292,393            167,596 Retirement of long-term debt                                                  (218,457)               (330,000)             (65,000)
Dividends paid.
Common stock                                                                   (46,800)               (31,700)            (27,300)
Preferred stock                                                                  (3,369)                (3,369)             (3,369)
Net cash flow provided by (used in) financing activities                         (90,116)               (72,676)             71,927 Net increase (decrease) in cash and cash equivalents                              16,558                (83,.883)            93,673 Cash and cash equivalents at beginning of period                                  63,838                147,721              54,048 Cash and cash equivalents at end of period                                      $80,396                 $63,838          $147,721 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid/(received) during the period for Interest - net of amount capitalized                                           $43,824                S51,126            S40,572 Income'taxes                                                                   S11,995               ($78,091)          -$28,440 241

ENTERGY MISSISSIPPI, INC.
BALANCE SHEETS ASSETS December 31, 2004                                 2003 (In Thousands)
                                                                              .              . ,*    1,
* I -
CURRENT ASSETS Cash and cash equivalents:
Cash                                                                                        $4,716                          .,$6,381 Temporary cash investment - at cost, which approximates market                                              .      I- ..         75,680               .            57,457 Total cash and cash equivalents                                                         80,396                            63,838 Other temporary investments                                                                            -                            7,506 Accounts receivable:
Customer                                                                                    68,821                  f         59,729 Allowance for doubtful accounts                                                              (1,126)                           (1,375)
Associated companies                                                                        22,616                            25,935-Other                                                                                       12,133                              6,400 Accrued unbilled revenues                                                                    34,348                            31,209 Total accounts receivable                                                               136,792                            121,898 Deferred fuel costs'                                                                                                            89,078 Accumulated deferred income taxes                                                             27,924                                     -
Fuel inventory - at average cost                                                                4,137                             5,077 Materials and supplies - at average cost                                                      18,414 ,                           17,682 Prepayments and other                                                                         15,413                              9,583 TOTAL                                                                                      283,076                           314,662 OTHER PROPERTY AND INVESTMENTS Investment in affiliates - at equity _                                                          5,531t                            5,531 Non-utility property - at cost (less accumulated depreciation)                                  6,465                             6,466 TOTAL                                                                                           1           .           .- 1996  1,997 I    ,-. I   j     .  ",!
UTILITY PLANT Electric                                                                             2,385,465                            2,24X,852 Property under capital lease                                                                        95                                136 Construction work in progress                                                                 89,921.                         108,829        V, TOTAL UTILITY PLANT                                                                  2,475,481                            2,352,817 Less - accumulated depreciation and amortization                           .I              870,188.                          837,492       .   .
UTILITY PLANT - NET                                                                   1,605,293                           1,515,325 DEFERRED DEBITS AND OTHER ASSETS                                     ;   I,.,,.     .    ,
Regulatory assets:
SPAS 109 regulatory asset - net                                                              17,628                            28,964 Other regulatory assets                                                                      82,674       -- I;                58,287 Long-term receivable                                                                            4,510 Other                                                                                         31,009                            23,117 TOTAL                                                                                      135,821                            110,368' TOTAL ASSETS                                                                        $2,036,186                       S1,952,352 See Notes to Respective Financial Statements.
242

ENTERGY MISSISSIPPI, INC.
BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY December 31, 2004                 2003 (in Thousands)
CURRENT LIABILITIES Currently maturing long-term debt                                                              $75,000 Accounts payable:
Associated companies                                                        65,806               62,705 Other                                                                       25,543              28,212 Customer deposits                                                            37,333               33,861 Taxes accrued                                                                40,106               39,041:
Accumulated deferred income taxes                                                                  7,120 Interest accrued                                                             12,487               13,772 Deferred fuel costs                                                          22,793 Obligations under capital leases                                                  43                   41 Other                                                                         8,341                2,567 TOTAL                                                                       212,452             262,319
            -       NON-CURRENT LIABILITIES Accumulated deferred income taxes and taxes accrued                         438,321             385,395 Accumulated deferred investment tax credits                                  13,687               15,092
                                                                          -       52                   95 Obligations under capital leases Accumulated provisions                                                       12,718                9,929 Long-term debt                                                              695,073             654,956 Other                                                                        76,071               60,082 TOTAL                                                                    1,235,922            1,125,549 Commitments and Contingencies SHAREHOLDERS' EQUITY Preferred stock without sinking fund                                         50,381               50,381 Common stock, no par value, authorized 15,000,000 shares; issued and outstanding 8,666,357 shares in 2004 and 2003           199,326              199,326 Capital stock expense and other                                                  (59)                 (59)
Retained earnings                                                           338,164             314,836 TOTAL                                                                       587,812             564,484 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                              $2,036,186          $1,952,352 See Notes to Respective Financial Statements.
243

ENTERGY MISSISSIPPI, INC.
STATEMENTS OF RETAINED EARNINGS
                                   . : 11 I   -  .
                                                 ,; I*     .1      '   '  '   r For the Years Ended December 31, 2004                2003     2002 (In Thousands)
Retained Earnings, January 1                                             $314,836;.. - $282,847       $261,108 Add:
Net income                                                                  73,497           67,058   52,408 Deduct:
Dividends declared:
Preferred stock                                                              3,369           3,369    3,369 Common stock                                                               46,800           31,700   27,300 Total                                                                    50,169           35,069   30,669 Retained Earnings, December 31                                           $338,164            $314,836 $282,847 See Notes to Respective Financial Statements.
                                                              .. :   . N    ,    :,  4  1. ,
244

ENTERGY MISSISSIPPI, INC.
SELECTED FINANCIAL DATA - FIVE-YEAR COMPARISON 2004           2003            2002            2001            2000 (In Thousands)
Operating revenues                        $1,213,629    $1,035,360        $991,095      $1,093,741        $937,371 Net Income                                   $73,497        $67,058        $52,408         $39,620         $38,973 Total assets                              $2,036,186    $1,952,352      $1,832,372      $1,683,026     $1,683,939 Long-term obligations (I)                   $695,125      $655,051        $510,240        $589,937        $584,678 (1) Included long-term debt (excluding currently maturing debt) and noncurrent capital lease obligations.
                                        - i 2004            2003            2002            2001            2000 (Dollars In Millions)
Electric Operating Revenues:
Residential                                    $467          $410            $375           $391            $341 Commercial                                      397            342             310             328            275 Industrial                                      204            174             165           ' 191            161 Governmental                                     38             32              29              31             26 Total retail .                              1406             958             879             941            803 Sales for resale:                                               21 Associated companies                           39             21              63             111             83 Non-associated companies                       30             21              15              21             27 Other                                            39             35              34              22             25 Total                                      $1,214        $1,035             $991         $1,095            $938 Billed Electric Energy Sales (GWh):
Residential                                   5,085          5,092           5,092          4,867           4,976 Commercial                                    4,518          4,476           4,445          4,322           4,307 Industrial                                    2,977          2,939           2,910          3,051           3,188 Governmental                                    398            384             382             381            376 Total retail                               12,978         12,891          12,829         12,621       .. 12,847 Sales for resale:
Associated companies                          305            112           1,123          1,728           1,276 Non-associated companies .                    393            331             197           *289             313 Total                                      13,676         13,334          14,149         14,638        ; 14,436 245

ENTERGY NEW ORLEANS, INC.
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS Results of Operations Net Income (Loss) 2004 Compared to 2003 Net income increased $20.2 million primarily due to higher net revenue.
2003 Compared to 2002                                                                              -
Entergy New ~Orleans had net income of $7.9 million in 2003 compared to a net loss in 2002. The increase was due to higher net revenue and lower interest - expense,. partially offset by higher other operation and maintenance expenses and depreciation and amortization expenses.
Net Revenue 2004 Compared to 2003 Net revenue, which is Entergy New Orleans' measure of gross margin, consists of operating revenues net of: 1) fuel, fuel-related, and purchased power expenses and 2) other regulatory credits. Following is an'analysis of the change in net revenue comparing 2004 to 2003.
(In Millions)
* 2003 net revenue                               $208.3 Base rates                                        10.6 Volume/weather                                     8.3 2004 deferrals                                     7.5 Price applied to unbilled electric sales           3.7 Other                                              0.6 2004 net revenue                               $239.0 The increase in base rates was effective June 2003. The rate increase is discussed in Note 2 to the domestic utility companies and System Energy financial statements.
The volume/weather variance is primarily due to increased billed electric-usage of:'162 GWh in the industrial service sector. The increase was partially offset by milder weather in the residential and commercial sectors.
The 2004 deferrals variance is due to the deferral of voluntary severance plan and fossil plant maintenance expenses in accordance with a stipulation approved by the City Council in August 2004. The stipulation allows for the recovery of these costs through amortization of a regulatory asset. The voluntary severance plan and fossil plant maintenance expenses are being amortized over a five-year period that became effective January 2004 and January 2003, respectively. The formula rate plan is discussed in Note 2 to the domestic utility companies and System Energy financial statements.
The price applied to unbilled electric sales variance is due to an increase in the fuel price applied to unbilled sales.
246

Entergy New Orleans, Inc.
Managements Financial Discussion and Analysis Gross operatingrevenues, fuel andpurchasedpower expenses, andother regulatory credits Gross operating revenues increased primarily due to an increase in gross wholesale revenue as a result of an increase of $32.4 million in sales to affiliates and an increase of $28.7 million in fuel revenues due to higher fuel rates, in addition to the net revenue items mentioned above.
Fuel and purchased power expenses increased primarily due to an increase in electricity generated and power purchased coupled with an increase in the' market prices of natural gas and purchased power.
Other regulatory credits increased primarily due to a stipulation approved by the City Council in August 2004, as discussed above.
2003 CoMpared to 2002 Net revenue, which is Entergy New Orleans' measure of gross margin, consists, of operating revenues net of: 1) fuel, fuei-related, and purchased power expenses and 2) othei regulatory'credits. Following is an analysis of the change in net revenue comparing 2003 to 2002.
(In Millions) 2002 net revenue '                                $183.7 Base rates                                          15.9 Rate refund provisions    '             '       '    9.1 Other                                               (0.4) 2003 net revenue                                  $208.3 The increase in base rates was effective June 2003. The rate increase is discussed in Note 2 to the domestic utility companies and System Energy financial statements.
Rate refund provisions increased net revenue due to -larger accruals for potential rate actions and refunds in 2002.
Gross operatingrevenues andfuel andpurchasedpower expenses Gross operating revenues increased primarily due to an increase of $78.4 million in sales to affiliates. The increase was also attributable to a base rate increase and an increase in the market price of natural gas.
          -Fuel and purchased power expenses increased primarily due to an increase in the market price of natural gas.
Other Income Statement Variances 2004 Compared to 2003 Other operation and maintenance expenses decreased slightly primarily due to the $4.7 million voluntary severance program accruals in 2003. The decrease was offset by increases in customer service support costs and maintenance and outage costs at fossil plants.
The increase in miscellaneous income is primarily due to an asbestos insurance settlement in April 2004.
Interest on long-term debt decreased primarily due to long-term debt refinancing in the third quarter of 2003.
247

Entergy New Orleans, Inc.
Management's Financial Discussion and Analysis 2003 Compared to 2002 Other operation and maintenance expenses increased primarily due to the following:
* voluntary severance program accruals of $4.7 million;
* an increase of $2.7 million in benefit costs;
* an increase of $2.2 million in billing, customer inquiry, and collection costs; and
* an increase of $2.0 milliork in' fossil plant maintenance 6utage costs.
Depreciation and amortization expenses increased due to an increase in plant in service.,
Miscellaneous income decreased primarily due to a gain on the sale of property at a non-operating plant site in 2002.
Other interest decreased primarily due to interest accrued in 2002 for potential rate actions and refunds and a true-up of those accruals in May 2003.
Income Taxes The effective income tax rates for 2004, 2003, and 2002 were 37.5%, 42.8%, and 64.7%, respectively. See Note 3 to the domestic utility companies and System Energy financialstatements for a reconciliation of the federal statutory rate of 35% to the effective income tax rate. Tax reserves not expected to reverse within the next year are reflected as non-current taxes accrued on the balance sheet.
Liquidity and Capital Resources Cash Flow Cash flows for the years ended December 31, 2004, 2003, and 2002 were as follows:
2004            2003          2002 (In Thousands),
Cash and cash equivalents at beginning of period                          $4,669         $66,247       $38,184 Cash flow provided by (used in):
Operating activities                                                  63,577           7,194        72,143 Investing activities                                                 (49,280)        (64,806)      (41,647)
Financing activities                                                 (11,012)         (3,966)       (2,433)
Net increase (decrease) in cash and cash equivalents                    3,285       (61,578)       28,063 Cash and cash equivalents at end of period                                $7,954          $4,669-      $66,247' Operating Activities Cash flow from operations increased $56.4 million in 2004 primarily due to increased net income and the timing of collections of receivables.
Cash flow from operations decreased $64.9 million in 2003 primarily due to decreased fuel cost recoveries and the timing of collection of receivables due to an increase in retail customer receivable days outstanding.
248

Entergy New Orleans, Inc.
Managemenfs Financial Discussion and Analysis Entergy New Orleans' receivables from the money pool were as follows as of December 31 for each of the following years:
2004             2003            2002             2001 (In Thousands)
                                       $1,413           $1,783           $3,500          $9,208 Money pool activity provided $0.4 million of Entergy New Orleans' operating cash flow in 2004, provided
$1.7 million in 2003, and provided $5.7 million in 2002. See Note 4 to the domestic utility companies and System Energy financial statements for a description of the money pool.
Investing Activities Net cash used in investing activities decreased $15.5 million in 2004 primarily due to capital expenditures related to a turbine inspection project at a fossil plant in 2003 and decreased customer service spending.
Net cash used in investing activities increased $23.2 million in 2003 compared to 2002 primarily due to the maturity of $14.9 million of other temporary investments in 2002 and increased construction expenditures due to increased customer service spending.
Financing Activities Net cash used in financing activities increased $7.0 million in 2004 primarily due to the costs and expenses related to refinancing $75 million of long-term debt in 2004 and an increase of $2.2 million in common stock dividends paid.
Net cash used in financing activities increased $1.5 million in 2003 primarily due to additional common stock dividends paid of $2.2 million.
In July 2003, Entergy New Orleans issued $30 million of 3.875% Series First Mortgage Bonds due August 2008 and $70 million of 5.25% Series First Mortgage Bonds due August 2013. The proceeds from these issuances were used to redeem, prior to maturity, $30 million of 7% Series First Mortgage Bonds due July 2008, $40 million of 8% Series bonds due March 2006, and $30 million of 6.65% Series First Mortgage Bonds due March 2004. The issuances and redemptions are not shown on the cash flow statement because the proceeds from the issuances were placed in a trust for use in the redemptions and never held as cash by Entergy New Orleans.
See Note 5 to the domestic utility companies and System Energy financial statements for details on long-term debt.
Uses of Capital Entergy New Orleans requires capital resources for:
* construction and other capital investments;
* debt and preferred stock maturities;
* working capital purposes, including the financing of fuel and purchased power costs; and
* dividend and interest payments.
249

Entergy New Orleans, Inc.
Managements Financial Discussion and Analysis Following are the amounts of Entergy New Orleans! planned construction and other capital investments and existing debt obligations:
2005        2006-2007       2008-2009        After 2009       Total (In Millions)
Planned construction and capital investment (I)                          $47             $96            N/A              N/A           $143 Long-term debt                                   $30               $-           $30             $170           $230 Purchase obligations (2)                        $182            $346           $200           $1,215         $1,943 (1)     Consists almost entirely of maintenance capital, which is planned spending on routine Icapital projects that are necessary to support reliability of service, equipment or systems and to support normal customer growth.
(2)     Purchase obligations represent the minimum purchase obligation or cancellation charge for contractual obligations to purchase goods or services. For Entergy New Orleans almost all of the total consists of unconditional fuel'and purchased power obligations, including its obligations under the Unit Power Sales Agreement, which 'is discussed ity Note 8 to' the' domestic utility companies and System Energy financial statements.
In addition to these contractual obligations, Entergy New Orleans expects to contribute $ 1'5.7 million to its pension plans and $4.4 million to other postretirement plans in 2005.
The planned capital investment estimate for Entergy New Orleans reflects capital required' to support existing business. The estimated capital expenditures are subject to periodic review and modification and may vary based on the'ongoing effects of regulatory constraints, environmental compliance, market volatility, economic trends, and the ability to access capital. Management provides more information on long-term debt and preferred stock maturities in Notes 5 and 6 and to the domestic utility companies and System Energy financial statements.
As a wholly-owned subsidiary, Entergy' New'Orleans'dividends its earnings to Entergy Corporation at a percentage determined monthly. In addition, all of Entergy New Orleans' retained earnings are currently available for distribution.
Sources'of Capital Entergy New Orleans' sources to meet its capital requirements include:
* internally generated funds;
* cash on hand;
* debt or~preferred stock issuances; and
* bank financing under new or existing facilities.
Entergy New Orleans issued $75 million of First Mortgage Bonds in 2004 as follows:
Issue Date           Description    -     Maturity               Amount (In Thousands)
August 2004           5.60% Series        September 2024             $35,000 August 2004           5.65% Series        September 2029              40,000
                                                                                          $75,000 250

Entergy New Orleans, Inc.
Management's Financial Discussion and Analysis Proceeds from the issuances in August 2004 were used to retire or redeem the following First Mortgage Bonds:
Retirement Date            Description           Maturity              Amount (In Thousands)
September 2004          7.55% Series         September 2023               $30,000 September 2004          8.00% Series         March 2023                    45,000
                                                                                             $75,000 In July 2004, Entergy New Orleans entered into a credit facility and Entergy Louisiana renewed its credit facility with the same lender. Both facilities will expire in April 2005. Entergy New Orleans can borrow up to $14 million and Entergy Louisiana can borrow up to $15 million under their respective credit facilities, but at no time can the total amount borrowed by the two companies combined exceed $15 million. As of December 31, 2004, no borrowings were outstanding under the facilities.
Entergy New Orleans may refinance or redeem debt and preferred stock prior to maturity, to the extent market conditions and interest and dividend rates are favorable.
All debt and common and preferred stock issuances by Entergy New Orleans require prior regulatory approval. Preferred stock and debt issuances are also subject to issuance tests set forth in corporate charters, bond indentures, and other agreements. Entergy New Orleans has sufficient capacity under these tests to meet its foreseeable capital needs.
Short-term borrowings by Entergy New Orleans, including borrowings under the money pool, are limited to an amount authorized by the SEC, $100 million. Under restrictions contained in its articles of incorporation, Entergy New Orleans could incur approximately $40 millioniof new unsecured debt as of December 31, 2004. Under its SEC Order and without further SEC authorization, Entergy New Orleans cannot incur additional short-term indebtedness unless (a) it and Entergy Corporation maintain a common equity ratio of at least 30% and (b) with the exception of money pool borrowings, the security to be issued (if rated) and all outstanding securities of Entergy New Orleans (other than preferred stock), as well as all outstanding securities of Entergy Corporation, that are rated, are rated investment grade. See Note 4 to the domestic utility companies and System Energy financial statements for further discussion of Entergy New Orleans' short-term borrowing limits.
Significant Factors and Known Trends State and Local Rate Regulatory Risks The rates that Entergy New Orleans charges for electricity and natural gas significantly influence its financial position, results of operations, and liquidity. Entergy New Orleans is closely regulated and the rates charged to its customers are determined in regulatory proceedings. A governmental agency, the City Council, is primarily responsible for approval of the rates charged to customers.
In May 2003, the City Council approved a resolution allowing for a total increase of $30.2 million in electric and gas base rates effective June 1, 2003. In April 2004, Entergy New Orleans made filings with the City Council as required by the earnings review process prescribed by the Gas and Electric Formula Rate Plans approved by the City Council in 2003. The filings sought an increase in Entergy New Orleans' electric revenues of
  $1.2 million and an increase in Entergy New Orleans' gas revenues of $32,000. The Council Advisors and intervenors reviewed the filings, and filed their recommendations in July 2004. In August 2004, in accordance with the City Council's requirements for the formula rate plans, Entergy New Orleans made a filing with the City Council reflecting the parties' concurrence that no change in Entergy New Orleans' electric or gas rates is warranted. Later in August 2004, the City Council approved an unopposed settlement among Entergy New
 'Orleans, the Council Advisors, and the intervenors in connection with the Gas and Electric Formula Rate Plans. In accordance with the resolution approving the settlement agreement, Entergy New Orleans' gas and electric base rates remain unchanged from levels set in May 2003. The resolution ordered Entergy New Orleans to defer $3.9 251

Entergy New Orleans, Inc.
Managemenfts Financial Discussion and Analysis million relating to voluntary severance plan costs allocated to its electric operations and $ 1.0 million allocated to its gas operations, which amounts were accrued on its books in 2003, and to record on its books regulatory assets in those amounts to be amortized over five years effective January 2004. Entergy New Orleans also was ordered to defer $6.0 million of fossil plant maintenance expense incurred in 2003 and to record on its books a regulatory asset in that amount to be amortized over a five-year period effective January 2003.
Entergy New Orleans will file its formula rate plan for the year ended December 31, 2004 by May 1, 2005 and also intends to file for an extension of the formula rate plan by September 1, 2005. If the formula rate plan is not extended by the City Council, the rate adjustments in effect based on the December 31, 2004 test year shall continue.
In May 2003, the City Council approved implementation of, a generation. performance-based rate calculation in the electric fuel adjustment clause under which Entergy New Orleans receives 10% of calculated fuel and purchased power cost savings in excess of $20 million, based on a defined benchmark, subject to a 1325%
return on equity limitation for electric operations as provided for in the, electric formula rate plan. Entergy New Orleans bears 10% of any "negative" fuel and purchased power cost savings. In October 2004, Entergy New Orleans' annual evaluation report was submitted for the period June 2003 through May 2004. Additional savings associated with the first year generation performance-based rate calculation was $71 million of which Entergy New Orleans' share was $5.1 million.
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 Entergy New 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. Plaintiffs allege that Entergy New Orleans and the other defendant Entergy-companies conspired to make, these purchases 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 by stipulation of the parties pending a decision by the City Council in the proceeding discussed in the next paragraph.
Plaintiffs also filed this complaint with the City Council in order to initiate a review by the City Council of the plaintiffs' allegations and to force restitution to ratepayers of all costs they allege were improperly 'and imprudently included in the fuel adjustment filings. Testimony was filed on behalf of the plaintiffs in this proceeding asserting, among other things,, that Entergy New Orleans and other defendants have engaged in fuel procurement and power purchasing practices and included costs in Entergy New Orleans' fuel adjustment that could have resulted in New Orleans customers being overcharged by more than $100 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 refund to customers of $11.3 million, including interest, during the months of June through September 2004. The resolution concludes, among other things, that the record does, not support an allegation that Entergy Ne6.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 t6 its ratepayers. The plaintiffs have appealed the City Council resolution to the state court in Orleans Parish. Oral argument on the plaintiffs' appeal was conducted in February 2005.
In addition to rate proceedings, Entergy New Orleans' fuel costs recovered from customers are subject to regulatory scrutiny.
Entergy New Orleans' retail and wholesale rate matters and proceedings, including fuel cost recovery- related issues, are discussed more thoroughly in Note 2 to the domestic utility companies and System Energy financial statements.;
252

Entergy New Orleans, Inc.
Management's Financial Discussion and Analysis System Agreement Proceedings The domestic utility companies historically have engaged in the coordinated planning, construction, and operation of generating and transmission facilities under the terms of an agreement called the System Agreement that has been approved by the FERC. Litigation involving the System Agreement is being pursued by the LPSC at both the FERC and before itself. These proceedings include challenges to the allocation of costs as defined by the System Agreement, raise questions of imprudence by the domestic utility companies in their execution of the System Agreement, and seek support for local regulatory authority over System Agreement issues. Regarding the proceeding at the LPSC, Entergy believes that state and local regulators are preempted by federal law from reviewing and deciding System Agreement issues for themselves. An unrelated case between the LPSC and Entergy Louisiana raised the question of whether a state regulator is preempted by federal law from reviewing and interpreting FERC rate schedules that are part of the System Agreement, and from subsequently enforcing that interpretation. The LPSC interpreted a System Agreement rate schedule in the unrelated case, and then sought to enforce its interpretation. The Louisiana Supreme Court affirmed the LPSC's decision. In 2003, the U.S. Supreme Court, ruled in Entergy Louisiana's favor and reversed the decisions of the LPSC and the Louisiana Supreme Court.
In February 2004, a FERC ALJ issued an Initial Decision in the LPSC-initiated proceeding at the FERC.
The Initial Decision decided some issues in favor of the relief sought by the LPSC, and decided some issues against the relief sought by the LPSC. Several parties, including Entergy, the LPSC, the APSC, the MPSC, the City Council, and the FERC Staff, filed briefs on exceptions in response to the ALUs Initial Decision. Entergy's exceptions to the AL's Initial Decision include: the practical effect of the Initial Decision is full production cost equalization; which was rejected in the Initial Decision and previously has been rejected by the FERC; resource planning for the Entergy System would be impeded if the Initial Decision were adopted; the remedy in the Initial Decision is inconsistent with the history, structure, and precedent regarding the System Agreement; the Initial Decision's remedy ignores the historical pattern of production cost disparities on the Entergy System and would result in substantial, sudden transfers of costs between groups of Entergy customers; the numerical standards proposed in the Initial Decision are arbitrary and are so complex that they will be difficult to implement; the. Initial Decision improperly rejected Entergy's resource planning remedy; the Initial Decision erroneously determined that the full costs of the Vidalia project should be included in Entergy Louisiana's production costs for purposes of calculating relative production costs; and the Initial Decision erroneously adopted a new method of calculating reserve sharing costs rather than the current method.
If the FERC grants the relief requested by the LPSC in the proceeding, the relief may result in a material increase in the total production costs the FERC allocates to companies whose costs currently are projected to be less than the Entergy System average, and a material decrease in the total production costs the FERC allocates to companies whose costs currently are projected to exceed that average. If the FERC adopts the AL's Initial Decision, the amount of production costs that would be reallocated among the domestic utility companies would be determined through consideration of each domestic utility company's relative total production cost expressed as a percentage of Entergy System average total production cost. The AL's Initial Decision would reallocate production costs of the domestic utility companies whose percent of Entergy System average production cost are outside an upper or lower bandwidth. This would be accomplished by, payments from domestic utility companies whose production costs are below Entergy System average production cost to domestic utility companies whose production costs are above Entergy System average production cost.                                  :
An assessment of the potential effects of the AL's Initial Decision requires assumptions regarding the future total production cost of each domestic utility company, which assumptions include the mix of solid fuel and gas-fired generation available to each company and the costs of natural gas and purchased power. Entergy Louisiana and Entergy Gulf States are more dependent upon gas-fired generation than Entergy Arkansas, Entergy Mississippi, or Entergy New Orleans. Of these, Entergy Arkansas is the least dependent upon gas-fired generation.
Therefore, increases in natural gas prices likely will increase the amount by which Entergy Arkansas' total production costs are below the average production costs of the domestic utility companies. Considerable uncertainty exists regarding future gas prices. Annual average Henry Hub gas prices have varied significantly over recent years, ranging from $1.72/mmBtu to $5.85/mmBtu for the 1995-2004 period, and averaging $3.43/mmBtu during the ten-year period 1995-2004 and $4.58/mmBtu during the five-year period 2000-2004. Recent market conditions have resulted in gas prices that have averaged $5.85/mmBtu for the twelve months ended December 253

Entergy New Orleans, Inc.
Management's Financial Discussion and Analysis 2004. Based upon analyses considering the effect on future production costs if the FERC adopts. the AL's Initial Decision, the following potential annual production cost reallocations among the domestic utility companies could result assuming annual average gas prices range from $6.39/mmBtu in 2005 declining to $4.97/mmBtu by 2009:
Average Annual Range of Annual Payments      Payments or (Receipts) or (Receipts)             for 2005-2009 Period (In Millions),                (In Millions)
Entergy Arkansas                      $154 to $281                      $215 Entergy Gulf States                 ($130) to ($15)                      ($63)
Entergy Louisiana                   ($199) to ($98)                    ($141)
Entergy Mississippi                     ($16) to $8                        $1 Entergy New Orleans                    ($17) to ($5)                    ($12)
Management believes that any changes in the allocation of production costs resulting from a FERC decision and related retail proceedings should result in similar rate changes for retail customers. Although the outcome and timing of the FERC, APSC, and other proceedings cannot be predicted at this time, Entergy New Orleans does not believe that the ultimate resolution of these proceedings will have a material effect on its financial condition or results of operation.
In February 2004, the APSC issued an "Order of Investigation," in which it discusses the negative effect that implementation of the FERC AL's Initial Decision would have on Entergy Arkansas' customers. The APSC order establishes an investigation into whether Entergy Arkansas' continued participation in the System Agreement is in the best interest of its customers, and whether there are steps that Entergy Arkansas or the APSC can take "to protect [Entergy Arkansas' customers] from future attempts by Louisiana, or any other Entergy retail regulator, to shift its' high costs to Arkansas." Entergy Arkansas filed testimony in response to the APSC's Order of Investigation. The testimony emphasizes that the AL's Initial Decision is not a final order by the FERC; briefly discusses some of the aspects of the Initial Decision that are included in Entergy's exceptions filed with the FERC; emphasizes that Entergy will seek to reverse the production cost-related portions of the Initial Decision; and states that Entergy Arkansas believes that it is premature, before the FERC makes a decision, for Entergy Arkansas to determine whether its continued participation in the System Agreement is appropriate.
In April 2004, the APSC commenced the investigation into Entergy Louisiana's Vidalia purchased power contract and requested historical documents, records, and information from Entergy Arkansas, which Entergy Arkansas has provided to the APSC. Also in April 2004, the APSC issued an order directing Entergy Arkansas to show cause why Entergy Arkansas should not have to indemnify and hold its customers harmless from any adverse financial effects related to Entergy Louisiana's pending acquisition of the Perryville power plant, of show that the Perryville unit will produce economic benefits for Entergy Arkansas' customers. Entergy Arkansas filed a response in May 2004 stating that Entergy will seek to reverse the production cost-related portions of the AL's Initial Decision in the System Agreement proceeding at the FERC, that the Perryville acquisition is part of Entergy's request for proposal generation planning process, that Entergy Arkansas is not in a position to indemnify its retail customers from actions taken by the FERC, and that the Perryville acquisition is expected to reduce the domestic utility companies' overall production costs. Procedural schedules have not been established in these APSC investigations.
In April 2004, the City Council issued a resolution directing Entergy New Orleans and Entergy Louisiana to notify the City Council and obtain prior approval for any action that would materially modify, amend, or terminate the System Agreement for one or more of the domestic utility companies. Entergy New Orleans and Entergy Louisiana appealed to state court the City Council's resolution on the basis that the imposition of this requirement with respect to the System Agreement, a FERC-approved tariff, exceeds the City Council's jurisdiction and authority. In July 2004, the City Council answered the appeal and filed a third party demand and counterclaim against Entergy, the domestic utility companies, Entergy Services, and System Energy; seeking a declaratory judgment that Entergy and its subsidiaries cannot terminate the System Agreement until obligations owed under a March 2003 rate case settlement are satisfied. In August 2004, Entergy New Orleans and Entergy Louisiana, as 254

Entergy New Orleans, Inc.
Management's Financial Discussion and Analysis well' as the named third party defendants, filed pleadings objecting to the City Council's third party demand and counterclaim on various grounds, including federal preemption.; In February 2005, the state court issued an oral decision dismissing the City Council's claims for lack of subject matter jurisdiction and prematurity.
Transmission In 2000, FERC issued an order encouraging utilities to voluntarily 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, and 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. Assuming applicable regulatory support and approvals can be obtained, Entergy proposed to contract with the ICT to oversee the granting of transmission service on the Entergy system as well as the implementation of the proposed weekly procurement process (WPP). 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.
Entergy also proposed to have the ICT administer a transmission expansion pricing protocol that will increase the efficiency of transmission pricing on the Entergy system and that will be' designed to protect Entergy's native load customers from bearing the cost of transmission upgrades not required to reliably serve these customers' needs.
Entergy intends for the ICT to determine whether transmission upgrades associated with new requests for service should be funded directly by the party requesting such service or by a broader group of transmission customers, including Entergy's native load customers. This determination would be made in accordance with protocols approved by the FERC, and any party contesting such determination, including Entergy, would be required to seek review at the FERC. Several technical conferences regarding the ICT proposal, or various components thereof, were held in 2004.
Entergy has also responded to discovery requests that resulted from these conferences.
In January 2005, Entergy filed a petition for declaratory order with the FERC requesting that the FERC provide guidance on two important issues: (1) whether the functions performed by the ICT will cause it to become a "public utility" under the Federal Power Act or the "transmission provider" under Entergy's open access transmission tariff; and (2) whether Entergy's transmission pricing proposal, as administered by the ICT, satisfies the FERC's transmission pricing policy. The petition also indicates that, subject to the outcome of the petition and obtaining support of Entergy's retail regulators, Entergy would be willing to have the ICT perform the following additional functions: (a) grant or deny requests for transmission service; (b) calculate available flowgate capacity; (c) administer Entergy's OASIS; and (d) perform an enhanced planning function (integrating the plans of Entergy and other potential transmission owners to identify regional synergies.) Comments and interventions on the petition were filed by market participants and retail regulators on February' 4, 2005. In their individual comments, the APSC, LPSC, and City Council supported Entergy's position that the ICT would not become 'a "public utility" or "transmission provider" and that the transmission pricing proposal satisfies the FERC's transmission pricing policy. Certain other parties urged the FERC to reject the petition for declaratory order or, in the alternative, that the FERC assert jurisdiction over the ICT and determine that Entergy's proposed pricing policy is inconsistent with FERC's current pricing policy. FERC action on the petition is expected during the first half of 2005.
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 comments opposing the ICT proposal. A public hearing'has n6t 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. Additionally, 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 on the 255

Entergy New Orleans, Inc.
Managemenes Financial Discussion and Analysis transmission pricing aspects of the ICT proposal is Scheduled for May 2005, with a separate hearing on the WPP portion of the proposal currently scheduled for August 2005.
Available Flowgate Capacity Proceeding On December 17, 2004, the FERC issued an order initiating a hearing and investigation concerning the justness and reasonableness of the Available Flowgate Capacity (AFC) methodology, the methodology, used to evaluate short-term transmission service requests under the domestic utility companies' open access transmission tariff,, and establishing a refund effective date. -In its order, the FERC indicated that although it "appreciates that Entergy is attempting to explore ways to improve transmission access on its system," it believed that an investigation was warranted to gather more evidence in light of the concerns raised by certain transmission customers and certain issues raised in a FERC audit report finding errors and problems with the predecessor methodology used by Entergy for evaluating short-term transmission requests, the Generator Operating Limits methodology. The FERC order indicates that the investigation will include an examination of (i) Entergy's implementation of the AFC program, (ii) whether Entergy's implementation has complied with prior FERC orders and open access transmission tariff provisions addressing the AFC program, and (iii) whether Entergy's provision of access to short-term transmission on its transmission system was just, reasonable, and not unduly discriminatory.
Entergy has submitted an Emergency Interim Request for Rehearing requesting the FERC to defer the hearing process and instead proceed initially with an independent audit of the AFC program and the expansion of the current process involving other market participants to address a broader range of issues. Entergy believes that this type of approach is a more efficient and effective mechanism for evaluating the AFC program. Following the completion of the independent audit and process involving other market participants, the FERC could determine whether other procedural steps are necessary. The FERC has not yet ruled on the Emergency Interim Request for Rehearing submitted by Entergy.
Entergy believes that it has complied with the provisions of its open access transmission tariff, including the provisions addressing the implementation of the AFC methodology; however, the ultimate scope of this proceeding cannot be predicted at this time. A hearing in the AFC proceeding is currently scheduled to commence in August 2005.
Market and Credit Risks Entergy New Orleans has certain market and credit risks inherent in its business. Market risks represent 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. Credit risk is risk of loss from nonperformance by suppliers, customers, or financial counterparties to a contract or agreement.
Environmental Risks Entergy New Orleans' facilities and operations are subject to regulation by various governmental authorities having jurisdiction over air quality, water quality, control of toxic substances and hazardous solid wastes, and other environmental matters. Management believes that Entergy New Orleans is in substantial compliance with environmental regulations currently applicable to its facilities and operations. Because environmental, regulations are subject to change, future compliance costs cannot be precisely estimated.
Litigation Risks Te territory in which Entergy New Orleans operates has proven to be an unusually litigious environment.
Judges and juries in-New Orleans have demonstrated a, willingness to grant large verdicts, including punitive damages,. to plaintiffs in personal injury, property damager and business tort cases. Entergy New Orleans uses legal and appropriate means to contest litigation threatened or filed against it, but the litigation environment poses a significant business risk.                             - .            l 256

Entergy New Orleans, Inc.
Managementfs Financial Discussion and Analysis Critical Accounting Estimates The preparation of Entergy New Orleans' 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 there is the potential for future changes in the assumptions and measurements could produce estimates that would have a material impact on the presentation of Entergy New Orleans' financial position or results of operations.
Unbilled Revenue As discussed in Note I to the domestic utility companies and System Energy financial statements, Entergy New Orleans records an estimate of the revenues earned for energy delivered since the latest customer billing.
Each month the estimated unbilled revenue amounts are recorded as revenue and a receivable, and the prior month's estimate is reversed. The difference between the estimate of the unbilled receivable at the beginning of the period and the end of the period is the amount of unbilled revenue recognized during the period. The estimate recorded is primarily based upon an estimate of customer usage during the.unbilled period and the billed price to customers in that month, including fuel price. Therefore, revenue recognized may be affected by the estimated price and usage at the beginning and end of each period and fuel price fluctuations, in addition to changes in certain components of the calculation including changes to estimates such as line loss, which affects the estimate of unbilled customer usage, and assumptions regarding price such as the fuel cost recovery mechanism.
Pension and Other Postretirement Benefits Entergy sponsors 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 domestic utility companies and System Energy financial statements, 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.
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 obligations, Entergy reviews market yields on high-quality corporate debt and matches these rates with Entergy's projected stream of benefit payments. Based on recent market trends, Entergy reduced its discount rate used to calculate benefit obligations from 6.75% in 2002 to 6.25% in 2003 and to 6% in 2004. 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, 2004 accumulated postretirement benefit obligation to a 10%
257

Entergy New Orleans, Inc.
Managements Financial Discussion and Analysis increase in health care costs in 2005 gradually decreasing each successive year, until it reaches a 4.5% annual increase in health care costs in 2011 and beyond.
In determining its expected long-term rate of return on plan assets, Entergy reviews past long-term performance, asset allocations, and long-term inflation assumptions. Entergy targets an asset allocation for its pension plan assets of roughly 65% equity securities, 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 2002 and 2003 to 8.5% in 2004. The assumed rate of increase in future compensation levels used to calculate benefit obligations was 3.25% in 2002, 2003, and 2004.
Cost Sensitivity The following chart reflects the sensitivity of pension cost to changes in certain actuarial assumptions (dollars in thousands):
Change in            Impact on 2004         Impact on Projected Actuarial Assumption                 Assumption              Pension Cost           Benefit Obligation Increase/(Decrease)
Discount rate                                  (0.25%)                   $227                      $2,694 Rate of return on plan assets                  (0.25%)                    $73 Rate of increase in compensation                0.25%                    $113                        $718 The following chart reflects the sensitivity of postretirement benefit cost to changes in certain actuarial assumptions (dollars in thousands):
                                                                                         -Impact on Accumulated Change in              Impact on 2004               Postretirement Benefit Actuarial Assumption'             Assumption        Postretirement Benefit Cost              Obligation Increase/(Decrease)
Health care cost trend                  0.25%                         $157                             $973 Discount rate                          (0.25%)                         $50                           $1,279 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 utilizes a number of accounting mechanisms that reduce the volatility 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 necessary, the excess is amortized over the average remaining service period of active employees.
Additionally, Entergy accounts for the, impact of asset performance on pension expense over a twenty-quarter phase-in period through a "market-related" value 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 pension 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 accordance with SFAS 87.
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Entergy New Orleans, Inc.
Management's Financial Discussion and Analysis Costs and Funding Total pension cost for Entergy New Orleans in 2004 was $4.6 million. Entergy New Orleans anticipates 2005 pension cost to decrease to $4.2 million. Entergy New Orleans contributed $2.1 million to its pension plan in 2004, and anticipates making $15.7 million in contributions in 2005. The rise in pension funding requirements is due to declining interest rates and the phased-in effect of asset underperformance from 2000 to 2002, partially offset by the Pension Funding Equity Act relief passed in April 2004.
Entergy New'Orleans' accumulated benefit obligation 'at December 31, 2004, 2003 and 2002 exceeded plan assets. As a result, Entergy New Orleans was'required to recognize an additional minimum liability as prescribed by SFAS 87. At December 31, 2004 Entergy New Orleans increased its additional minimum liability to $16.9 million from $13.1 million at December 31, 2003. Entergy New Orleans decreased its intangible asset for the unrecognized prior service cost to $1.7 million at December 31, 2004 from $2.8 million at December 31, 2003.
Entergy New Orleans increased the regulatory asset to $15.2 million at December 31, 2004 from $10.3 million at December 31, 2003. Net income for 2004, 2003, and 2002 were not impacted.
Total post retirement health care and life insurance benefit costs for Entergy New Orleans in 2004 were $4.3 million, including $1.3 million in savings due to the estimated effect of future Medicare Part D subsidies. Entergy New Orleans expects 2005 postretirement health care and life insurance benefit costs to approximate $4.2 million, including $1.4 million in savings due to the estimated effect of future Medicare Part D subsidies.
259

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIR1S To the Board of Directors and Shareholders Entergy New Orleans, Inc.:
We have audited the accompanying balance sheets of Entergy New Orleans, Inc. as of December 31, 2004 and 2003, and the related statements of operations, retained earnings, and cash flows (pages 261 through 266 and applicable items in pages 284 through 348) for each of the three years in the period ended December 31, 2004.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing 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 provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Entergy New Orleans, Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, 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 8, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP New Orleans, Louisiana March 8, 2005 260

ENTERGY NEW ORLEANS, INC STATEMENTS OF OPERATIONS For the Years Ended December 31, 2004              2003         2002 (In Thousands)
OPERATING REVENUES Domestic electric                                           $588,457          $527,660     $424,527 Natural gas                                                   147,411           126,356       83,347 TOTAL                                                         735,868           654,016      507,874 OPERATING EXPENSES Operation and Maintenance:
Fuel, fuel-related expenses, and gas purchased for resale                                   245,301           214,735      163,323 Purchased power                                             256,190           231,787      158,191 Other operation and maintenance                             107,874           108,217       98,511 Taxes other than income taxes                                   43,577           42,198       40,099 Depreciation and amortization                                   29,657           30,004       27,699 Other regulatory charges (credits) - net                        (4,670)             (8436       2,701 TOTAL                                                         677,929           626,098      490,524 OPERATING INCOME                                                57,939           27,918        17,350 OTHER INCOME Allowance for equity funds used during construction               1,378            2,085         1,835 Interest and dividend income                                        720              825           689 Miscellaneous - net                                                 270            1,453)          584 TOTAL                                                             2,368            1,457        3,108 INTEREST AND OTHER CHARGES Interest on long-term debt                                      15,357            17,436       18,011 Other interest - net                                          , 1,253                350        4,939 Allowance for borrowed funds used during construction            (1,243)          (2,145)      (1,840)
TOTAL                                                           15,367            15,641       21,110 INCOME (LOSS) BEFORE INCOME TAXES                               44,940            13,734          (652)
Income taxes                                                     16,868            5,875          (422)
NET INCOME (LOSS)                                               28,072             7,859          (230)
Preferred dividend requirements and other                           965              965           965 EARNINGS (LOSS) APPLICABLE TO COMMON STOCK                                                   $27,107            $6,894      ($1,195)
See Notes to Respective Financial Statements.
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STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2004                   2003              2002 (In Thousands)
OPERATING ACTIVITIES
                                                                                 $28,072                  $7,859             ($230)
Net Income (loss)
Adjustments to reconcile net income to net cash flow provided by operating activities:
Other regulatory charges (credits) - net                                          (4,670)                    (843)          2,701 Depreciation arid amortization                                                    29,657                 30,004           27,699 Deferred income taxes and investment tax credits                                  39,782                 15,401             6,729 Changes in working capital:
Receivables                                                                       9,162               (41,308)           10,540 1,399            * (2,296)                (203)
Fuel inventory (3,014)                17,81-7          18,070 Accounts payable Taxes accrued                                                                  (13,056)                   1,372            5,603 (1,455)                   (276).           (544)
Interest accrued Deferred fuel costs                                                              (5,279)            -(12,162)              4,686 Other working capital accounts                                                    2,121                 (7,553)          (4,971)
Provision for estimated losses and reserves                                        (1,305)             . (1,634)            (3,348)
Changes in other regulatory assets                                                 (5,380)                (9,473)           (3,061)
(126457)                 10,286             8,472 Other Net cash flow provided by operating activities                                     63,577                    7,194          72,143 INVESTING ACTIVITIES Construction expenditures                                                         (51,264)               (66,285)          (58,341)
Allowance for equity funds used during construction                                  1,378                   2,085            1,835 Changes in other temporary investments - net                                            606                   (606)          14,859 Net cash flow used In investing activities                                        (49,280)               (64,806)          (41,647) t FINANCING ACTIVITIES Proceeds from the issuance of long-term debt                                       72,640                                  24,332 Retirement of long-term debt                                                      (77,487)                                 (25,000)
Dividends paid:
Common stock                                                                      (5,200)                 (3,001)             (800)
(965)                    (965)            (965)
Preferred stock Net cash flow used In financing activities                                       (11,012)                  (3,966)  !       (2,433)
Net Increase (decrease) In cash and cash equivalents                                3,285                (61,578)           28,063 Cash and cash equivalents at beginning of period                                    4,669                 66,247           38,184 Cash and cash equivalents at end of period                                         $7,954                 S4,669          $66,247 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paidl(received) during the period for:
Interest - net of amount capitalized                                            $16,172                $17,427           $19,961 Income taxes                                                                     ($5,736)             ($13,530)         ($37,929)
See Notes to Respective Financial Statements.

ENTERGY NEW ORLEANS, INC.
BALANCE SHEETS ASSETS December 31, 2004                 2003 (In Thousands)
CURRENT ASSETS Cash and cash equivalents:
Cash                                                                      $2,998                  $28.
Temporary cash investments - at cost, which approximates market                                                   4,956               4,641 Total cash and cash equivalents                                          7,954               4,669.
Other temporary investments                                                                         606 Accounts receivable:
Customer I                                                                47,356               44,663 Allowance for doubtful accounts                                            (3,492)             (3,104)
Associated companies                                                      12,223               24,697 Other         I                                                             7,329              10,057' Accrued unbilled revenues                                                 24,848               21,113 Total accounts receivable                                                88,264               97,426_    .1 I Deferred fuel                                                                 2,559 Accumulated deferred income taxes -                                                                 460 Fuel inventory - at average cost                                             .4,181               5,580 Materials and supplies - at average cost                           --   -     9,150  -            8,660 - -
Prepayments and other                                                         3,467               8,050 TOTAL,                                                                     115,575              125,451
                                                                                                      .3 .
OTHER PROPERTY AND INVESTMENTS Investment in affiliates - at equity                                 -        3,259           I- 3,259 UTILITY PLANT Electric                                                                   699,072              666,122 Natural gas                                                                183,728              167,011 Construction work in progress                                               33,273               45,061 TOTAL UTILITY PLANT                                                        916,073              878,194 Less - accumulated depreciation and amortization                           435,519              420,745 UTILITY PLANT - NET                                                        480,554             457,449
-. -    - DEFERRED DEBITS AND OTHER ASSETS Regulatory assets:
     - Other regulatory assets                                                   40,354               27,222 Long term receivables                                                  I . 2,492, Other                                                                       20,540               16,246 TOTAL                                                                       63,386               43,468-TOTAL ASSETS                                                              $662,774            $629,627 See Notes to Respective Financial Statements.
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ENTERGY NEW ORLEANS, INC.
* BALANCE SHEETS   -
LIABILITIES AND SHAREHOLDERS' EQUITY December 31, 2004                2003 (In Thousands)
CURRENT LIABILITIES Currently maturing long-term debt                                      $30,000 Accounts payable:
Associated companies                                                    30,563              35,008 Other                                                                  44,149              42,718 Customer deposits                                                        17,187              15,575 Taxes accrued                                                             2,592 Accumulated deferred income taxes                                         1,906 Interest accrued                                                          4,757               6,212 Deferred fuel costs                                                                           2,720 Energy Efficiency Program provision                                       6,611               6,356 Other                                                                     3,477               2,088 TOTAL                                                                  141,242             110,677 NON-CURRENT LIABILITIES Accumulated deferred income taxes and taxes accrued                      47,062              39,486 Accumulated deferred investment tax credits                               3,997               4,441 SFAS 109 regulatory liability - net                                      46,406              40,543 Other regulatory liabilities                                                                    954 Accumulated provisions                                                    9,323              10,628 Pension liability                                                        36,845              30,585 Long-term debt                                                         199,902             229,217 Other                                                                     3,755              10,761 TOTAL                                                                  347,290             366,615 Commitments and Contingencies SHAREHOLDERS' EQUITY Preferred stock without sinking fund                                     19,780              19,780 Common stock, $4 par value, authorized 10,000,000 shares; issued and outstanding 8,435,900 shares in 2004 and 2003                                                               33,744              33,744 Paid-in capital                                                          36,294              36,294 Retained earnings                                                        84,424              62,517 TOTAL                                                                   174,242             152,335 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                            $662,774            $629,627 See Notes to Respective Financial Statements.
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ENTERGY NEW ORLEANS, INC.'
STATEMENTS OF RETAINED EARNINGS For the Years Ended December 31, 2004           2003        2002 (In Thousands)
Retained Earnings, January 1                                  $62,517        $58,624    $60,619 Add:
Net income (loss)                                            28,072          7,859        (230)
Deduct:
Dividends declared:
Preferred stock                                                 965           965         965 Common stock                                                  5,200      I 3,001          800 Total                                                       6,165         3,966       1,765 Retained Earnings, December 31                                $84,424        $62,517    $58,624 See Notes to Respective Financial Statements.
266

ENTERGY NEW ORLEANS, INC.
SELECTED FINANCIAL DATA - FIVE-YEAR COMPARISON 2004          2003             2002            2001       2000 (In Thousands)
Operating revenues                        $735,868      $654,016         $507,874         $630,850   $640,290 Net Income (loss)                          $28,072         $7,859            ($230)        ($2,195)   $16,518 Total assets                              $662,774      $629,627         $584,705         $566,037   $559,231 Long-term obligations (1)                 $199,902      $229,217         $229,191         $299,097   $199,031 (1) Includes long-term debt (excluding currently maturing debt).
2004          2003             2002            2001 .      2000 (Dollars In Millions)
Electric Operating Revenues:
Residential                                 $184           $178             $170            $190        $188 Commercial                                    171            162              154             186        171 Industrial                                     34              27              25              32         25 Governmental                                   70              68              66              81         73 Total retail                                459            435              415             489        457 Sales for resale:
Associated companies                        118              85               7              10         32 Non-associated companies                      2               2               2               3          9 Other                                           9               6               1                1        17 Total                                      $588          $528              $425           $503        $515 Billed Electric Energy Sales, (GWh):
Residential                                 2,139         2,133             2,158           1,981      2,178 Commercial                                  2,316         2,262             2,255          2,185       2,260 Industrial                                    575            413              409             414        384 Governmental                                1,025          1,036            1,053           1,017      1,058 Total retail                              6,055.        5,844             5,875          5,597       5,880 Sales for resale:
Associated companies                      1,514          1,312              144             115        570 Non-associated companies                     25              28              32              59        141 Total                                     7,594          7,184            6,051           5,771      6,591
                                              =
267

SYSTEM ENERGY RESOURCES, INC, MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS System Energy's principal asset consists of a 90% ownership and leasehold interest in Grand Gulf. The capacity and energy from its 90% interest is sold under the Unit Power Sales Agreement to its only four customers, Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans. System Energy's operating revenues are derived from the allocation of the capacity, energy, and related costs associated wiih its 90% interest in Grand Gulf I pursuant to the Unit Power Sales-Agreement. Payments under the Unit Power Sales Agreement are System Energy's only source of operating revenues.
Results of Operations Net Income 2004 Compared to 2003:
Net income remained relatively unchanged, decreasing $0.06 million in 2004.
2003 Compared to 2002 Net income increased $2.7 million in 2003 primarily due to lower interest charges primarily resulting from lower interest expense associated with the, Grand Gulf sale-leaseback. This increase was partially offset by a decrease in rate base in 2003 resulting in lower operating income. The decrease in rate base was due to the normal depreciation of Grand Gulf.                                                                                                1' Income Taxes The effective income tax rates for 2004, 2003, and 2002, were 42.4%, 41.7%, and 42.4%, respectively. See Nbte 3 to the domestic utility companies and System Energy financial statements for a reconciliation of the federal statutory rate of 35.0% to the effective income tax rate. Tax reserves not expected:to reverse within the~ ext year are reflected as non-current taxes accrued on the balance sheet.
Liquidity and Capital Resources Cash Flow Cash flows for the years ended December 31, 2004, 2003, and 2002 were as follows:
2004             2003             2002 (In Thousands)
Cash and cash equivalents at beginning of period    -                $52,536         $113,159          $49,579 Cash flow provided by (used in):
Operating activities                                             332,928          100,817          225,639 Investing activities                                             (45,053)         (45,065)         (28,873)
Financing activities                                           (124,056)        (116,375)        (133,186)
Net increase (decrease) in cash and cash equivalents           163,819          (60,623)          63,580 Cash and cash equivalents at end of period                          $216,355          $52,536         $113,159 268

System Energy Resources, Inc.
Management's Financial Discussion and Analysis Operating Activities Cash flow from operations increased by $232'I million in 2004 primarily due to income tax refunds of
$70.6 million in 2004 compared to income tax payments of $230.9 million in 2003. The increase was partially offset by money pool activity, as discussed below.
In 2003, the domestic utility companies and System Energy filed, with the IRS, a change in tax accounting method notification 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 provided under the IRS capitalization regulations. The cumulative adjustment placing these companies on the new methodology resulted in a $430 million deduction for System Energy on Entergy's 2003 income tax return. There was no cash benefit from the method change in 2003. In 2004 System Energy realized $144 million in cash tax benefit from the method change.
This tax accounting method change is an issue across the utility industry and will, likely be challenged by the IRS on audit.
Cash flow from operations decreased by $124.8 million in 2003 primarily due to the following:
* an increase in federal income taxes paid of $74.0 million in 2003 compared to 2002;
* the cessation of the Entergy Mississippi GGART. System Energy collected $21.7 million in 2003 and
          $40.8 million in 2002 from Entergy Mississippi in conjunction with the GGART, which provided for the acceleration of Entergy Mississippi's Grand Gulf purchased power obligation. The MPSC authorized cessation of the GGART effective July 1, 2003. See' Note 2 to the domestic utility companies and System Energy financial statements for further discussion of the GGART; and
* money pool activity, as discussed below.
System Energy's receivables from the money pool were as follows as of December 31 for each of the following years:
2004            2003              2002            2001 (In Thousands)
                                        $61,592         $19,064            $7,046        $13,853 Money pool activity used $42.5 million of System Energy's operating cash flows in 2004, used $12.0 million in 2003, and provided $6.8 million in 2002. See Note 4 to the domestic utility companies' and System Energy financial statements for a description of the money pool.                             '
Investing Activities Net cash used for investing activities was practically unchanged in 2004 compared to 2003 primarily because an increase in construction expenditures caused by a reclassification of inventory items to capital was significantly offset by the maturity of $6.5 million of other temporary investments that had been made in 2003, which provided cash in 2004.
The increase of $16.2 million in net cash used in investing activities in 2003 was primarily due to the following:
* the maturity in 2002 of $22.4 million of other temporary investments that had been made in 2001, which provided cash in 2002;
* an increase in decommissioning trust contributions and realized change in trust assets of $8.2 million in 2003 compared to 2002; and
* other temporary investments of $6.5 million made in 2003.
Partially offsetting the increases in net cash used in investing activities was a decrease in construction expenditures of $22.1 million in 2003 compared to 2002 primarily due to the power uprate project in 2002.
269

System Energy Resources, Inc.
Management's Financial Discussion and Analysis Financing Activities The increase of $7.7, million in net cash used in financing activities in 2004 was. primarily 'due to $5.5 million in costs related to Systemr Energy refunding bonds associated with its Grand Gulf Lease Obligation in May 2004 and the retirement of $ 7.6 million of long-term debt 2004. The increase was partially offset, by a decrease of
$5.0 million in the January 2004 principal payment made on the Grand Gulf sale-leaseback compared to the January 2003 principal payment.            -        -
i         i            .     .   !':  i'E-1E}Mi 1r The decrease of $16.8 million in net cash used in financing activities in 2003 was primarily due to a decrease of $19.5 million in the January 2003 principal payment made qn the Grand Gulf sale-leaseback compared to the January 2002 principal payment. ,                ,                  '    ;
See Note 5 to the domestic utility companies and System Energy financial statements for details of long.
term debt.
Uses of Capital            .
System Energy requires capital resources for:,
* construction and other capital investments;                             -;
* debt maturities;                     ,
working capital purposes, including the financing of fuel costs; and'
* dividend and interest payments.
Following are the amounts of System Energy's planned construction and other capital investments, existing debt and lease obligations, and other purchase obligations:                              '                       v 2005           2006-2007            2008-2009       After 2009 Total!!
(In Millions)
Planned construction and                                    -;
capital investment                               $38               $81                       N/A        N/A    $119 Long-term debt                                     $29              $125                         $62     $659    $875 Nuclear fuel lease obligations (1)                 $28               $38                         N/A      N/A      $66 (1)    It is expected that additional financing .under the leases will, be arranged as needed to acquire additional fuel, to pay interest, and to pay maturing debt. If such additional financing cannot be arranged, however, the lessee in each case must repurchase sufficient nuclear fuel to allow the lessor to meet its obligations.
System Energy expects to contribute $9.3 million to pension plans and $1.7 million to other postretirement plans in 2005.
The planned capital investment estimate for System Energy reflects capital required to support the existing business of System Energy. Management provides more information on long-term debt and preferred stock maturities in Notes 5 and 6 to the domestic utility companies and System Energy financial statements.
As a wholly-owned subsidiary, System Energy dividends its earnings to Entergy Corporation at a percentage determined monthly. Currently, all of System Energy's retained earnings are available for distribution.
Sources of Capital System Energy's sources to meet its capital requirements include:
* internally generated funds;
* cash on hand; debt issuances;, and                        -       -' -       -
* bank financing under new or existing facilities.                                     '               -
270

System Energy Resources, Inc.
Management's Financial Discussion and Analysis System Energy had three-year letters of credit in place that were scheduled to expire in March 2003 securing certain of its obligations related to the sale-leaseback of a portion of Grand Gulf. System Energy replaced the letters of credit before their expiration with new three-year letters of credit totaling approximately $198 million that were backed by cash collateral. In December 2003, System Energy replaced the cash-backed letters of credit with syndicated bank letters of credit. In December 2004 System Energy amended these letters of credit and they now expire in May 2009.
System Energy may refinance or redeem debt prior to maturity, to the extent market conditions and interest and dividend rates are favorable.                                                                -
All debt and common stock issuances by System Energy require prior regulatory approvl. Debt issuances are also subject to issuance tests set forth in bond indentures and other agreements. System Energy has sufficient capacity under these tests to meet its foreseeable capital needs.
Borrowings and securities issuances by System Energy are'limited to amounts authorized by the SEC. The current short-term borrowing limitation, including borrowings under the money pool, is $140 million. Under its SEC Orders and without further SEC authorization, System Energy cannot incur additional short-term indebtedness unless (a) it and Entergy Corporation maintain a common equity ratio of at least 30% and (b) with the exception of money pool borrowings, the security to be issued (if rated) and all outstanding securities of System Energy, as well as all outstanding securities of Entergy Corporation, that are rated, are rated investment grade. See Note 4 to the domestic utilitycompanies and System Energy financial statements for further discussion of System Energy's short-term borrowing limits.
Significant Factors and Known Trends Market Risks Interest Rate and Equity Price Risk - Decommissioning Trust Funds System Energy's nuclear decommissioning trust funds expose it to fluctuations in equity prices and interest rates. The NRC requires System Energy to maintain trusts to fund the costs of decommissioning Grand Gulf. The funds are invested primarily in equity securities; fixed-rate, fixed-income securities; and cash and cash equivalents.
Management believes that its exposure to market fluctuations will not affect results of operations for the Grand Gulf trust funds because of the application of regulatory accounting principles. The decommissioning trust funds are discussed more thoroughly in Notes 1, 8, and 12 to the domestic utility companies and System Energy financial statements.
Nuclear Matters System Energy owns and operates, through an affiliate, Grand Gulf. System Energy is, therefore, subject to the risks related to owning and operating a nuclear plant. These include risks from the use, storage, handling and disposal of high-level and low-level radioactive materials, limitations on the amounts and types of insurance commercially available for losses in connection - with nuclear operations, and technological and financial uncertainties related to decommissioning nuclear plants at the end of their licensed lives, 'including the sufficiency of funds in decommissioning trusts. In the event of an unanticipated early shutdown of Grand Gulf, System Energy may be required to provide additional funds or credit support to satisfy regulatory requirements for decommissioning.                '
Litigation Risks The states in which System Energy's customers operate have proven to be unusually litigious environments.
Judges   and juries in these states have demonstrated a willingness to'grant large verdicts, including punitive damages, to plaintiffs in personal injury, property damage, and business tort cases. System Energy uses legal and appropriate means' to contest litigation threatened or filed against it, but the litigation environment poses a significant business risk.
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System Energy Resources, Inc.
Management's Financial Discussion and Analysis Environmental Risks Systemn Energy's facilities and operations are subject to regulation by various governmental authorities having jurisdiction over air quality, water quality, control of toxic substances and hazardous and solid wastes, and other environmental matters. Management believes' that System Energy is in substantial compliance with environmental regulations currently applicable to its facilities and operations. Because environmental regulations are subject to change, future compliance costs cannot be precisely estimated.
Critical Accounting Estimates The preparation of System Energy'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 there is, the potential for future changes in the assumptions and' measurements could produce-estimates that would have a material impact on the presentation of System Energy's financial position or results of operations.
Nuclear Decommissioning Costs                                       i Regulations require that Grand Gulf be decommissioned after the facility is taken out of service, and funds are collected and deposited in trust funds during the facility's operating life in order to provide for this obligation.
System Energy conducts periodic decommissioning cost studies (typically updated every three to five years) to estimate the costs that will be incurred to decommission the facility. See Note 8 to the dothestic utility companies and System Energy financial statements for details regarding System Energy's most recent study and the obligations recorded by System Energy related to decommissioning. The following key assumptions have a significant effect on these estimates:
* Cost Escalation Factors - System Energy's decommissioning studies include an assumption that decommissioning costs will escalate over present cost levels by an annual factor averaging approximately 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 - The date of the plant's retirement must be estimated and 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. System Energy's decommissioning studies for Grand Gulf assume immediate decommissioning upon expiration of the original plant license. While the impact of these assumptions cannot be determined with precision, assuming either license extension or use of a "safestore" status can possibly decrease the present value of these obligations.                    -
Spent Fuel Disposal - Federal regulations require the 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 Mountain, Nevada. However, until this site is available, nuclear plant operators must provide for interim spent fuel storage on the nuclear plant site, which can require the construction and maintenance of dry cask storage sites or other facilities. The costs of developing and maintaining these facifities can have a significant impact (as much as 16% of estimated decommissioning costs). System Energy's decommissioning studies include cost estimates for spent fuel storage. However, these estimates could change in the future based on the timing of the opening of the Yucca Mountain facility, the schedule for shipments to that facility when it is opened, or other factors.
* Technology and Regulation - To date, there is limited practical experience in the United States with actual' decommissioning of large nuclear facilities. As experience is gained and technology changes, cost estimates could also change. If regulations regarding nuclear decommissioning were to change, this could have a potentially significant impact on cost estimates. The impact of these potential changes is not presently determinable. System Energy's decommissioning cost studies assume current technuologies and regulations.
272

System Energy Resources, Inc.
Managements Financial Discussion and Analysis System Energy collects the costs of decommissioning Grand Gulf through rates charged to its customers.
The amounts collected through rates, which are based upon decommissioning cost studies, are deposited in decommissioning trust funds. These collections plus earnings on the trust fund investments are estimated to be sufficient to fund the future decommissioning costs.
The obligation recorded by System Energy for decommissioning costs is reported in the line item entitled "Decommissioning." Prior to the implementation of SFAS 143, the amount recorded for this obligation was comprised of collections from customers and earnings on the trust funds.
SFAS 143 System Energy implemented SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. Nuclear decommissioning costs are System Energy's only asset retirement obligations, and the measurement and recording of System Energy's decommissioning obligations outlined above changed significantly with the implementation of SFAS 143. The most significant differences in the measurement of these obligations are outlined below:                                                                                -
* Recording of full obligation - SFAS 143 requires that the fair value of an asset retirement obligation be recorded when it is incurred. This caused the recorded decommissioning obligation of System Energy to increase significantly, as System Energy had previously only recorded this obligation as the related costs were collected from customers, and as earnings were recorded on the related trust funds.
* Fair value approach - SFAS 143 requires that these obligations be measured using a fair value approach.
Among other things, this entails the assumptionthat the costs will be incurred by a third party and will; therefore include appropriate profit margins and risk premiums. System Energy's decommissioning studies to date have been based on System Energy performing the work, and have not included any such margins or premiums. Inclusion of these items increases cost estimates.
* Discount rate - SFAS 143 requires that these obligations be discounted using a credit-adjusted risk-free rate.
The net effect of implementing this standard for System Energy was recorded as a regulatory asset, with no resulting impact on System Energy's net income. System Energy recorded this regulatory asset because its existing rate mechanism is based on a cost standard that allows System Energy to recover all ultimate costs of decommissioning from its customers. Upon implementation, assets and liabilities increased by $138 million in 2003 as a result of recording the asset retirement obligation at its fair value of $292 million as determined under SFAS 143, reversing the previously recorded decommissioning liability of $154 million, increasing utility plant by
$82 million, increasing accumulated depreciation by $36 million, and recording the related regulatory asset of $92 million.
Pension and Other Postretirement Benefits Entergy sponsors 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 domestic utility companies and System Energy financial statements, 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.
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; 273

System Energy Resources, Inc.
Management's Financial Discussion and Analysis
* 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 obligations, Entergy reviews market yields on high-quality corporate debt and matches these rates with Entergy's projected stream of benefit payments. Based on recent market trends, Entergy reduced its discount rate used to calculate benefit obligations from 6.75% in 2002 to 6.25% in 2003 and td 6% ih 2004. Entergy reviews actual recent cost trends and projected future trends in establishing health care cost trend ratesi Based on this review, Entergy increased its health care cost trend rate assumption used in calculating the December' 31, 2004 accumulated postretirement' benefit obligation to a 10%
increase in health care costs in 2005 gradually decreasing each successive year, until it reaches a 4.5% annual increase in health care costs in 2011 and beyond.
In determining its expected long-term rate of return on plan assets, Entergy reviews past long-term performance, asset allocations, and long-term inflation- assumptions. Entergy targets an asset allocation for its pension plan assets of roughly 65% equity securities,'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 2002 and 2003 to 8.5% in 2004. The assumed rate of increase in future compensation levels used to calculate benefit obligations was 3.25% in 2002, 2003, and 2004.
Cost Sensitivity                                    i The following chart reflects the sensitivity of pension cost to changes in certain actuarial assumptions (dollars in thousands):
Change in            Impact on 2004        Impact on Projected Actuarial Assumption'                  Assumption              Pension Cost         Benefit Obligation Increase/(Decrease)         '
Discount rate                                   (0.25%)          '         $433                     $4,249 Rate of return on plan assets                   (0.25%)                   -$130 Rate of increase in compensation                 0.25%       '             $204               '     $1,421 The following chart reflects the sensitivity of postretirement benefit cost to changes in certain actuarial assumptions (dollars in thousands):
Impact on Accumulated Change in            'Impact    on 2004            Postretirement Benefit Actuarial Assumption               Assumption         Postretirement Benefit Cost             Obligation Increase/(Decrease)
Health care cost trend                   0.25%                         $154                            $756 Discount rate                           (0.25%)                        $111                            $866 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 utilizes a number of accounting mechanisms that reduce the volatility of reported pension costs. Differences between actuarial 274

System Energy Resources, Inc.
Management's Financial Discussion and Analysis 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 necessary, the excess is amortized over the average remaining service period of active employees.
Additionally, Entergy accounts for the impact of asset performance on pension expense over a twenty-quarter phase-in period through a "market-related" value 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 pension 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 accordance with SFAS 87.
Costs and Funding Total pension cost for System Energy in 2004 was $4.6 million. System Energy anticipates 2005 pension cost to increase to $4.8 million due to decrease in the discount rate (from 6.25% to 6.00%) and the expected rate of return (from 8.75% to 8.5%) used to calculate benefit obligations. System Energy contributed $3.7 million to its pension plan in 2004, and anticipates making $9.2 million in contributions in 2005. The rise in pension funding requirements is due to declining interest rates and the phased-in effect of asset underperformance from 2000 to 2002, offset by the Pension Funding Equity Act relief passed in April 2004.
System Energy's accumulated benefit obligation at December 31, 2004, 2003, and 2002 exceeded plan assets. As a result, System Energy was required to recognize an additional minimum liability as prescribed by SFAS 87. At December 31, 2004 System Energy increased its additional minimum liability to $7.7 million from
$7.4 million at December 31, 2003. System Energy decreased its intangible asset to $0.2 million at December 31, 2004 from $0.4 million at December 31, 2003. System Energy increased its regulatory asset to $15.2 million at December 31, 2004, from $7.0 million at December 31, 2003. Net income for 2004, 2003, and 2002 was not impacted.
Total postretirement health care and life insurance benefit costs for System Energy in 2004 were $1.5 million, including $0.8 million in savings due to the estimated effect of future Medicare Part D subsidies. System Energy expects 2005 postretirement health care and life insurance benefit costs to approximate $1.7 million, including $1 million in savings due to the estimated effect of future Medicare Part D subsidies. The increase in postretirement health care and life inisurance benefit costs is due to the decrease in the discount rate (from 6.25% to 6.00%) and an increase in the health care cost trend rate used to calculate benefit obligations.
275

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholder System Energy Resources, Inc.:
We have audited the accompanying balance sheets of System Energy Resources, Inc. as of December 31, 2004 and 2003, and the related statements of income, retained earnings, and cash 'flows (pages 277 through 282 and applicable items in pages 284 through 348) for'each of the three years in the period ended Decembei-31, 2004.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.                          "
We conducted our audits in accordance with auditing 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 provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of' System Energy Resources, Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.                       '
As discussed in Note 8 to the notes to respective financial statements, in 2003 System Energy Resburces,jInc.
adopted the provisions of Statement of Financial Accounting Standards No. 143, Accountingfor Asset Retirement Obligations.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December, 31, 2004, based on the criteria established in Internal Control - Integrated Framework issued by the'Comimittee' of Sponsoring Organizations of the Treadway Commission and our' report dated March 8, 2005' expressed 'an unqualified opinion on management's assessment' of the effectiveness of the Company's internal' control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP New Orleans, Louisiana March 8, 2005 276

SYSTEM ENERGY RESOURCES, INC.
INCOME STATEMENTS For the Years Ended December 31, 2004             2003          2002 (In Thousands)
OPERATING REVENUES Domestic electric                                       $545,381         $583,820      $602,486 OPERATING EXPENSES Operation and Maintenance:
Fuel, fuel-related expenses, and gas purchased for resale                                38,337           43,132        36,456 Nuclear refueling outage expenses                        12,655           12,695        10,723 Other operation and maintenance                          96,809          105,333        98,264 Decommissioning                                            23,434           21,799        16,055 Taxes other than income taxes                              24,364           25,521        25,992 Depreciation and amortization                             127,081          109,528       112,093 Other regulatory charges (credits) - net                  (10,433)          27,400        53,769 TOTAL                                                     312,247          345,408       353,352 OPERATING INCOME                                         233,134           238,412       249,134 OTHER INCOME Allowance for equity funds used during construction         1,544             1,140         2,449 Interest and dividend income                                6,870             7,556         2,857 Miscellaneous - net                                           841            (1,194)          826 TOTAL                                                       9,255             7,502         6,132 INTEREST AND OTHER CHARGES Interest on long-term debt                                 58,561           62,802        73,891 Other interest - net                                          367             1,818         2,748 Allowance for borrowed funds used during construction        (500)             (554)         (902)
TOTAL                                                      58,428           64,066        75,737 INCOME BEFORE INCOME TAXES                                183,961          181,848       179,529 Income taxes                                               78,013           75,845        76,177 NET INCOME                                              $105,948         $106,003       $103,352 See Notes to Respective Financial Statements, 277

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SYSTEM ENERGY RESOURCES, INC.
STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2004                    2003              2002 (In Thousands)
OPERATING ACTIVITIES Net Income                                                                     S105,948                $106,003          $103,352 Adjustments to reconcile net income to net cash flow provided by operating activities:
Other regulatory charges (credits) - net                                        (10,433)                 27,400             53,769 Depreciation, amortization, and decommissioning                                 150,515                 131,327           128,148 Deferred income taxes and investment tax credits                              (178,535)                 (35,207)          (38,246)
Changes in working capital:
Receivables                                                                   (41,067)                 (8,025)             5,719 Accounts payable                                                                (5,324)                (1,232)            14,767 Taxes accrued                                                                 328,617                (123,317)          (43,112)
Interest accrued                                                                13,375                (12,904)            (4,568)
Other working capital accounts                                                    2,763                  1,463            (6,108)
Provision for estimated losses and reserves                                       (1,404)                  2,914               163 Changes in other regulatory assets                                                31,453                 26,307             52,448 Other                                                                           (62,980)                (13,912)          (40,693)
Net cash flow provided by operating activities                                   332,928                 100,817           225,639 INVESTING ACTIVITIES Construction expenditures                                                        (32,303)                (18,195)           (40,306)
Allowance for equity funds used during construction                                  1,544                  1,140             2,449 Nuclear fuel purchases                                                           (45,497)                                   (43,140)
Proceeds from sale/leaseback of nuclear fuel                                       45,677                                    43,140 Decommissioning trust contributions and realized change in trust assets                                                         (20,956)               (21,528)           (13,370)
Changes in other temporary investments - net                                         6,482                 (6,482)           22,354 Net cash flow used In Investing activities                                        (45,053)               (45,065)           (28,873)
FINANCING ACTIVITIES Proceeds from the issuance of long-term debt                                                                                 69,505 Retirement of long-term debt                                                      (13,973)               (11,375)         (100,891)
Other financing activities                                                          (5,483)
Dividends paid; Common stock                                                                  (104,600)               (105,000)         (10l,S00)
Net cash flow used In financing activities                                      (124,056)               (116,375)         (133,186)
Net Increase (decrease) In cash and cash equivalents                             163,819                 (60,623)            63,580 Cash and cash equivalents at beginning of period                                   52,536                113,159             49,579 Cash and cash equivalents at end of period                                    S216,355                  $52,536         S113,159 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid/(received) during the period for:
Interest - net of amount capitalized                                           $40,000                 $73,636           $77,190 Income taxes                                                                  ($70,595)               $230,919         $156,957 See Notes to Respective Financial Statements.
279

SYSTEM ENERGY RESOURCES, INC.
BALANCE SHEETS ASSETS December 31, 2004                  2003 (In Thousands), .
CURRENT ASSETS Cash and cash equivalents:
Cash                                                                           $399                  $2,918 Temporary cash investments - at cost, which approximates market                                                 215,956                   49,618 Total cash and cash equivalents                                        216,355                   52,536 Other temporary investments                                                                            6,482 Accounts receivable:
Associated companies                                                       111,588                   72,477 Other                                                                         3,733                   1,777 Total accounts receivable                                                 115,321                   74,254 Materials and supplies - at average cost                                     53,427                   63,047 Deferred nuclear refueling outage costs.                                       9,510                   2,979 Prepayments and other              -    .    - -                               1,007                   1,031   .
TOTAL                                                                       395,620                200,329 OTHER PROPERTY AND INVESTMENTS Decommissioning trust funds                                           a,    205,083   .              172,916 8 UTILITY PLANT Electric                                                                  3,232,314;
* 3,205,895 Property under capital lease                                                469,993                466,521 Construction work in progress                                                28,743                   31,344 Nuclear fuel under capital lease                                             65,572        -          47,242 TOTAL UTILITY PLANT                                                       3,796,622,      I 3,751,002 Less - accumulated depreciation and amortization                          1,780,450    - - i ,672,658-UTILITY, PLANT - NET                                                      2,016,172             2,078,344 DEFERRED DEBITS AND OTHER ASSETS I 1:iRegulatory assets: .              . I
*  . SFAS 109 regulatory asset - net          ;                                  96,047       * -        115,633 Other regulatory assets                                                    296,305                301,233
    *I  Other                                Ii                                       19,578&                 12,269     H.I . .
TOTAL                                                                       411,930                429,135 TOTAL ASSETS                                                             S3,028,805            $2,880,724 See Notes to Respective Financial Statements.
280

SYSTEM ENERGY RESOURCES, INC.
                                      .L L
                                            .. BALANCE AN. ISAEH SHEETSES ,.  .
LIABILITIES AND SHAREHOLDiR'S EQUITY December 31, 2004                 2003 (In Thousands)
CURRENT LIABILITIES Currently maturing long-term debt                                           $25,266               $6,348 Accounts payable:
Associated companies                                                         3,880 Other                                                                       21,051               30,255 Taxes accrued                                                                46,468               55,585 Accumulated deferred income taxes                                             3,477                  942 Interest accrued                                                             42,998               29,623 Obligations under capital leases                                             27,716               31,266 Other                                                                         1,621                1,971 TOTAL                   -                                                   172,477         :' 155,990 NON-CURRENT LIABILITIES Accumulated deferred income taxes and taxes accrued                         421,466              290,964 Accumulated deferred investment tax credits                                  75,612               79,088 Obligations under capital leases                                             37,855               15,976 Other regulatory liabilities                                                210,863              213,093 Decommissioning                                                             335,893              312,459 Accumulated provisions                                                        2,378                3,782 Long-term debt                                                              849,593              882,401 Other                                                                        28,084               33,735 TOTAL                                                                     1,961,744            1,831,498 Commitments and Contingencies SHAREHOLDER'S EQUITY Common stock, no par value, authorized 1,000,000 shares; issued and outstanding 789,350 shares in 2004 and 2003                     789,350              789,350 Retained earnings                                                           105,234              103,886 TOTAL                                                                       894,584              893,236 TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY                              $3,028,805          $2,880,724 See Notes to Respective Financial Statements.
281

SYSTEM ENERGY RESOURCES, INC.
STATEMENTS OF RETAINED EARNINGS For the Years Ended December 31, 2004           2003         2002 (In Thousands)
Retained Earnings, January I                           $103,886         $102,883   $101,331 Add:
Net income                                             105,948           106,003    103,352 Deduct:
Dividends declared                                    104,600  .         105,000    101,800 Retained Earnings, December 31                         $105,234         $103,886   $102,883 See Notes to Respective Financial Statements.
                                                                    '. 1 '  ,,
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282

SYSTEM ENERGY RESOURCES, INC.
SELECTED FINANCIAL DATA - FIVE-YEAR COMPARISON 2004           2003           2002"     '     2001            2000 (Dollars In Thousands)
Operating revenues                        $545,381       $583,820       $602,486        $535,027       $620,032 Net Income                                $105,948       $106,003       $103,352        $116,355          $82,372 Total assets                            $3,028,805     $2,880,724     $2,915,898      $2,964,041      $3,369,048 Long-term obligations (1)                 $887,448       $898,377       $942,701        $865,439      $1,122,178 Electric energy sales (GWh)                   9,212          9,812          9,053           8,921           7,567 (1) Included long-term debt (excluding currently maturing debt) and noncurrent capital lease obligations.
283

ENTERGY ARKANSAS, ENTERGY GULF STATES, ENTERGY LOUISIANA, ENTERGY MISSISSIPPI, ENTERGY NEW ORLEANS, AND SYSTEM ENERGY RESOURCES NOTES TO RESPECTIVE FINANCIAL STATEMENTS NOTE 1.           

==SUMMARY==
OF SIGNIFICANT ACCOUNTING POLICIES (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)
The accompanying separate financial statements of Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans (the "domestic utility companies") and System Energy are included in this document and result from these companies having registered securities with the SEC. These companies maintain accounts in accordance with FERC and other regulatory guidelines. Certain previously reported amounts have been reclassified to conform to current classifications, with no effect on net income or shareholders' equity.
Use of Estimates in the Preparation of Financial Statements The preparation of the domestic utility companies' and System Energy's financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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 different from the estimates used.
Revenues and Fuel Costs Entergy Arkansas, Entergy Louisiana, and Entergy Mississippi generate, transmit, and distribute electric power primarily to retail customers in Arkansas, Louisiana, and Mississippi, respectively. Entergy Gulf States generates, transmits, and distributes electric power primarily to retail customers in Texas and Louisiana. Entergy Gulf States also distributes gas to retail customers in and around Baton Rouge, Louisiana. Entergy New Orleans sells both electric power and gas to retail customers in the City of New Orleans, except for Algiers, where Entergy Louisiana is the electric power supplier.
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 recorded 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 unbilled revenues from one period to the next, and may result in variability in reported revenues from one period to the next as prior estimates are so recorded and reversed.
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 fixed fuel factor filing. Entergy Mississippi's fuel factor includes an energy cost rider that is adjusted quarterly. As discussed in Note 2 to the domestic utility companies and System Energy financial statements, the MPSC approved Entergy Mississippi's deferral of the refund of fuel over-recoveries for the third quarter of 2004 that would have been refunded in the first quarter of 2005. The deferred amount plus carrying charges will be 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 as regulatory investments in the cash flow 284

Domestic utility companies and System Energy Notes to Respective Financial Statements statements 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 attributable 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.
Properti,    Plant, and Equipment Property, plant, and equipment is stated at original cost. 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.
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.
Net property, plant, and equipment by company and functional category, as of December 31, 2004 and 2003, is shown below:
Entergy       Entergy        Entergy        Entergy         Entergy       System 2004                -
Arkansas     Gulf States    Louisiana Mississippi        New Orleans Energv
                                                                        * (In Millions)
Production
   - Nuclear                                 $951         $1,627       $1,543                                       $1,866 Other                                    269           529            197             221             12 Transmission                                 646           708           385              406             29             8 Distribution                              1,283          1,339         1,000              713            337 Other                                        216           247           269              175             70           16 Construction work in progress                226           332            189              90             33          29 Nuclear fuel (leased and owned)              106            71             32                                         66 Asset retirement obligation                   24                           42                                         31 Property, plant, and equipment - net     $3,721         $4,853       $3,657            $1,605          $481       $2,016 Entergy        Entergy       Entergy        Entergy         Entergy       System 2003                -
Arkansas     Gulf States    Louisiana Mississippi        New Orleans      Energy (In Millions)
Production Nuclear                                $940         $1,638       $1,593                                $-     $1,941 Other                                    326           583           205              228             17 Transmission                                 636           647           369              380             26             9 Distribution                               1,184         1,197           923             ,632            294 Other                                      . 214           238           266              166             75           17 Construction work in progress                239           326            172             1.09            45          31 Nuclear fuel (leased and owned)              110            64             65                                         47 Asset retirement obligation                   45            32             45                                         33 Property, plant, and equipment - net     $3,694         $4,725       $3,638            $1,515          $457       $2,078 285

Domestic utility companies and System Energy Notes to Respective Financial Statements 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 are shown below:
Entergy          Entergy          Entergy         Entergy             Entergy            System Arkansas        Gulf States      Louisiana        Mississippi       New Orleans           Energy 2004            3.2%              2.1%            2.9%             2.5%              2.8%                 2.9%
2003            3.2%              2.2%            3.0%             2.5%              3.1%                 2.8%
2002            3.2%              2.4%            3.0%              2.5%             3.1%                 2.8%
Non-utility property - at cost (less accumulated depreciation) for Entergy Gulf States is reported net of accumulated depreciation of $125.1 million and $122.7 million as of December 31, 2004 and 2003, respectively.
Jointly-Owned Generatin2 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, 2004, the subsidiaries' investment and accumulated depreciation in each of these generating stations were as follows:
Total Megawatt                                         Accumulated Generating Stations              Fuel-Type      Capability (1)     Ownership       Investment      Depreciation (In Millions)
Entergy Arkansas -
Independence          Unit 1                  Coal               815           31.50%             $117               $73 Common Facilities       Coal                              15.75%             $31               $18 White Bluff           Units 1 and 2           Coal             1,635           57.00%             $428             $264 Entergy Gulf States -
Roy S. Nelson         Unit 6                  Coal               550           60.90%             $403             $241 Big Cajun 2           Unit 3                  Coal               575           42.00%             $233             $128 Entergy Mississippi -
Independence          Units I and 2 and       Coal             1,630           25.00%             $232             $116 Common Facilities System Energy -
Grand Gulf            Unit 1                Nuclear            1,270         90.00%(2)          $3,702            $1,780 (1)   "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 domestic utility companies and System Energy financial statements.
Nuclear Refueling Outage Costs The domestic utility companies and System Energy record 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 without having to be taken off line. Except for the River Bend plant, the costs are deferred during the outage and amortized over the period to the next outage. In accordance with the regulatory treatment of the River Bend plant, the costs are accrued in advance and included in the cost of service used to establish retail rates. Entergy Gulf States relieves the accrued liability when it incurs costs during the next River Bend outage.
286

Domestic utility companies and System Energy Notes to Respective Financial Statements 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. Although AFUDC increases both the plant 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 U.S. consolidated federal income tax return.
Income taxes are allocated to the subsidiaries in proportion to their contribution to consolidated taxable income.
SEC regulations require that no Entergy subsidiary pay more taxes than it would have paid if a separate income tax return had been filed. In accordance with SFAS 109, "Accounting for Income Taxes," deferred income taxes are recorded for all temporary differences 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 law 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.
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 meet 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 otherwise 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.
SFAS 71 requires that rate-regulated enterprises assess the probability of recovering their regulatory assets at each balance sheet date. When 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 FASB Statement No. 71," specifies how an enterprise that ceases to meet the criteria for application of SFAS 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.
EITF 97-4: "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101" specifies that SFAS 71 should be discontinued 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 promulgates 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 SFAS 71.
287

Domestic utility companies and System Energy Notes to Respective Financial Statements See Note 2 to the domestic utility companies and System, Energy financial statements for discussion of transition to competition activity in the retail regulatory jurisdictions served by the domestic utility companies.
Only Texas currently has an 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 determine 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 temporary investments on the balance sheet.
Investments Entergy applies the provisions of SFAS 115, "Accounting for Investments for Certain Debt and Equity Securities," in accounting for investments in decommissioning trust funds. As a result, Entergy records the decommissioning trust funds at their fair value on the consolidated balance sheet. 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, Entergy Arkansas, Entergy Gulf States (for the regulated portion of River Bend), Entergy Louisiana, and System Energy have recorded an offsetting amount of unrealized gains/(losses) on investment securities in other regulatory liabilities/assets. For the nonregulated portion of River Bend, Entergy Gulf States has recorded an offsetting amount of unrealized gains/(losses) in other deferred credits.
See Note 12 to the domestic utility companies and System Energy financial statements foif details onrithe decommissioning trust funds.
Derivatives and Hedging                                               -
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," requires that all derivatives be recognized in the balance sheet, either as assets or liabilities, at fair value, unless they meet the normal purchases normal sales criteria. The changes in the fair value of recognized derivatives are recorded, each period in current earnings or other comprehensive. income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction,.
Contracts for commodities that will be delivered in quantities expected to be used or sold in the-ordinary course of business, including certain purchases and sales of power and fuel, are not classified as derivatives. These contracts are exempted under the normal purchase, normal sales criteria of SFAS 133. Revenues and expenses from these contracts are reported on a gross basis in the appropriate revenue and expense categories as the commodities are received or delivered.
  -       For other contracts for commodities in which Entergy is hedging the variability of cash flows related to a variable-rate asset, liability, or forecasted transactions that qualify as cash flow hedges, the changes in the fair value of such derivative instruments are reported in other comprehensive income. To qualify for hedge accounting, the relationship, between the hedging instrument and the hedged item must be documented to include the, risk management objective and strategy and, at inception and on an ongoing basis, the effectiveness of the hedge in offsetting the changes in the cash flows of the item being hedged. Gains or losses accumulated in other comprehensive income are reclassified as earnings in the periods in which earnings are affected by the variability of the cash flows of the hedged item. The ineffective portions of all hedges are recognized in current-period earnings.
Fair Values The estimated fair values of the domestic utility companies' and System Energy's financial instruments and derivatives are determined using bid prices and market quotes. Considerable judgment is required in developing the estimates of fair value. Therefore, estimates are not necessarily indicative of the amounts that the domestic utility companies and System Energy could realize in a current market exchange. Gains or losses realized on 288

Domestic utility companies and System Energy Notes to Respective Financial Statements financial instrumerits held by regulated businesses may be reflected in future rates and therefore do not accrue to the benefit or detriment of stockholders.
The domestic utility companies and System Energy consider the carrying amounts of most of their financial instruments classified as current assets and liabilities to be a reasonable estimate of their fair value because of the short maturity of these instruments. Additional information regarding financial instruments and their fair values is included in Notes 5 and 6 to the domestic utility companies and System Energy financial statements.
Impairment of Long-Lived Assets The domestic utility companies and System Energy periodically review their long-lived assets whenever events or changes in circumstances indicate that recoverability of these assets is uncertain. Generally, the determination of recoverability is based on the net cash flows expected to result from such operations and assets.
Projected net cash flows depend on the future operating costs associated with the assets, the efficiency and availability of the assets and generating units, and the future market and price for energy over the remaining life of the assets.
River Bend AFUDC The River Bend AFUDC gross-up is a regulatory asset that represents the incremental difference imputed by the LPSC between the AFUDC actually recorded by Gulf States Utilities on a net-of-tax basis during the construction of River Bend and what the AFUDC would have been on a pre-tax basis. The imputed amount was only calculated on that portion of River Bend that the LPSC allowed in rate base and is being amortized over the estimated remaining economic life of River Bend.
Transition to Competition Liabilities In conjunction with electric utility industry restructuring activity in Texas, regulatory mechanisms were established to mitigate potential stranded costs. Texas restructuring legislation allowed depreciation on transmission and distribution assets to be directed toward generation assets. The liability recorded as a result of this mechanism is classified as "transition to competition" deferred credits on the balance sheet for Entergy Gulf States.
Reacquired Debt The premiums and, costs associated with reacquired debt of the domestic utility companies and System Energy (except that portion allocable to the deregulated operations of Entergy Gulf States) are being amortized over the life of the related new issuances, in accordance with ratemaking treatment.
Entergy Gulf States' Deregulated Operations Entergy Gulf States does not apply regulatory accounting principles to its wholesale jurisdiction, Louisiana retail deregulated portion of River Bend, and the 30% interest in River Bend formerly owned by Cajun. The Louisiana retail deregulated portion of River Bend is operated under a deregulated asset plan representing a portion (approximately 16%) of River Bend plant costs, generation, revenues, and expenses established under a 1992 LPSC order. The plan allows Entergy Gulf States to sell the electricity from the deregulated assets to Louisiana retail customers at 4.6 cents per kWh or off-system at higher prices, with certain provisions for sharing such incremental revenue above 4.6 cents per kWh between ratepayers and shareholders.
289

Domestic utility companies and System Energy Notes to Respective Financial Statements The results of these deregulated operations before interest charges for the years ended December 31, 2004, 2003, and 2002 are as follows:
2004'            2003            2002 (In Thousands)
Operating revenues                                     $280,279          $273,150      - $209,752 Operating expenses Fuel, operation, and maintenance                  197,275          177,385         158,927 Depreciation and accretion                         30,653           47,566          40,092 Total operating expense           -                      227,928.         224,951         199,019 Operating income                                          52,351           48,199           10,733 Income tax expense                                        20,414           17,722            4,503 Net income from deregulated utility operations           $31,937          $30,477          $6,230 The net investment associated with these deregulated operations as of December 31, 2004 and 2003 was approximately $830 and $838 million, respectively.
New Accounting Pronouncements During 2004, Entergy adopted the provisions of FSP 106-2, "Accounting and Disclosure Requirements Related to Medicare Prescription Drug, Improvement and Modernization Act of 2003," which is discussed further in Note 10 to the domestic utility companies and System Energy financial statements.
SFAS 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4" and SFAS 153, "Exchanges of Nonmonetary Assets", were also issued during the fourth quarter of 2004 and are effective for Entergy in 2006 and 2005, respectively. Entergy does not expect the impact of the adoption of these standards to be material.
During 2003, Entergy adopted the provisions of the following accounting standards:! SFAS 143, "Accounting for Asset Retirement Obligations," which is discussed further in Note 8 to the domestic' utility companies and System Energy financial statements; FIN 46, Consolidation of Variable Interest Entities," which is discussed further in Note 5 to the domestic utility companies and System Energy financial statements; and SEAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150, which became effective July 1, 2003, requires mandatorily redeemable financial instruments to be classified and treated as liabilities in the presentation of financial 'position and results "of operations. The only effect of implementing SFAS 150 for Entergy is the inclusion of long-term debt and preferred stock with sinkinig fund under the liabilities caption in Entergy's balance sheet. Entergy's results of operations and cash flows were not affected by this standard.
During 2003, Entergy also adopted the provisions of the following accounting standards: SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" and related interpretations by the Derivatives Implementation Group, 'and 'FIN 45, "Guarantor's Accounting and'Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others". The adoption of these standards did not have a material effect on Entergy's financial statements.                                            '
290

Domestic utility companies and System Energy Notes to Respective Financial Statements NOTE 2.           RATE AND REGULATORY MATTERS Electric Industry Restructuring and the 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. Entergy believes that significant issues remain to be addressed by Texas regulators, and the enacted law does not provide sufficient detail to allow Entergy Gulf States to reasonably determine the impact on Entergy Gulf States' regulated operations. Entergy therefore continues to apply regulatory accounting principles to the retail operations of all of the domestic utility companies. Following is a summary of the status of retail open access in the domestic utility companies' retail service territories.
Arkansas (Dntergy Arkansas)
In April 1999, the Arkansas legislature enacted Act 1556, the Arkansas Electric Consumer Choice Act, providing for competition in the electric utility industry through retail open access. In December 2001, the APSC recommended to the Arkansas General Assembly that legislation be enacted during the 2003 legislative session to either repeal Act 1556 or further delay retail open access until at least 2010. In February 2003, the Arkansas legislature voted to repeal Act 1556 and the repeal was signed into law by the governor.
Texas (Entergy Gulf States)                                       i As ordered by the PUCT, in January 2003, Entergy Gulf States filed its proposal for an interim solution (retail open access without a FERC-approved RTO), which among other elements, included:
* the recommendation that retail open access in Entergy Gulf States' Texas service territory, including corporate unbundling, occur by January 1, 2004, or else be delayed until at least January 1, 2007. If retail open access is delayed past January 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.
* the recommendation 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.
* the recommendation that the decision points be identified that would require prior to January 1, 2004, the PUCT's determination, based upon objective criteria, whether to proceed with further 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 initiate 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.
291

Domestic utility companies and System Energy Notes to Respective Financial Statements In February 2005, bills were submitted in the Texas Legislature that would clarify that Entergy Gulf States is no longer subject to a rate freeze and specify that retail open access will not commence in Entergy Gulf States' Texas service territory until the PUCT certifies a power region.
Louisiana (Entergy Gulf States and Entergy Louisiana)
In November 2001, the LPSC decided not to move forward with retail open access for any customers at this time. 'The LPSC instead directed its staff to hold collaborative group meetings concerning open access from time to time, and to have the LPSC staff monitor developments in neighboring states and to report to the LPSC regarding the progress of retail access developments in those states. In September 2004, in response to a study funded by certain industrial customers that evaluated a limited industrial-only retail choice program, the LPSC asked the LPSC staff to solicit comments and obtain information from utilities, customers, and other interested parties concerning the potential costs and benefits of a limited choice program, the impact of such a program on other customers, as well as issues such as stranded costs and transmission service. Comments from interested parties were filed with the LPSC on January 14, 2005. The LPSC has not established a procedural. framework for consideration of the comments. At this time, it is not certain what further action, if any, the LPSC might take in response to the information it received.
Mississippi (Entergy Mississippi)
In May 2000, after two years of studies and hearings, the MPSC announced that it was suspending its docket studying the opening of the state's retail electricity markets to competition. The MPSC based its decision on its finding. that competition could raise the electric rates paid by residential and small commercial customers. The final decision regarding the introduction of retail competition ultimately lies with the Mississippi Legislature.
Management cannot predict when, or if, Mississippi will deregulate its retail electricity market.
New Orleans (Entergy New Orleans)
Entergy New Orleans filed an electric transition to competition plan in September 1997. No procedural schedule has been established for consideration of that plan by the City Council.

Domestic utility companies and System Energy Notes to Respective Financial Statements Regulatory Assets Other Regulatory Assets The domestic utility companies and System Energy are subject to the provisions of SFAS 71, "Accounting for the Effects of Certain Types of Regulation." Regulatory assets represent probable future revenues associated with certain costs that are expected to be recovered from customers through the ratemaking process. In addition to the regulatory assets that are specifically disclosed on the face of the balance sheets, the tables below provide detail of "Other regulatory assets" included on the balance sheets of the domestic utility companies and System Energy as of December 31, 2004 and 2003 (in millions).
Entergy       Entergy       Entergy     Entergy         Entergy        System 2004                   Arkansas     Gulf States    Louisiana   Mississippi    New Orleans      Energy Asset Retirement Obligation -
recovery dependent upon timing of decommissioning (Note 8)                     $141.2             $-      $141.6                             $-       $97.3 Deferred distribution expenses -
recovered through May 2008                                                                                4.9 Deferred fossil plant maintenance expenses - recovered through December 2007 (Note 2)                                                                                             3.6 Deferred fuel - non-current -
recovered through rate riders when rates are redetermined annually                        13.7                                      8.1 Depreciation re-direct - recovery begins at start of retail open access (Note 1)                                                      79.1 DOE Decom. and Decontamination; Fees - recovered through fuel rates until December 2006 (Note 8)                          13.1          2.3          5.0                                        4.9 Incremental ice storm costs -
recovered until 2032                             14.2 Low-level radwaste - recovery timing dependent upon pending lawsuit                   16.2           3.1 Pension costs (Note 10)                          70.8                      34.1          20.2            15.2          7.4 Postretirement benefits - recovered through 2013 (Note 10)                           19.1 Provision for storm damages -
recovered through cost of service               29.0         57.1         41.7 Removal costs - recovered through depreciation rates (Note 8)                     34.9           0.9                       32.7             1.3        17.1 Resource planning - recovery timing will be determined by the LPSC in a base rate proceeding (Note 2)                                             25.4 River Bend AFUDC - recovered through A'ugust 2025 (Note 1)                                37.5 Sale-leaseback deferral - recovered through June 2014 (Note 9)                                                                                          127.3 Spindletop gas storage facility -
recovered through 2032                                       42.3 Unamortized loss on reaquired debt -
recovered over term of debt                     37,0         43.4         27.4           15.6             4.6        41.8 Other - various,                              . 11.0.         19.3        27.3            6.1            10.8         0.5 Total                                 $400.2        $285.0       $302.5         $82.7           $40.4      $296.3 293

Domestic utility companies and System Energy Notes to Respective Financial Statements 2003                     Entergy      Entergy        Entergy       Entergy     Entergy      System Arkansas     Gulf States    Louisiana    Mississippi New Orleans    Energy; Asset Retirement Obligation (Note 8)        $203.7        $36.2         $132.3                                 $92.7 Deferred fuel - non-current                   17.1                                      11.1 Depreciation re-direct (Note 1)                            79.1 DOE Decom. and Decontamination Fees (Note 8)                                 17.1           3.0            6.5                                  6.4 Incremental ice storm costs                   14.7.
Low-level radwaste                            16.2           3.1 Pension costs (Note 10)                       41.7                                       6.4        10.4         7.1 Postretirement benefits (Note 10)             21,5 Provision for storm damages                   25.3         57.4            40.9          3.5 Removal costs (Note 8)                        26.6           4.2                        24.4         2.1        15.1 Resource planning (Note 2)                                                  5.8 River Bend AFUDC (Note 1)                                  39.4 Sale-leaseback deferral (Note 9)                                                                               131.7 Spindletop gas storage facility                            38.0 Unamortized loss on reaquired debt            38.3         46.6            24.0         11.8         1.7        41.9 1994 FERC Settlement (Note 2)
* 4.0 Other                                         15.3         13.4             8.2          1.1        13.0         2.3 Total                                $437.5       $320.4         $217.7         $58.3      $27.2      $301.2 Deferred fuel costs The domestic utility companies are allowed to recover certain fuel and purchased power costs through fuel mechanisms included in electric rates that are recorded as fuel cost recovery revenues. The difference between revenues collected and the current fuel and purchased power costs is recorded as "Deferred fuel costs"t on the domestic utility companies' financial statements. The table below shows the amount of deferred fuel costs as of December 31, 2004 and 2003 that Entergy expects to recover or (refund) through the fuel mechanisms of the domestic utility companies, subject to subsequent regulatory review.
2004                2003 (In Millions)
Entergy Arkansas              $7.4               $10.6 Entergy Gulf States          $90.1             $118.4 Entergy Louisiana             $8.7               $30.6 Entergy Mississippi        ($22.8)               $89.1 Entergy New Orleans           $2.6               ($2.7)
Entergy Arkansas Entergy Arkansas' rate schedules include an energy cost recovery rider to recover fuel and purchased energy costs in monthly bills. The rider utilizes prior calendar year energy costs and projected energy sales for the twelve-month period commencing on April 1 of each year to develop an annual energy cost rate, The energy cost rate includes a true-up adjustment reflecting the over-recovery or under-recovery, including carrying charges, of the energy cost for the prior calendar year.
In March 2004, Entergy Arkansas filed with the APSC its energy cost recovery rider for- the period April' 2004 through March 2005. The filed energy cost rate, which accounts for 12 percent of a typical residential customer's bill using 1,000 kWh per month, increased 16 percent due primarily to the elimination of a"credit contained in the prior year's rate to refund previously over-recovered fuel costs. Also included in the current year's energy cost calculation is a decrease in rates of $3.9 million as a result of the operation of a revised energy allocation method between the retail and wholesale sectors resulting from the APSC's approval of a life-of-resources power purchase agreement with Entergy New Orleans.
294

Domestic utility companies and System Energy Notes to Respective Financial Statements Entergy Gulf States (Texas)
In the Texas jurisdiction, Entergy Gulf States' rate schedules include a fixed fuel factor to recover fuel and purchased power costs, including carrying charges, not recovered in base rates. Under the current methodology, semi-annual revisions of the fixed fuel factor may be made in March and September based on the market price of natural gas. Entergy Gulf States will likely continue to use this methodology until the start of retail open access, which has been delayed. The amounts collected under Entergy Gulf States' fixed fuel factor and any interim surcharge implemented until the date retail open access commences are subject to fuel reconciliation proceedings before the PUCT. In the Texas jurisdiction, Entergy Gulf States' deferred electric fuel costs are $78.6 million as of December 31, 2004, which includes the following:
Amount (In Millions)
Under-recovered fuel costs for the period 9/03 - 7/04 to be recovered through an interim fuel surcharge over a six-month period'beginning in January 2005                                                                      $27.8 Items to be addressed as part of unbundling                                       $29.0 Imputed capacity charges                                                           $ 9.3 Other                                                                             $12.5 The PUCT has ordered that the imputed capacity charges be excluded from fuel rates and therefore recovered through base rates. Entergy Gulf States filed'a retail'electric rate case and fuel proceeding with the PUCT in August 2004. As discussed below, the PUCT dismissed the rate' case and fuel reconciliation proceeding in' October 2004 indicating that Entergy Gulf States is still subject to a rate freeze based on the current PUCT-approved settlement agreement stipulating that a rate freeze would remain in effect until retail open access commenced in Entergy Gulf States' service territory, unless the rate freeze is lifted by the PUCT prior'thereto. Without a Texas base rate proceeding, it is possible that Entergy Gulf States will not be allowed to recover imputed capacity charges in Texas retail rates in the future. Entergy Gulf States believes the PUCT has misinterpreted the settlement and has appealed the PUCT order to the Travis County District Court and also intends to'pursue other available remedies as discussed in "Electric Industry Restructuring and the Continued Application of SFAS '71." The dismissal of the rate case does not preclude Entergy Gulf States from seeking the reconciliation of fuel and purchased power costs of $288 million incurred from September 2003 through March 2004 when, at the appropriate time, similar costs are reconciled in the future.
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 $583 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 $6.3 million, including interest through July 31,2002. Approximately $4.7 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 disallowance of approximately $4.2 million related to imputed capacity costs and its disallowance related to' costs for energy delivered from the 30% non-regulated share of River Bend. The case was argued before the Travis County Texas District Court in August 2003 and the Travis County District Court judge affirmed the PUCT's order. In October 2003, Entergy Gulf States appealed this decision to the Court of Appeals. Oral argument before the appellate court occurred in September 2004 and the matter is still pending.
In September 2003, Entergy Gulf States filed an application with the PUCT to implement an $87.3 million interim fuel surcharge, including interest, to collect under-recovered fuel and purchased power expenses incurred from September 2002 through August 2003. Hearings were held in October 2003 and the PUCT issued an order in December 2003 allowing for the recovery of $87 million: The surcharge was collected over a twelve-month period that began in January 2004.
                                                            '295

Domestic utility companies and System Energy Notes to Respective Financial Statements In March 2004, Entergy Gulf States filed with the PUCT a fuel reconciliation case covering the period September 2000 through August 2003. Entergy Gulf States is reconciling $1.43 billion of fuel and purchased power costs on a Texas retail basis. This amount includes $8.6 million of under-recovered costs that Entergy Gulf States is asking to reconcile and roll into its fuel over/under-recovery balance to be addressed in the next appropriate fuel proceeding. This case involves imputed capacity and River Bend payment issues similar to those decided adversely in the January 2001 proceeding, discussed above, which is now on appeal. On January 31, 2005, the ALJs issued a Proposal for Decision that recommends disallowing $10.7 million (excluding interest) related to these two issues. A final PUCT decision is expected in the first quarter of 2005.
In September 2004, Entergy Gulf States filed an application with the PUCT to implement a $27.8 million interim fuel surcharge, including interest, to collect under-recovered fuel and purchased power expenses incurred from September 2003 through July 2004. Entergy Gulf States proposed to collect the surcharge over a six-month period beginning January 2005. In December 2004, the PUCT approved the surcharge consistent with Entergy Gulf States' request. Amounts collected though the interim fuel surcharge, which will be implemented over the six-month period commencing January 2005, are subject to final reconciliation in a future fuel reconciliation proceeding.
Entergv Gulf States (Louisiana) and Entergv 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 proceeding to audit the fuel adjustment clause filings of Entergy Louisiana pursuant to a November 1997 LPSC general order. The time period that is the subject of the audit is January 1, 2000 through December 31, .2001. In September 2003, the LPSC staff issued its audit report and recommended a disallowance with regard to one item. The issue relates to the alleged failure to uprate Waterford 3 in a timely manner, a claim that also has been raised in the summer 2001, 2002, and 2003 purchased power proceedings. The LPSC staff has quantified the possible disallowance as between $7.6 and $14 million.
Entergy Louisiana notified the LPSC that it will contest the recommendation. The procedural schedule in the case has been suspended. A status conference for the purpose of establishing a new procedural schedule will be set when the current hearings in the Power Purchase Agreement proceedings at the FERC are concluded. The FERC hearings in that matter concluded in November 2004. If the LPSC approves the proposed settlement (discussed below under "Retail Rate Proceedings"), the issue of a proposed imprudence disallowance relating to the uprate will be resolved and will no longer be at issue in this proceeding.
In January 2003, the LPSC authorized its staff to initiate a proceeding to audit the fuel adjustment clause filings of Entergy Gulf States and its affiliates pursuant to a November 1997 LPSC general order. The audit will include a review of the reasonableness of charges flowed by Entergy Gulf States through its fuel adjustment clause in Louisiana for the period January 1, 1995 through December 31, 2002. Discovery is underway, but a detailed procedural schedule extending beyond the discovery stage has not yet been established, and the LPSC staff has not yet issued its audit report.
Enterge  Mississippi Entergy Mississippi's rate schedules include an energy cost recovery rider which is adjusted quarterly to reflect accumulated over- or under-recoveries, from the second prior quarter. In May 2003, Entergy Mississippi filed and the MPSC approved a change in Entergy Mississippi's energy cost recovery rider. Under the MPSC's order, Entergy Mississippi 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 296

Domestic utility companies and System Energy Notes to Respective Financial Statements amount of $77.6 million plus carrying charges was collected through the energy cost recovery rider over a twelve-month period that began in January 2004.
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 will be deferred from the first quarter 2005 'energy cost recovery rider adjustment calculation. The deferred amount of $21.3 million plus carrying charges will be refunded through the energy cost recovery rider in the second and third quarters of 2005 at a rate of 45% and 55%, respectively.
Entergy New Orleans.
Entergy New Orleans' electric rate schedules include a fuel adjustment tariff designed to reflect no more than targeted fuel and purchased power costs adjusted by a surcharge or credit for deferred fuel expense arising from monthly reconciliations, including carrying charges. Entergy New Orleans' gas rate schedules include estimates for the billing month adjusted by a surcharge or credit for deferred fuel expense arising from monthly reconciliations, including carrying charges.
In June and November 2004, the City Council passed resolutions implementing a package of measures developed by Entergy New Orleans and the Council Advisors to protect customers from potential gas price spikes during the 2004 -:2005 winter heating season. These measures include: maintaining Entergy New Orleans' financial hedging plan for its purchase of wholesale gas, and deferral of collection of up to $6.2 million of gas costs associated with a cap on the purchased gas adjustment in November and December 2004 and in the event that the average residential customer's gas bill were to exceed a threshold level. The deferrals resulting from these caps will receive accelerated recovery over a seven-month period beginning in April 2005.
In November 2004, the City Council directed Entergy New Orleans to confer with the Council Advisors regarding possible modification of the current gas cost collection mechanism in order to address concerns regarding its fluctuations particularly during the winter heating season.
Retail Rate Proceedings Filings with the APSC (Entergy Arkansas)
Retail Rates No significant retail rate proceedings are pending in Arkansas at this time.
Filings with the PUCT and Texas Cities (Entergy Gulf States)
Retail Rates Entergy Gulf States is operating in Texas under the terms of a December 2001 settlement agreement approved by the PUCT. The settlement provided for a base rate freeze that has remained in effect during the delay in the implementation of retail open access in Entergy Gulf States' Texas service territory. In view of the PUCT
*orderin July 2004 to further delay retail open access in the Texas service territory, Entergy Gulf States filed a retail electric rate case and fuel reconciliation proceeding with the PUCT in August 2004 seeking the following:
* approval of a base rate increase of $42.6 million annually for the Texas retail jurisdiction;
      *. approval to implement a $14.1 million per year rider to recover, over a 15-year period, $110.9 million of incurred costs related to its efforts to transition to a competitive retail market in accordance with the Texas restructuring law;
* approval to implement a proposed $11.3 million franchise fee rider to recover payments to municipalities charging such fees; and
* a requested return on equity of 11.5%.
297

Domestic utility companies and System Energy Notes to Respective Financial Statements In addition, Entergy Gulf States' fuel reconciliation filing made in conjunction with the base rate case sought to reconcile approximately $288 million in fuel and purchased power costs incurred during the period September 2003 through March 2004. In October 2004, the PUCT issued a written order in which it dismissed the rate case and fuel reconciliation proceeding indicating that Entergy Gulf States is still subject to a rate freeze based on a PUCT-approved agreement in 2001 stipulating that a rate freeze would remain in effect until retail open access commenced in Entergy Gulf States' service territory, unless the 'rate freeze is lifted by the PUCT prior thereto.
Entergy Gulf States believes the PUCT has misinterpreted the settlement and has appealed the PUCT order to the Travis County District Court and intends to pursue other available remedies.
In February 2005, bills were submitted in the Texas Legislature that would clarify that Entergy Gulf States is no longer subject to a rate freeze and specify that retail open access will not commence in Entergy Gulf States' Texas service territory until the PUCT certifies a power region.
Recovery of River Bend Costs In March 1998, the PUCT disallowed recovery of $1.4 billion of company-wide abeyed River'Bend plant costs, which have been held in abeyance since 1988. Entergy Gulf States appealed the PUCT's decision on this matter to the Travis County District Court in Texas. In April, 2002, the Travis County District Court issued an order affirming the PUCT's order on remand disallowing recovery of the abeyed plant costs. Entergy Gulf States appealed this ruling to the Third District Court of Appeals. In July 2003, the Third District Court of Appeals unanimously affirmed the judgment of the Travis County District Court. After considering the progress of the proceeding in light of the decision of the Court of Appeals, Entergy Gulf States accrued for the loss that would be associated with a final, non-appealable decision disallowing the abeyed plant costs. The net carrying value of the abeyed plant costs was $107.7 million at the time of the Court of Appeals decision. Accrual of the $107.7 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, the Texas Supreme Court denied Entergy Gulf States' petition for review, and Entergy Gulf States filed a motion for rehearing. In February 2005, the Texas Supreme Court denied the motion for rehearing, and the proceeding is now final.
Filings with the LPSC Proposed Settlement (Entergy Gulf States and Entergy Louisiana)
In September 2004, the LPSC consolidated various dockets that were the subject of settlement discussions between the LPSC staff and Entergy Gulf States and Entergy Louisiana. The LPSC directed its staff to continue the settlement discussions and submit any proposed settlement to the LPSC for its consideration. In January 2005, Entergy Gulf States and Entergy Louisiana filed testimony with the LPSC in support of a proposed settlement that currently includes an offer to refund $76 million to' Entergy Gulf States' Louisiaila customers, with no immediate change in current base rates and to refund $14 million to Entergy Louisiana's customers. If the LPSC approves the proposed settlement, Entergy Gulf States will be regulated under a three-year formula rate plan that, among other provisions, establishes a ROE mid-point of 10.65% and permits Entergy Gulf States to recover incremental capacity costs without filing a traditional base rate proceedings The settlement resolves all issues' in, and will result in the dismissal of, Entergy Gulf States' fourth, fifth, sixth, seventh, and eighth annual earnings reviews, Entergy Gulf States' ninth post-merger earnings review and revenue requirement analysis, a fuel review for Entergy Gulf States, dockets established to consider issues concerning power purchases for Entergy Gulf States and Entergy Louisiana for the summers of 2001, 2002, 2003, and 2004, and a docket concerning retail issues arising under the Entergy System Agreement. The settlement does not include the System Agreement case pending at FERC. The LPSC has solicited comments on the proposed settlement from the parties to the various proceedings at issue in the proposed settlement. The proposed settlement is scheduled to be presented to the LPSC for consideration on March 23, 2005.
298

Domestic utility companies and System Energy Notes to Respective Financial Statements Annual Earnings Reviews (Entergy Gulf States)
In May 2002, Entergy Gulf States filed its ninth and last required post-merger analysis with the LPSC. The filing included an earnings review filing for the 2001 test year that resulted in a rate decrease of $11.5 million, which -was implemented effective June' 2002. In, its latest testimony, in December 2003, the LPSC staff recommended a rate -refund of $30.6 million and a prospective rate reduction of approximately $50 million.
Hearings concluded in May 2004. Should the LPSC approve the proposed settlement discussed above, the ninth post-merger analysis would be resolved.
In December 2002, the LPSC approved a settlement between Entergy Gulf States and the LPSC staff pursuant to which Entergy Gulf States agreed to make a base rate refund of $16.3 million, including interest, and to implement a $22.1 million prospective base rate reduction effective January 2003. The settlement discharged any potential liability for claims that relate to Entergy Gulf States' fourth, fifth, sixth,' seventh, and eighth post-merger earnings reviews, with the exception of certain issues related to the calculation of the River Bend Deregulated Asset Plan percentage. Entergy Gulf States made the refund in February 2003. Should the LPSC approve the proposed settlement discussed above, the outstanding issue in these proceedings would be resolved.
Retail Rates (Entergy Gulf States)
In July 2004, Entergy Gulf States filed with the LPSC an application 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. Entergy Gulf States also is seeking approval of certain proposed rate design, rate schedule, and policy changes.' Discovery is underway, and a decision is expected during the third quarter of 2005.
(Entergy Louisiana)         '
         'In January 2004, Entergy Louisiana made a rate filing with the LPSC requesting a base rate increase of approximately $167 million. In that filing, Entergy Louisiana noted that 'approximately $73 million of the base rate increase was attributable to the acquisition of a generating station and certain power purchase agreements that, based on current natural gas prices, would produce fuel and purchased -power savings for customers that substantially mitigate the impact of the requested 'base rate 'inrease. The filing also requested an allowed ROE midpoint of 11.4%. Entergy Louisiana's previously authorized ROE mid-point currently in effect is 10.5%.
Hearings concluded in December 2004. Based on'the evidence submitted at'the hearing, the LPSC staff is recommending approximately a $7 million base' rate increase. The LPSC 'staff proposed the implementation of a formula rate plan that 'includes a provision for the recovery of incremental capacity costs, including those related to the proposed Perryville acquisition, without: filing a traditional base rate proceeding' A decision by the LPSC is expected in mid- to late-March 2005 on these issues.      '     '   :
Filings with the MPSC (Entergy Mississippi)
Formula Rate Plan Filings                 -                     '    '            ,                ,
Entergy Mississippi is operating under a December 2002 order issued by the MPSC. The order endorsed a new power management rider schedule designed to more efficiently collect capacity portions of purchased power costs. Also, the order-provides for improvements in the return on equity formula and more robust performance measures for Entergy Mississippi's formula rate plan.. Under the provisions of Entergy Mississippi's formula rate plan, a bandwidth is placed around the benchmark ROE, and if Entergy Mississippi earns outside of the bandwidth (as well as outside of a range-of-no-change at each edge of the bandwidth), then Entergy Mississippi's rates will be adjusted, though on a prospective basis only. Under Mississippi law and Entergy Mississippi's formula rate plan, however, if Entergy Mississippi's earned-ROE is above the top of the range-of-no-change at the top of the formula rate plan bandwidth, then Entergy Mississippi's "Allowed ROE" for the next twelve-month period is the point halfway between such earned ROE and the top of the bandwidth; and Entergy Mississippi's retail rates are set at 299

Domestic utility companies and System Energy Notes to Respective Financial Statements that halfway-point ROE level. In the situation where Entergy Mississippi's earned.ROE is not above the top, of the range-of-no-change at the top of the bandwidth, then Entergy Mississippi's "Allowed ROE" for the next twelve-month period is the top of the range-of-no-change at-the top bf the bandwidth.        ,'
        , Entergy Mississippi made its annual formnula. rate plan filing with the MPSC in March 2004 based on a 2003 test year. In April 2004, 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 or. a performance adjusted ROE mid-point of 10.77%, establishing an allowed regulatory earnings range of 9.3% to 12,2%.. .
* Grand Gulf Accelerated Recovery Tariff (GGART1                    -
In September 1998, FERC approved the GGART for Entergy Mississippi's allocable portion of Grand Gulf; which was filed with FERC in August 1998. ;The GGART 'provided for the acceleration of Efitergy Mississippi's Grand Gulf purchased power obligation over the period October l '1998'through June 30, 2004. In May 2003, the MPSC authorized the cessation of the GGART effective July. 1 2003. Entergy Mississippi filed notice of the change with FERC, and the FERC approved the filing on JulYi30, 2003; Entergy Mississippi.accelerated a total of
$168.4 million of Grand Gulf purchased power obligation costs under the GGART over the period October 1, 1998 through June 30, 2003.
Filings with the City Council (Entergy New Orleans)
FormulaRatePlans.              ,,
          *In May 2003, the City Council, approved a resolution, allowing for, a total increase of $30.2 million in electric and gas base rates, effective June 1, 2003. In April 2004, Entergy.New Orleans made filings with the City Council as required by the earnings review process prescribed by the Gas and Electric Formula Rate Plans approved by the City Council in 2003. The filings sought an increase in Entergy New Orleans' electric.revenues of
$1.2 million and an increase in Entergy New Orleans' gas revenues of $32,000. The Council Advisors and intervenors reviewed the filings, and filed their recommendations in July 2004. In August 2004, in accordance with the City, Council's requirements for the formula rate plans, Entergy New' Orleans made,a filing with the City Council reflecting the parties' concurrence that no clhangq in Entergy NewOrleans' electricor gas ratesi$
warranted., Later- in.August 2004, the City.-Councilapproved -an unopposed settlement among, EntergyNew Orleans,jthe Council Advisors, and 'the intervenors inf connection with the. Gas and Electric Formula Rate Plans. In accordance with the resolution approving the settlement agreement,. Entergy. New Orleans' gas and electric, base rates remain unchanged from levels set in May 2003.j The, resolution ordered Entergy New, Orleans. to defeg $3.9 million relating to voluntary severance plan costs allocated to its electric operations and $1,.0 million allocated to its gas opqeations 4 which amounts were accrued on, its books in 2903, and to recor4 on its books regulatory assets ii those amounts to be amortized over five years effective January 2004, Entergy New Orleansalso was orderedto defer $6.0 million of fossil plant maintenance expense incurred in 2003 and to record on its books a regulatory asset in that amount to be amortized over a five-year period effective January 2003.
Entergy New Orleans will file its formula rate plan for the year ended December 31, 2004 by May 31, 2005 and also intends to file for an extension of the formula rate plan by September 1, 2005. If the formula rate plan is not extended by the City Council, the rate adjustments in effect based on the December 31, 2004 test year shall continue.'          7;l.    ' T'              " ' '                                    '
         ,In May! 2003, the City Council approved implementation ofa geheration performance-based rate calculation in the, electric fuel adjustment clause under. which Entergy New Orleans receives 10% of calculated fuel and purchased power cost savings in excess of $20 milliozin based. on a defined benchmark; subject to!a 13.25%
return on equity limitation for electric operations. is provided for in the electric formula rate plan. Entergy New Orleans bears- 10%/6 'of any "negative" fuel. and purchased power cost 'savingg. Id October 2004, Entergy New Orleans' annual evaluation report was submitted'for the period June 2003 through'May 2004. Savings associated with'the first year generation performance-based rateicalculatiol was $71 million of which Entergy New Orleans' sharewas$5A million. ,.,              .   .                          I' 300

Domestic utility companies and System Energy Notes to Respective Financial Statements Fuel Adjustment Clause Litigation                      l 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 behalfof all Entergy. New 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. Plaintiffs allege that Entergy New ,Orleans and the other defendant Entergy companies conspired to make these purchases 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 by stipulation of the parties pending a decision by the City Council in the proceeding discussed in the next paragraph.
Plaintiffs also filed this complaint with the City Council in order to initiate a review by the City Council of the plaintiffs' allegations and to force restitution to ratepayers of all costs they allege were improperly and imprudently included in the fuel adjustment filings. Testimony was filed on behalf of the plaintiffs in this proceeding asserting, among other things, that Entergy New Orleans and other defendants 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 $100 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 refund to customers, of $11.3 million, including interest, during the months of June through September 2004. The resolution concludes, among other things, that the 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 with this proceeding. The plaintiffs have appealed the City Council resolution to the state court in Orleans Parish. Oral argument on the plaintiffs' appeal was conducted in February 2005.
Purchased Power for Summer 2001, 2002 and 2003 (Entergy Gulf States and Entergy Louisiana)
In March 2001, Entergy Louisiana and Entergy Gulf States filed applications with the LPSC for authorization to participate in contracts that would be executed by the Entergy System to meet the summer peak load requirements for the summer of 2001. In May 2001, the LPSC determined that 24% of Entergy Louisiana's and Entergy Gulf States' costs relating to summer 2001 purchases should be categorized as capacity charges.
Subsequently, the LPSC raised certain prudence issues related to the 2001 purchases. The administrative law judge (ALJ) presiding over the case issued a Preliminary Recommendation regarding prudence issues primarily associated with the power uprates at the Waterford 3 and Grand Gulf nuclear units. In the event that such decision becomes final, additional calculations would be required to determine the potential refund obligation for the periods 2001, 2002 and 2003. The ALJ also concluded that Entergy should be permitted the opportunity to recover the expenses of the uprates through appropriate rate proceedings.
In March 2002 and 2003, Entergy Louisiana and Entergy Gulf States filed an application with the LPSC for the approval of capacity and energy purchases for the summers of 2002 and 2003, respectively, similar to the applications filed for the summers of 2000 and 2001. The LPSC ordered that 14% of Entergy Louisiana's and Entergy Gulf States' costs relating to summer 2002 purchases be categorized as capacity charges, and that 11% of Entergy Louisiana's and Entergy Gulf States' costs relating to summer 2003 power purchases, the price of which was stated on the basis of $/MWh, be categorized as capacity charges. The LPSC did not allow the capacity charges to be set up as a regulatory asset, but authorized Entergy Louisiana and Entergy Gulf States to include these costs in any base rate case for their respective test years. Prudence issues relating to summer 2002 and 2003 purchases were resolved in subsequent settlements approved by the LPSC. In the event that the LPSC adopts the 301

Domestic utility companies and System Energy Notes to Respective Financial Statements ALls recommendation relating to potential uprates at nuclear facilities in the summer 2001 case, and such decision becomes final following an appeal or the expiration of appeal delays, these settlements reserve the LPSC's right to propose in a future case disallowances relating to the effect that such uprates would have had on the summer 2002 and summer 2005 firm energy contracts, while Entergy'Gulf States and Entergy Louisiana reserve their right to oppose any such proposal.
No refunds were ordered in the summer 2002 settlement, although with respect to the capacity costs to be incurred pursuant to a particular purchased power contract, Entergy- Louisiana agreed in the settlement to forgo recovery of approximately $0.8 million in-2002, $1.3 million in 2003, and $1.0 million in 2004, and Entergy Gulf States agreed to forgo recovery of approximately $0.5 million in 2002, $0.9 million in 2003, and $0.1 million in 2004. All other purchases for the summers of 2002 and 2003 were found to be prudent. Issues relating to the reasonableness of the long-term planning process were moved from the summer 2002 case' into a separate sub-docket. In the summer 2003 settlement, the LPSC also reserved its right to investigate any alleged imprudence regarding the System's decision to spin off the ISES and Ritchie generating units to an unregulated affiliate, Entergy Power, Inc.
Should the LPSC approve the proposed settlement discussed above, all issues arising out of the purchased power cases for the summers of 2001, 2002, and 2003 would be resolved.
FERC Settlement (Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)
* In November 1994, FERC approved an agreement settling a long-standing dispute involving income tax allocation procedures of System Energy. In accordance with the'agreernent, System Energy refunded a total of approximately $62 million, plus interest, to Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans through June 2004. System Energy also reclassified from utility' plant to other deferred debits approximately $81 million of other Grand Gulf costs. Although'such costs were excluded from rate base, System Energy amortized and recovered these costs over a 10-year period. Interest on the $62 million refund and the loss of the return on the $81 million of other Grand Gulf costs reduced Entergy's and System Energy's net income by approximately $10 million annually.
302

Domestic utility companies and System Energy Notes to Respective Financial Statements NOTE 3.               INCOME TAXES Income tax expenses for 2004, 2003, and 2002 consist of the following:
Entergy        Entergy        Entergy          Entergy         Entergy       System
                ;       2004             Arkansas      Gulf States    Louisiana         Mississippi New Orleans       Energy (In Thousands)
Current:
      *Federal (a)(b)                       $14,490    ; $42,436       ;    $2,439        ($23,568)       ($19,259)    $222,622 State (a)(b)                         8,727          7,944           1,957          (1,221)'        (3,655)      33,926 Total (a)(b)                      23,217,        50,380            4,396        (24,789)        (22,914)     256,548
    , Deferred      -  net                   70,674         63,615          80,207           63,234          40,226    (175,059)
Investment tax credit adjustments - net                   (4,827)       (5,707)         (5,128)          (1,405)           (444)      (3,476)
Recorded income tax expense       $89,064      $108,288          $79,475         $37,040         $16,868      $78,013 Entergy,      Entergy         Entergy          Entergy        Entergy       System 2003            Arkansas      Gulf States    Louisiana         Mississippi New Orleans       Energy (In Thousands)
Current:
      -   Federal (a)                       $40,632       ($11,535) - ($745,724)           ($2,969)        ($7,655)     $95,670 State (a)                           16,306        (1,503)        (16,243)            2,565         (1,871)      15,382 Total (a)                         56,938     . (13,038)       (761,967)             (404)        (9,526)    111,052 Deferred -- net                       53,309        36,652         864,656           36,240          15,853     (31,731)
Investment tax credit adjustments - net                  (4,951)      (12,078)          (5,281)         (1,405)           (452)      (3,476)
Recorded income tax expense     $105,296        $11,536         $97,408         $34,431           $5,875     $75,845
                                         *Entergy       Entergy          Entergy         Entergy         Entergy       System 2002            Arkansas      Gulf States    Louisiana         Mississippi New Orleans        Energy (In Thousands)
Current:
Federal (a)                       $13,206        $66,227         $43,048          $21,817         ($7,103)    $99,429 State (a)                             3,243        11,345            1,867           3,969             (47)     14,994 Total (a)                        16,449        77,572          44,915           25,786          (7,150)     114,423 Deferred - net                        59,963         (4,210)        45,253            (6,529)          7,196     (34,770)
Investment tax credit adjustments - net                   (5,008)       (7,365)         (5,403)          (1,411)           (468)      (3,476)
Recorded income tax expense       $71,404       $65,997         $84,765          $17,846           ($422)    $76,177 r.
(a)  Entergy Louisiana's actual cash taxes paid/(refunded) were $(70,650) in 2004, $35,128 in 2003, and
     $(781,540) in 2002. Entergy Louisiana's mark-to-market tax accounting election significantly reduced taxes paid in 2002. In 2001, Entergy Louisiana changed its method of accounting for tax purposes related to its wholesale electric power contracts. The most significant of these is the contract to purchase power from the Vidalia project (the contract is discussed in Note 8 to the domestic utility companies and System Energy financial statements). The new tax accounting method has provided a cumulative cash flow benefit of approximately $790 million through 2004, which is expected to reverse in the years 2005 through 2031. The election did not reduce book income tax expense. The timing of the reversal of this benefit depends on several variables, including the price of power. Approximately half of the consolidated cash flow benefit of the election occurred in 2001 and the remainder occurred in 2002. In accordance with Entergy's intercompany tax allocation agreement, the cash flow benefit for Entergy Louisiana occurred in the fourth quarter of 2002.
303

Domestic utility companies and System Energy Notes to Respective Financial Statements (b)    In 2003, the domestic utility companies and System Energy filed, with the IRS, a change in tax accounting method notification 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 provided under the IRS capitalization regulations. The cumulative adjustment placing these companies on the new methodology resulted in a $1.171 billion deduction for Entergy Arkansas, a $674 million deduction for Entergy Gulf States, a $505 million deduction for Entergy Louisiana, a $145 milliori deduction for Entergy Mississippi, a
       $31 million deduction for Entergy New Orleans, and a $430 million deduction for System- Energy on Entergy's 2003 income tax return. There was no cash benefit from the method change in 2003.. In 2004, Entergy Arkansas realized $173 million, Entergy Gulf States realized $69_million, Entergy Louisiana realized
       $100 million, Entergy Mississippi realized $36 million, and System Energy realized $144 million in cash tax benefit from the method change. This tax accounting method change is an issue across the utility industry and will likely be challenged by the IRS on audit. Entergy believes that its contingency provision established in its financial statements will sufficiently cover its risk associated with this issue.
Total income taxes differ from the amounts computed by applying the statutory income tax rate to income before taxes. The reasons for the differences for the years 2004, 2003, and 2002 are:
I1    7 Entergy            Entergy          Entergy            Entergy       Entergy                      System 2004                -
Arkansas        Gulf States        Louisiana         Mississippi New Orleans Energy '
_      I,,
(In Thousands)
Computed at statutory rate (35%)               $80,946          $105,194          $72,440      '    $38,688         $15,729                     $64,386 Increases (reductions) in tax resulting from:
State income taxes net of federal income tax effect                 12,204             8,289   ' ''        6,411           3,845            1,158         '             7?,665 Regulatory differences -
utility plant items                     I 13,775             6,951   .,       10,052          : (1,482)           1,373                     10,528 Amortization of investment                                                                                             f    .:
tax credits                               (4,827)''         (5,316)'          (5,128)           (1,405)        '" (444)                    (3,476)
Flow-through/permanent
            .differences (9,127)           (7,080)           (3,576) ;         (2,114)           (878)                 \   . .(993)
Other -- net                                 (3,907)              250-        -- (724)                (492)            (70)                        - (97)
Total income taxes                        $89,064          $108,288.         $79,475        .  $37,040         $16,868                  !, $78,013
                                                                                                                                          '1 ! .. ,- _-.         .
Effective Income Tax Rate                         38.5%             36.0%              38.4%            33.5%          37,5%             ,,          42,4%
E1 Entergy            Entergy          Entergy            Entergy          atergy                   System 2003              -
Arkansas        Gulf States        Louisiana         Mississippi INev v.Orleans                   Energ (In Thousands)
                 .1        ,,  !
Computed 'at statutory rate'(35%)    i
                                                   ':$80,957     ;' ' $18,934 '         $85,247           $35,522           $4,807                )S $63,647 Increases (reductions) in tax
  *   -resulting        from:
State income taxes net of federal income tax effect                 12,987. z. . .
473        ; 7,704                3,000                 21,. r                  7,765 Regulatory differences -
utilitjr plant items                       15,994            13,260             10,56X              (930)        2,045                      11,530 Amortization of investment tax credits                               (4,951)           (8,797)           (5,281)           (i,404)''         (452):-~-                (3,476)
Flow-through/permanen1'                                         X  -    i.1    I                                   .          :  .      A      ,        ,
differences                                1,090          (10,625)             (2,012)          (1,112)           (625)                         (420)
Benefit of Entergy Corp. expenses            (1,145)             (888)                   -                -                 -                 (3,408)
Other - net                                     364              (821)              1,122             (645)               79                         207 Total income taxes                      $105,296            $11,536          $97,408           $34,431           $5,875                      $75,845 Effective Income Tax Rate                        45.5%             21.3%              40.0%            33.9%         42.8%                          41.7%
304

Domestic utility companies and System Energy Notes to Respective Financial Statements Entergy         Entergy            Entergy          Entergy          Entergy              System 2002                 Arkansas       Gulf States        Louisiana         Mississippi New Orleans                Energy (In Thousands)
Computed at statutory rate (35%)          $72,467           $84,064          $80,317           $24,589              ($228)           $62,836
: creases (reductions) in tax resulting from:
State income taxes net of federal income tax effect              8,784            6,401              6,065             2,069               551              7,049 Regulatory differences utility plant items                    10,615            2,738              6,875           (3,032)             1,125             11,453 Amortization of investment tax credits                           (5,008)          (6,528)            (5,403)          (1,411)              (468)            (3,476)
Flow-through/permanent differences                          (10,687)         (15,000)            (1,878)          (1,453)              (538)            (1,183)
Benefit of Entergy Corp. expenses        (3,428)          (3,830)              (180)          (2,331)              (434)               (191)
Other -- net                             (1,339)          (1,848)            (1,031)             (585)             (430)               (311)
Total income taxes                    $71,404           $65,997           $84,765          $17,846              ($422)           $76,177 Effective Income Tax Rate                    34.5%            27.5%              36.9%             25.4%             64.7%              42.4%
Significant components of net deferred and long-term accrued tax liabilities as of December 31, 2004 and 2003 are as follows:
Entergy          Entergy             Entergy           Enitergy            Entergy            System 11 .                      2004                       Arkansas        Gulf States          Louisiana         Missiissiopi New Orleans                Enerev (In Thousands)
Deferred and Long-term Accrued Tax Liabilities:
Net regulatory assets/(liabilities)                 ($128,594)        ($479,158)         ($169,675)         ($22,864)              $44,867       ($223,391)
Plant-related basis differences - net           * (1,237,303)        (1,388,391)           (921,976)        (389,558)             (103,733)       (471,026)
Power purchase agreements                                     -                   --       (971,676)                  -                     -              -
Rate refunds                                          (39,163)                .   -         (17,736)          (49,124)             (14,375)                -
Deferred fuel                                           (2,899)            (36,017)           (1,286)          (6,424)               (3,873)                -
Other reserves                                           2,686             (33,916)           27,421             5,856                 (323)        (80,597)
Other                                                (80,980)           .(20,781)          (68,381)          (16,516)               (2,982)        (11,851)
Total                                          (1,486,253)       (1,958,263)         (2,123,309)         (478,630)             (80,419)       (786,865) beferred Tax Assets:
Accumulated deferred investment tax credit                                         26,936               34,359            36,989             5,235                1,538          28,922 Sale and leaseback                                           -                   -           82,410                  -                      -      144,745 NOL carryforward                                     300,249              164,749           164,840           34,642                18,973                 -
Unbilled/Deferred revenues                                   -.            17,001                   -          10,193                        -             -
Pension-related items                                        -             14,499            13,039                  -              10,656            6,737 Reserve for regulatory adjustments                                        131,112                   -                -                     -               -
Rate refund                                                  -             32,932                   -                -                     -       170,222 Customer deposits                                      40,880              33,425             17,479           15,777                    91            !
Nuclear decommissioning                                12,070                                  2,833                 -
Other                                                  11,801              10,721             13,021            2,386                   193          11,296 Total                                             391,936              438,798           330,611           68,233                31,451         361,922 Net deferred tax liability                    ($1,094,317)      ($1,519,465)        ($1,792,698)       ($410,397)             ($48,968)      ($424,943) 305

Domestic utility companies and System Energy Notes to Respective Financial Statements Entergy          Entergy      . Entergy        Entergy         Entergy         System 2003                    Arkansas         Gulf States     Louisiana     Mississippi     New Orleans      Energy (In Thousands)
Deferred and Long-term Accrued Tax Liabilities:
Net regulatory assets/(liabilities)            ($157,147)        ($478,254)     ($195,074)     ($34,738)        . $38,834. ($246,519)
Plant-related basis differences, net             (798,641)      (1,095,206)      (806,955)     (284,550)           (74,041), (332,197)
Power purchase agreements                                                  -     (945,495)              I     -                        -
Deferred fuel                                       (4,154)..       (45,762)              -      (40,091)           (1I109)            -
Long term taxes accrued                           (26,611)          (55,155)              -      (52,646)         .(17,491)    (57,239)
Other                                             (85,528)          (26,012)       (67,272)       (21,806) ,        (1,728)    (11,497)
Total                                      (1,072,081)       (1,700,389)    (2,014,796)     (433,831)       , (55,535)     (647,452)
Deferred Tax Assets:
Accumulated deferred investment tax credit                                      28,836            36,192         38,962           5,773            1,709     30,251 Sale and leaseback                                                         -        83,539                -               -    139,595 NOL carryforward'                                                          -       104,489                -   .                        -
Unbilled/Deferred revenues                                           11,959               -          7,357                 -           -
Pension-related items                                5,453           11,474          12,562               -           9,324      7,354 Reserve for regulatory adjustments                                  138,933               -
Rate refund                                          2,351           23,184            789              379          3,977     170,222 Customer deposits                                   37,778           35,840         16,804         18,085                84            -
Nuclear decommissioning                         - 13,171                             2,833 Other                                                6,399           26,147         26,096           9,722            1,415       8,124 Total                                           93,988          283,729         286,074         41,316           16,509     355,546 Net deferred tax liability                  ($978,093)      ($1,416,660)   ($1,728,722)    ($392,515)         ($39,026) . ($291,906)
                                                                                                       =.=
As of December 31, 2004, federal net operating loss carryforwards were $766.9 million for Entergy Arkansas, $447.5 million for Entergy Gulf States, $195.7 million for Entergy Louisiana, $40.9 million for Entergy Mississippi, and $54.9 million for Entergy New Orleans. If the federal net operating loss carryforwards are not utilized, they will expire in the year 2023.
As of December 31, 2004, state net operating loss carryforwards were $1.9 billion for Entergy Louisiana,
 $278 million for Entergy Gulf States, $11 million for Entergy New Orleans, and $638 million for Entergy Arkansas. If the state net operating loss carryforwards are not utilized, they will expire in the years 2016 through 2018 for Entergy Louisiana, 2018 for Entergy Gulf States, 2018 for Entergy New Orleans, and 2008 for Entergy Arkansas..
NOTE 4.             LINES OF CREDIT AND SHORT-TERM BORROWINGS (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)
The short-term borrowings of Entergy's subsidiaries are limited to amounts authorized by the SEC. The current limits authorized are effective through November 30, 2007. In addition to borrowing from commercial banks, Entergy's subsidiaries are authorized under the SEC order to borrow from Entergy's money pool. The money pool
-is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries' dependence on external short-term borrowings. Borrowings from the money pool and external borrowings combined may not exceed the SEC authorized limits. Under the SEC Order and without further SEC authorization, the domestic 'utility companies and System Energy cannot incur additional short-term indebtedness unless (a) the issuer and Entergy Corporation maintain a common equity ratio of at least 30% and (b) with the exception of money pool borrowings, the security to be issued (if rated) and all outstanding securities of the issuer (other than preferred stock of Entergy Gulf States and Entergy New Orleans), as well as all outstanding securities of Entergy Corporation, that are rated, are rated investment grade.
306

Domestic utility companies and System Energy Notes to Respective Financial Statements The following are the SEC authorized limits-for short-term borrowings and the outstanding short-term borrowings from the money pool for the domestic utility companies and System Energy as of December 31, 2004:
Authorized           Borrowings (In Millions)
Entergy Arkansas                        $235 Entergy Gulf States                     $340                   $59.7 Entergy Louisiana                       $225 Entergy Mississippi                     $160 Entergy New Orleans                     $100 System Energy                           $140 Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans each have 364-day credit facilities available as follows:
Amount of           -Amount Drawn as of Company             Expiration Date           Facility               Dec. 31, 2004 Entergy Arkansas                April 2005          $85 million Entergy Louisiana               April 2005         $15 million(a)
Entergy Mississippi             May 2005             $25 million Entergy New Orleans             April 2005         $14 million(a)
(a) The combined amount borrowed by Entergy Louisiana and Entergy New Orleans under these facilities at any one time cannot exceed $15 million.
The 364-day credit facilities have variable interest rates and the average commitment fee.is 0.13%. The Entergy Arkansas facility requires it to maintain total shareholder's equity of at least 25% of its total assets.
307

Domestic utility companies and System Energy Notes to Respective Financial Statements NOTE 5.           LONG - TERM DEBT (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)
Long-term debt as of December 31, 2004 and 2003 consisted of:
2004                 2003 (In Thousands)
Enterey Arkansas Mortgage Bonds:
6.125% Series due July 2005                                    $100,000            $100,000 5.4% Series due May 2018                                         150,000             150,000 5.0% Series due July 2018                                        115,000             115,000 7.0% Series due October 2023                                     175,000             175,000 6.7% Series due April 2032                                       100,000             100,000 6.0% Series due November 2032                                    100,000             100,000 5.9% Series due June 2033                                        100,000             100,000 6.38% Series due November 2034                                    60,000 Total mortgage bonds                                            900,000              840,000 Governmental Bonds (a):
6.3% Series due 2016, Pope County (h)                             19,500              19,500 5.6% Series due 2017, Jefferson County                            45,500              45,500 6.3% Series due 2018, Jefferson County (h)                         9,200               9,200 6.3% Series due 2020, Pope County                                120,000             120,000 6.25% Series due 2021, Independence County (h)                    45,000              45,000 5.05% Series due 2028, Pope County (b)                            47,000              47,000 Total governmental bonds                                        286,200
* 286,200 Other Long-Term Debt Long-term DOE Obligation (c)                                        156,332             154,409 8.5% Junior Subordinated Deferrable Interest Debentures                                  61,856 Unamortized Premium and Discount - Net                               (4,390)             (4,708)
Other                                                                   621                 621 Total Long-Term Debt                                                1,338,763           1,338,378 Less Amount Due Within One Year                                        147,000 Long-Term Debt Excluding Amount Due Within One Year               $1,191,763          $1,338,378 Fair Value of Long-Term Debt (d)                                  $1,224,942          $1,235,278 308

Domestic utility companies and System Energy Notes to Respective Financial Statements 2004                 2003 (In Thousands)
Entergv Gulf States Mortgage Bonds:
8.25% Series due April 2004                                                            $292,000 6.77% Series due August 2005                                      1 98,000                98,000 Libor + 0.9% Series due June 2007                                                        275,000 5.2% Series due December 2007                                                            200,000 3.6% Series due June 2008                                         325,000                325,000 Libor + 0.4% Series due December 2009                             225,000 4.875% Series due November 2011                                   200,000 6.0% Series due December 2012                                      140,000           . 140,000 5.6% Series due December 2014                                        50,000 5.25% Series due August 2015                                       200,000               200,000 6.2% Series due July 2033                                          240,000               240,000 Total mortgage bonds                                            1,478,000              1,770,000 Governmental Bonds (a):
5.45% Series due 2010, Calcasieu Parish                            -22,095               22,095 6.75% Series due 2012, Calcasieu Parish                              48,285               48,285 6.7% Series due 2013, Pointe Coupee Parish                           17,450               17,450 5.7% Series due 2014, Iberville Parish                               21,600               21,600 7.7% Series due 2014, West Feliciana Parish                          94,000               94,000 5.8% Series due 2015, West Feliciana Parish                          28,400               28,400 7.0% Series due 2015, West Feliciana Parish                          39,000               39,000 7.5% Series due 2015, West Feliciana Parish                          41,600               41,600 9.0% Series due 2015, West Feliciana Parish                          45,000               45,000 5.8% Series due 2016, West Feliciana Parish                          20,000            . 20,000 5.65% Series due 2028, West Feliciana Parish (e)                                          62,000 6.6% Series due 2028, West Feliciana Parish                          40,000               40,000 Total governmental bonds                                           417,430               479,430 Other Long-Term Debt 8.75% Junior Subordinated Deferrable Interest Debentures               87,629               87,629 Unamortized Premium and Discount - Net                                 (2,397)               (2,596)
Other                                                                   8,816                 9,150 Total Long-Term Debt                                                  1,989,478             2,343,613 Less Amount Due Within One Year                                          98,000              354,000 Long-Term Debt Excluding Amount Due Within One Year                $1,891,478            $1,989,613 Fair Value of Long-Term Debt (d)                                   $1,999,249            $2,438,997 309

Domestic utility companies and System Energy Notes to' Respective Financial Statements 2004               2003 (In Thousands)
Entergv Louisiana Mortgage Bonds:
6.5% Series due March 2008                                                 $115,000 5.09% Series due November 2014                            115,000 5.5% Series due April 2019                                100,000 7.6% Series due April 2032                              ' 150,000            150,000 6.4% Series due October 2034                                70,000' Total mortgage bonds                                      435,000            265,000 Governmental Bonds (a):
7.5% Series due 2021, St. Charles Parish (h)               50,000             50,000 7.0% Series due 2022, St. Charles Parish (h)               24,000             24,000 7.05% Series due 2022, St. Charles Parish (h)              20,000             20,000 5.95% Series due 2023, St. Charles Parish (h)              25,000             25,000 6.2% Series due 2023, St. Charles Parish (h)               33,000             33,000, 6.875% Series due 2024, St. Charles Parish (h)             20,400             20,400 6.375% Series due 2025, St. Charles Parish                  16,770            16,770 5.35% Series due 2029, St. Charles Parish (i)
Auction Rate due 2030, St. Charles Parish (h)         ' 60,0004               60,000 4.9% Series due 2030, St. Charles Parish (f) (g)           55,000             55,000 Total governmental bonds                                 304,170             304,170 Other Long-Term Debt:
Waterford 3 Lease Obligation 7.45% (Note 9)                    247,725             262,534 9.0% Junior Subordinated Deferrable Interest Debentures                       -     72,165 Unamortized Premium and Discount - Net                            (1,200)           (1,373)
Total Long-Term Debt                                               985,695             902,496 Less Amount Due Within One Year                                      55,000             14,809 Long-Term Debt Excluding Amount Due Within One Year              $930,695            $887,687 Fair Value of Long-Term Debt (d)                                 $762,782            $668,700
     ., . I                        i 3 lb

Domestic utility companies and System Energy Notes to Respective Financial Statements 2004                   2003 (In Thousands)
Enteray Mississippi Mortgage Bonds:
6.2% Series due May 2004                                                                            I - $75,000 6.45% Series due April 2008                                                                               80,000 4.35% Series due April 2008                                           '    I I 100,000                  100,000 4.65% Series due May 2011                                                           80,000 5.15% Series due February 2013                                                 ' 100,000           I    100,000 4.95% Series due June 2018                                              X- i       -95,000                95,000 7.7% Series due July 2023                                                                                 60,000 6.0% Series due November 2032                                                       75,000               75,000 7.25% Series due December 2032                                                     100,000         I    100,000 6.25% Series due April 2034                                                       100,000 Total mortgage bonds                                                              650,000               685,000 I            I  .
Governmental Bonds (a):
7.0% Series due 2022, Warren County                                                                       8,095 7.0% Series due 2022, Washington County                                                                   7,935 4.60% Series due 2022, Mississippi Business Finance Corp. .                      .. 16,030 Auction Rate due 2022, Independence County (h)                                       30,000               30,000 Total governmental bonds                                                            46,030               46,030 Other Long-Term Debt:
Unamortized Premium and Discount - Net                                                     (957)             (1,074)
Total Long-Term Debt                                                                      695,073              729,956 Less Amount Due Within One Year                                                                                  75,000 Long-Term Debt Excluding Amount Due Within One Year                                     $695,073           . $654,956 Fair Value of Long-Term Debt (d)                                                        $716,201              $771,402 1-    . I
                                                                   ;     I
                                                                .1 .
j   . ,      :~-,
311

Domestic utility companies and System Energy Notes to Respective Financial Statements 2004                2003 (In Thousands)
Enteray New Orleans Mortgage Bonds:
8.125% Series due July 2005                                     $30,000        . $30,000 3.875% Series due August 2008
* 30,000            30,000
        .5,25% Series due August 2013                                      70,000            70,000 6.75% Series due October 2017                                      25,000            25,000 8.0% Series due March 2023
* 45,000 7.55% Series due September 2023                                                      30,000 5.6% Series due September 2024                               I    35,000 5.65% Series due September 2029                                   40,000 Total mortgage bonds                                             230,000            230,000
                                                                                . I Other Long-Term Debt:
Unamortized Premium and Discount - Net                                     (98)            (783)
Total Long-Term Debt                                                     229,902            229,217 Less Amount Due Within One Year                                            30,000 Long-Term Debt Excluding Amount Due Within One Year                     $199,902          $229,217 Fair Value of Long-Term Debt (d)                                        $231,957          $239,816 2004               2003-(In Thousands)
System Enermv Mortgage Bonds:
4.875% Series due October 2007                                  $70,000          $70,000" Total mortgage bonds                                              70,000-          70,000' Governmental Bonds (a):
5.875% Series due 2022, Mississippi Business Finance Corp.      216,000          216,000 5.9% Series due 2022, Mississippi Business Finance Corp.        102,975           102,975 7.3% Series due 2025, Claiborne County                                     -        7,625 6.2% Series due 2026, Claiborne County                            90,000           90,000 Total governmental bonds                                        408,975          416,600 Other Long-Term Debt:
Grand Gulf Lease Obligation 5.0 1%(Note 9)                           397,119          403,468 Unamortized Premium and Discount - Net                                 (1,235)          (1,319)
Total Long-Term Debt                                                     874,859          888,749 Less Amount Due Within One Year                                            25,266            6,348 Long-Term Debt Excluding Amount Due Within One Year                     $849,593         $882,401 Fair Value of Long-Term Debt (d)                                        $470,187         $489,436 312

Domestic utility companies and System Energy Notes to Respective Financial Statements (a)    Consists of pollution control revenue bonds and environmental revenue bonds.
(b)    The bonds are subject to mandatory tender for purchase from the holders at 100% of the principal amount outstanding on September 1, 2005 and can thenibe remarketed.
(c)    Pursuant to the Nuclear Waste Policy Act of 1982, Entergy's nuclear owner/licensee subsidiaries have contracts with the DOE for spent nuclear fuel disposal service. The contracts include a one-time fee for generation prior to April 7, 1983. Entergy Arkansas is the only Entergy company that generated electric power with nuclear fuel prior to that date and includes 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 within one year. It is determined using bid prices reported by dealer markets and by nationally recognized investment banking firms.,
(e)    The bonds had a mandatory tender date of September 1, 2004. Entergy Gulf States purchased the bonds from the holders, pursuant to the mandatory tender provision, and has not remarketed the bonds at this time.
(f)    On June 1, 2002, Entergy Louisiana remarketed $55 million St. Charles Parish Pollution Control Revenue Refunding Bonds due 2030, resetting the interest rate to 4.9% through May 2005.
(g)    The bonds are subject to mandatory tender for purchase from the holders at 100% of the principal amount outstanding on June 1, 2005 and can then be remarketed.
(h)    The bonds are secured by a series of collateral first mortgage bonds.
(i)    The bonds in the principal amount of $110.95 million had a mandatory tender date of October 1, 2003.
Entergy Louisiana purchased the bonds from the holders, pursuant to the mandatory tender provision, and has not remarketed the bonds at this time.
The annual long-term debt maturities (excluding lease obligations) for debt outstanding as of December 31, 2004, for the next five years are as follows:
Entergy            Entergy          Entergy          Entergy            Entergy            System Arkansas         Gulf States       Louisiana'      Mississippi       New Orleans           Energy (In Thousands) 2005               $147,000            $98,000        $55,000                   -           $30,000 2006 2007                        -                 -                -                -                   -         $70,000 2008                    $621         $325,000                  -       $100,000             $30,000 2009                        -        $225,000                  -                -                   -
The long-term securities issuances of Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and System Energy are limited to amounts authorized by the SEC. Under their SEC orders and without further SEC authorization, Entergy Gulf States, Entergy Louisiana, and Entergy Mississippi cannot incur additional indebtedness or issue other securities unless (a) the issuer and Entergy Corporation maintain a common equity ratio of at least 30% and (b) the security to be issued (if rated) and all its outstanding securities of the issuer (other than preferred stock of Entergy Gulf States), as well as all outstanding securities of Entergy Corporation, that are rated, are rated investment grade.
Junior Subordinated Deferrable Interest Debentures and Implementation of FIN 46 (Entergy Arkansas, Entergy Gulf States, and Entergy Louisiana)
Entergy implemented FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" effective December 31, 2003. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among their investors. Variable interest entities (VIEs), generally, are entities that do not have sufficient equity to permit the entity to finance its operations without additional financial support from its equity interest holders and/or the group of equity interest holders are collectively not able to exercise control over the entity. The primary beneficiary is the party that absorbs a majority of the entity's expected losses, receives a majority of its expected residual returns, or both as a result of holding the 313

Domestic utility companies and System Energy Notes to Respective Financial Statements variable interest. A company may have an interest in a VIE through ownership or other contractual rights or obligations.
Entergy Louisiana Capital I, Entergy Arkansas Capital 1, and Entergy Gulf States Capital I (Trusts) were established as financing subsidiaries of Entergy Louisiana, Entergy Arkansas, and Entergy Gulf States, respectively, (the parent company or companies, collectively) for the purposes of issuing common and preferred securities. The Trusts issued Cumulative Quarterly Income Preferred Securities (Preferred Securities) to the public and issued common securities to their parent companies. Proceeds from such issues were used to purchase junior subordinated deferrable interest debentures (Debentures) from the parent company. The Debentures held by each Trust are its only assets. Each Trust uses interest payments received on the Debentures owned by it to make cash distributions on the Preferred Securities and common securities. The parent companies fully and unconditionally guaranteed payment of distributions on the Preferred Securities issued by the respective Trusts. Prior to the application of FIN 46, each parent company consolidated its interest in its Trust. Because each parent company's share of expected losses of its Trust is limited to its investment in its Trust, the parent companies are not considered the primary beneficiaries and therefore de-consolidated their interest in the Trusts upon application of FIN 46 with no significant impacts to the financial statements. The parent companies' investment in the Trusts and the Debentures issued by each parent company are included in Other Property and Investments and Long-Term Debt, respectively.
Tax Exempt Bond Audit (Entergy Louisiana)
In November 2000, the Internal Revenue Service (IRS) began an audit of certain Tax Exempt Bonds issued by St. Charles Parish, State of Louisiana (the Issuer). The Bonds were issued to finance previously unfinanced acquisition costs expended by Entergy Louisiana to acquire certain radioactive solid waste disposal facilities (the Facilities) at the Waterford Steam Electric Generating Station. In January 2002, the IRS issued a preliminary adverse determination that the Bonds were not tax exempt. The stated basis for this determination was that radioactive waste did not constitute "solid waste" within the provisions of the Internal Revenue Code and therefore the Facilities did not qualify as solid waste disposal facilities. In a "technical advice memorandum," issued in October 2004 to the parish, the IRS National Office, concurred with the preliminary adverse determination. The Issuer and Entergy Louisiana intend to continue to vigorously contest this matter.
314

Domestic utility companies and System Energy Notes to Respective Financial Statements NOTE 6.          PREFERRED STOCK (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans)
The number of shares authorized and outstanding and dollar value of preferred stock for Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans as of December 31, 2004 and 2003 are presented below. Only the two Entergy Gulf States series "with sinking fund" contain mandatory redemption requirements. All other series of the U.S. Utility are redeemable at Entergy's option at the call prices presented. Dividends paid on all of Entergy's preferred stock series are eligible for the dividends received deduction. The dividends received deduction is limited by Internal Revenue Code section 244 for the following preferred stock series: Entergy Arkansas 4.72%, Entergy Gulf States 4.40%, Entergy Louisiana 4.96%, Entergy Mississippi 4.56%, and Entergy New Orleans 4.75%.
Shares                                              Call Price Per Authorized                      Dollars                Share as of and Outstanding               (In Thousands)             December 31, 2004            2003          2004              2003            2004 Enterev Arkansas Preferred Stock Without sinking fund:
Cumulative, $100 par value:
4.32% Series                      70,000          70,000        $7,000            $7,000         $103.65 4.72% Series                      93,500          93,500         9,350              9,350        $107.00 4.56% Series                      75,000          75,000         7,500              7,500        $102.83 4.56% 1965 Series                 75,000          75,000         7,500              7,500        $102.50 6.08% Series L                   100,000         100,000        10,000             10,000        $102.83 7.32% Series                     100,000         100,000        10,000             10,000        $103.17 7.80% Series                     150,000         150,000        15,000             15,000         $103.25 7.40% Series                     200,000         200,000        20,000            20,000          $102.80 7.88% Series                     150,000         150,000        15,000             15,000        $103.00 Cumulative, $0.01 par value:
         $1.96 Series (a)                 600,000         600,000        15,000             15,000          $25.00 Total without sinking fund 1,613,500       1,613,500      $116,350          $116,350 315

Domestic utility companies and System Energy Notes to Respective Financial Statements Shares                                  .          I,   Call Price Per Authorized                       Dollars                      Share as of and Outstanding        ;    ; (In Thousands)                   December 31, 2004             2003        2004               2003                       2004 Enterav Gulf States Preferred Stock Preferred Stock Authorized 6,000,000 shares,
  $100 par value, cumulative Without sinking fund; 4.40% Series                         51,173           51,173      $5,117              $5,117                   $108.00 4.50% Series                          5,830             5,830          583             i 583                   $105.00 4.40% 1949 Series                     1,655             1,655          166                 166                 $103.00 4.20% Series                          9,745             9,745          975                 975                 $102.82 4.44% Series                         14,804           14,804        1,480                1,480                 $103.75 5.00% Series                         10,993            10,993       1,099                1,099                 $104.25 5.08% Series                         26,845           26,845        2,685                2,685                  $104.63 4.52% Series                         10,564      -     10,564       1,056                1,056                 $103.57 6.08% Series                         32,829           32,829        3,283                3,283                  $103.34 7.56% Series                       308,830           308,830      30,883              30,883                   $101.80 I   ! I I Total without sinking fimd     473,268           473,268     $47,327            $47,327 With sinking fund:
Adjustable Rate-A, 7.0% (b)          84,000           96,020      $8,400              $9,602                   $100.00 Adjustable Rate-B, 7.0% (b)          90,000,         112,500        9,000              11,250                  $100.00 Total with sinking fund         174,000          208,520     $17,400            $20,852 Fair Value of Preferred Stock with Sinking Fund (c)                                                      $15,286            $15,354        ;
                                                                                                                   'I.
I
( Cia l i Pc.
Shares                                            !: :-Call Price Per Authorized                       Dollars                      Share as of and Outstanding                (In Thousands)                  December 31, 2004             2003        2004               2003                       2004 Enterev Louisiana Preferred Stock Without sinking fund:
Cumulative, $100 par value:
4.96% Series                         60,000           60,000      $6,000              $6,000                   $104.25 4.16% Series                         70,000           70,000        7,000                7,000                 $104.21 4.44% Series                         70,000           70,000        7,000                7,000                 $104.06 5.16% Series                         75,000           75,000        7,500                7,500                 $104.18 5.40% Series                         80,000           80,000        8,000                8,000                 $103.00 6.44% Series                         80,000           80,000        8,000                8,000                 $102.92 7.84% Series                        100,000          100,000       10,000              10,000                  $103.78 7.36% Series                        100,000          100,000       10,000              10,000                  $103.36 Cumulative, $25 par value:
8.00% Series                     1,480,000         1,480,000      37,000              37,000                     $25.00 Total without sinking fund   2,115,000         2,115,000    $100,500           $100,500 316

Domestic utility companies and System Energy Notes to Respective Financial Statements Shares                                              Call Price Per Authorized         -              Dollars'              Share as of and Outstanding                 (In Thousands)            December 31, 2004             2003      i   2004          :    2003           2004 Entereg Mississippi Preferred Stock Without sinking fund:
Cumulative, $100 par value:
4.36% Series                         59,920           59,920        $5,992             $5,992         $103.86 4.56% Series                         43,887           43,887          4,389             4,389         $107.00 4.92% Series                        100,000          100,000        10,000-            10,000         $102.88 7.44% Series                       100,000           100,000         10,000          .10,000          $102.81 8.36% Series                       200,000          200,000         20,000     .       20,000         $100.00 Total without sinking fund     503,807          503,807        $50,381           $50,381
                                                       -Shares                                              Call Price Per
                                                    -Authorized                      - Dollars               Share as of and Outstanding                 (In Thousands)            December 31, 2004             2003          2004               2003   -       2004 Enter&i New Orleans Preferred Stock Without sinking fund:
Cumulative, $100 par value:
4.75% Series                         77,798           77,798        $7,780             $7,780         $105.00 4.36% Series                         60,000           60,000          6,000             6,000         $104.58 5.56% Series                       ' 60,000           60,000          6,000             6,000         $102.59 Total without sinking fund      197,798          197,798       $19,780            $19,780 (a)    The total dollar value represents the liquidation value of $25 per share.
(b)     Represents weighted-average annualized rates for 2004 and 2003.
(c)     Fair values were determined using bid prices reported by dealer markets and'by nationally recognized investment banking firms. There is an additional disclosure of fair value of financial instruments in Note 11 to the domestic utility companies and System Energy financial statements.
Entergy Gulf States' preferred stock with sinking fund retirements were 34,500 shares in 2004 and 2003, and 18,579 shares in 2002.
Entergy Gulf States has annual sinking fund requirements of $3.45 million through 2009 for its preferred stock outstanding. Entergy Gulf States has the annual non-cumulative option to redeem, at par, additional amounts of certain Series of its outstanding preferred stock.
NOTE 7.            COMMON EQUITY (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans Dividend 'Restrictions               '
Provisions within the 'Articles of Incorporation or pertinent 1irxdntures and various other agreements relating to the long-term debt and preferred stock of the domestic utility, companies and System Energy restrict the payment of cash dividends or other distributions on their common and preferred stock. Additionally, PUHCA prohibits Entergy Corporation's subsidiaries from making loans or advances to. Entergy Corporation. As of December 31, 2004, Entergy Arkansas and Entergy Mississippi had restricted-retained earnings unavailable for distribution to Entergy Corporation of $394.9 million and $68.5 million, respectively.
317

Domestic utility companies and System Energy Notes to Respective Financial Statements NOTE 8.              COMMITMENTS AND CONTINGENCIES The domestic utility companies and System Energy are involved in a number of legal, tax, and regulatory proceedings before various courts, regulatory commissions, and governmental agencies in the ordinary course of their business. While management is unable to predict the outcome of such proceedings, it is not expected that the ultimate resolution of these matters will have a material adverse effect on Entergy Arkansas', Entergy Gulf States',
Entergy Louisiana's, Entergy Mississippi's, Entergy New Orleans', or System Energy's results of operations; cash flows, or financial condition.
Vidalia Purchased Power Agreement (Entergy Louisiana)
Entergy Louisiana has an agreement extending through the year 2031 to purchase energy generated by a hydroelectric facility known as the Vidalia project. Entergy Louisiana made payments under the contract of approximately $147.7 million in 2004, $112.6 million in 2003, and $104.2 imiillion in 2002. If the maximum percentage (94%) of the energy is made available to Entergy Louisiana, current production projections would require estimated payments of approximately $125.3 million in 2005, and a total of $3.5 billion for the years 2006 through 2031. Entergy Louisiana currently recovers the costs of the purchased energy through its fuel adjustment clause: In an LPSC-approved settlement related to tax benefits from the tax treatment of the Vidalia contract, Entergy Louisiana agreed to credit rates by $11 million each year oforup -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. Therefore, to the extent Entergy Louisiana's use of the proceeds would ordinarily have reduced its rate base, no change in rate base shall be reflected for ratemaking purposes.
System Fuels (Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)                                            -                -.
The domestic utility companies that are owners of System Fuels have made loans to System Fuels to finance its fuel procurement, delivery, and storige activities. The following loans outstanding to System Fuels as of December 31, 2004 mature in 2008:                                          - -
                  -, -                                Ownership                 '  Loan Outstabiding Owner                   -   Percentage ., -          at December 31, 2004:  -
              -,Entergy Arkansas          -     -    --   35% ;          .           $11.0 million  -
Entergy Louisiana                         33%                        $14.2 million Entergy Mississippi                       19%                          $5.5 million
              -  Entergy New Orleans             .        13%.         .               $3.3 million Nuclear Insurance (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)
Third Party Liability Insurance ,           ;- - .                .                  - -
The Price-Anderson Act provides insurance for the public in the event of a nuclear power plant accident.
The costs of this insurance are borne by the nuclear power industry. Originally passed by Congress in 1957 and most recently amended in 1988, the Price-Anderson Act requires nuclear power plants to show evidence of financial protection in the event of a nuclear accident. This protection must consist of two levels:
1: The primary level is private insurance underwritten by American Nuclear Insurers and provides liability
      -'insurance coverage of-$300 million.) If this amunt iis not sufficient to cover claims arising from the accident, the secondleVel, Secondary Financial Protection, applies. An industry-wide aggregate limitation of $300 million ekists for domestically-sponsored 'terrorist acts. There is no limitation for foreign-sponsored terrorist acts.      ;               i      '                -;                       ,
: 2. Within the Secondary Financial Protection level, each nuclear plant must pay a retrospective premium, equal to its proportionate share of the loss in excess of the primary level, up to a maximum of $100.6 318

Domestic utility companies and System Energy Notes to Respective Financial Statements million per reactor per incident. This consists of a $95.8 million maximum retrospective premium plus a five percent surcharge that may be applied, if needed, at a rate that is presently set at $10 million per year per nuclear power reactor. There are no domestically- or foreign-sponsored terrorism limitations.
Currently, 104 nuclear reactors are participating in the Secondary Financial Protection program - 103 operating reactors and one closed reactor that still stores used nuclear fuel on site. The product of the maximum retrospective premium assessment to the nuclear power industry and the number of nuclear power reactors provides over $10 billion in insurance coverage to compensate the public in the event of a nuclear power reactor accident.
Entergy Arkansas has two licensed reactors and Entergy Gulf States, Entergy Louisiana, and System Energy each have one licensed reactor (10% of Grand Gulf is owned by a non-affiliated company (SMEPA), which would share on a pro-rata basis in any retrospective premium assessment under the Price-Anderson Act).
An additional but temporary contingent liability exists for all nuclear power reactor owners because of a previous Nuclear Worker Tort (long-term bodily injury caused by exposure to nuclear radiation while employed at a nuclear power plant) insurance program that was in place from 1988 to 1998. The maximum premium assessment exposure to each reactor is $3 million and will only be applied if such claims exceed the program's accumulated reserve funds. This contingent premium assessment feature will expire with the Nuclear Worker Tort program's expiration, which is scheduled for 2008.
Property Insurance Entergy's nuclear owner/licensee subsidiaries are members of certain mutual insurance companies that provide property damage coverage, including decontamination and premature decommissioning expense, to the members' nuclear generating plants. These programs are underwritten by Nuclear Electric Insurance Limited (NEIL). As of December 31, 2004, the domestic utility companies and System Energy were insured against such losses per the following structures:
ANO I and 2, Grand Gulf. River Bend, and Waterford 3
* Primary Layer (per plant) - $500 million per occurrence
* Excess Layer (per plant) - $100 million per occurrence
* Blanket Layer (shared among all plants) - $ 1.0 billion per occurrence
* Total limit - $1.6 billion per occurrence
* Deductibles:
          * $5.0 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.
In addition, Waterford 3 and Grand Gulf 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 foll6wing'summarizes this coverage as of December 31, 2003:
Waterford 3
     * $2.95 million weekly indemnity
     * $413 million maximum indemnity
* Deductible: 26 week waiting period Grand Gulf
     * $100,000 weekly indemnity
     * $14 million maximum indemnity
* Deductible: 26 week waiting period 319

Domestic utility companies and System Energy Notes to Respective Financial Statements Under the property damage and accidental outage insurance programs, Entergy's nuclear plants could be subject to assessments should losses exceed the accumulated funds available from NEIL. As of December 31, 2004, the maximum amount of such possible assessments per occurrence were $15.1 million for Entergy Arkansas,
$11.1 million for Entergy Gulf States, $13.0 million for Entergy Louisiana, $0.06 million for Entergy Mississippi,
$0.06 million for Entergy New Orleans, and $11.5 million for System Energy.
Entergy maintains property insurance for its nuclear units in excess of the NRC's minimum requirement of
$1.06 billion per site for nuclear power plant licensees. NRC regulations provide that the proceeds of this insurance must be used, first, to render the reactor safe and stable, and second, to complete decontamination operations. Only after proceeds are dedicated for such use and regulatory approval is secured would any remaining proceeds be made available for the benefit of plant owners or their creditors.
In the event that one or more acts of domestically-sponsored terrorism causes property damage under one or more or all nuclear insurance policies issued by NEIL (including, but not limited to, those described above) within 12 months from the date the first property damage occurs, the maximum recovery under all such nuclear insurance policies shall be an aggregate of $3.24 billion plus the additional amounts recovered for such losses from reinsurance, indemnity, and any other sources applicable to such losses. There is no aggregate limit involving one or more acts of foreign-sponsored terrorism.
Nuclear Decommissionin! and Other Retirement Costs (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, System Energy)
SFAS 143, "Accounting for Asset Retirement Obligations," which was implemented effective January 1, 2003, requires the recording of liabilities for all legal obligations associated with the retirement of long-lived assets that result from the normal operation of those assets.
These liabilities are recorded at their fair values (which is the present values of the estimated future cash outflows) in the period in which they are incurred, with an accompanying addition to the recorded cost of the long-lived asset. The asset retirement obligation is accreted each year through a charge to expense,'to reflect the time value of money for this present value obligation. The amounts added to the carrying amounts of the long-lived assets are depreciated over the useful lives of the assets. The net effect of implementing this standard for the rate-regulated business of the domestic utility companies and System Energy was recorded as a regulatory asset, with no resulting impact on Entergy's net income. Entergy recorded these regulatory assets. because existing rate mechanisms in each jurisdiction are based on the principle that Entergy will recover all ultimate costs of decommissioning from customers. As a result of this treatment, SFAS 143 is expected to be earnings neutral to the rate-regulated business of the domestic utility companies and System Energy.,,
Upon implementation of SFAS 143 in 2003, assets and liabilities increased $1.1 billion for the U.S. Utility segment as a result of recording the asset retirement obligations at their fair values of $1.1 billion as determined under SFAS 143, increasing utility plant by $287 million, reducing accumulated depreciation by $361 million and recording the related regulatory assets of $422 million. The implementation of SFAS 143 for the portion of River Bend not subject to cost-based ratemaking decreased earnings in the first quarter of 2003 by $21 million net-of-tax as a result of a cumulative effect of accounting change. In accordance with ratemaking treatment and as required by SFAS 71, the depreciation provisions for the domestic utility companies and System Energy include a component for removal costs that are not asset retirement obligations under SFAS 143. In accordance with regulatory accounting principles, the domestic utility companies and System Energy have recorded regulatory assets (liabilities) in the following amounts to reflect their estimates of the difference between estimated incurred removal costs and estimated removal costs recovered in rates previously recorded as a component of accumulated depreciation:
320

Domestic utility companies and System Energy Notes to Respective Financial Statements December 31, 2004                2003 (In Millions)
Entergy Arkansas                              $34.9               $26.6 Entergy Gulf States                            $0.9                $4.2 Entergy Louisiana                           ($34.6)             ($26.8)
Entergy Mississippi                           $32.7               $24.4 Entergy New Orleans                            $1.3                 $2.1 System Energy                                 $17.1               $15.1 The cumulative decommissioning liabilities and expenses recorded in 2004 by Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy were as follows:
Change in Liabilities as of                        Cash Flow          Liabilities as of December 31, 2003        Accretion         Estimate        December 31, 2004 (In Thousands)
ANO l and ANO 2                      $567.5               $32.9          ($107.7)                $492.7 River Bend                           $298.8               $19.7          ($166.4)                $152.1 Waterford 3                          $325.3               $22.0                -                 $347.3 Grand Gulf                           $312.5               $23.4                -                 $335.9 Entergy periodically reviews and updates estimated decommissioning costs. The actual decommissioning costs may vary from the estimates because of regulatory requirements, changes in technology, and increased costs of labor, materials, and equipment.
In the first quarter of 2004, Entergy Arkansas recorded a revision to its estimated decommissioning cost liability in accordance with a new decommissioning cost study for ANO 1 and 2 as a result of revised decommissioning costs and changes in assumptions regarding the timing of when the decommissioning of the plants will begin. The revised estimate resulted in a $107.7 million reduction in its decommissioning liability, along with a $19.5 million reduction in utility plant and an $88.2 million reduction in the related regulatory asset.
In the third quarter of 2004, Entergy Gulf States recorded a revision to its estimated decommissioning cost liability in accordance with a new decommissioning cost study for River Bend that reflected an expected life extension for the plant. The revised estimate resulted in a $166.4 million reduction in decommissioning liability, along with a $31.3 million reduction in utility plant, a $49.6 million reduction in non-utility property, a $40.1 million reduction in the related regulatory asset, and a regulatory liability of $17.7 million. For the portion of River Bend not subject to cost-based ratemaking, the revised estimate resulted in the elimination of the asset retirement cost that had been recorded at the time of adoption of SFAS 143 with the remainder recorded as miscellaneous other income of $27.7 million.
If SFAS 143 had been applied by Entergy Gulf States for the portion of-River Bend not subject to cost-based ratemaking during prior periods, the following impacts would have resulted:
                                                                                      ,Year Ended December 31, 2002 Entergy Gulf States Earnings applicable to common stock - as reported                     $169,190 Pro forma effect of SFAS 143                                            ($2,227)
Earnings applicable to common stock - pro forma                       $166,963 321

Domestic utility companies and System'Energ-Notes to Respective Financial Statements Entergy maintains decommissioning trust funds that are committed 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 ofEntergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy as of December 31, 2004 are as follows:
                                                .(. f          Decommissioning                     Regulatory
                                             *              >'',i Trust Fair Values                     Assets,
                                                *o         W                  ,}r'(itz (In Millions)__,,e:<'-J ANO I & ANO 2                                $383.8                         $i4l.2 1'm River Bend                                   $291.0                                     -
W.,aterford 3                    J ,    f   $172.1       ,                 $141.6        .
Grand Gulf                                   $205.1       ,              .    $97.3 ;            ,.,
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 vlraniv~m enrichment operations. Annual assessments in 2004 were $4.4 million for Entergy Arkansas, $1.1 million for Entergy Gulf States, $1.6 million for Entergy Louisiana, hand $1.8 miLfor' SysfemiEii                        2004.'The~Eiey P61lic' AXct calls for cessation of annual D&D assessments not later than October 24, 2007. At December 31, 2004, two years of assessments were remaining. D&D fees are included in other current liabilities and othermpon-current liabilities and, as of December 31, 2004, recorded liabilities were $8.8 million for Entergy Arkansas, $1.9 million for Entergy Gulf States, $3.3 million for Entergy Louisiana, and $3.3 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 assessments are recovered through rates in the same manner as fuel costs.
Income Taxes       . r.                                .e
                                                         ,t:-       -      ;           Itig'.rz-)      e      - i          Ls    itt, !   VgOJ   .
Entergy is currently under audit by the IRS with respect to tax returns for tax periods subsequent to 1995 and through_2001, and is subject tq audit, by the ,IRS, and other taxing autho'rities for subsequent tax periods. The amount and timing of any tax assessments resu1ting from these Audits are uncertain, and could haye a material effect on Entergy's finanpcial, position and results of operations.,,nitergy btelieves that the contingency provisions established in its financial statements will sufficiently cover the risk associated with tax matters. Cer~,ain material audit matters austo which managemnc tbelieves there, is a reasoinable pqssibility of a. future tax assessment are discussed below. See Note 3 to the domestic utility companies and System Energy financial statements for additional discussion of income taxes. ,                                    -. <,,                a      ; 9 :         ;, ; } d DepreciableProperty Lives                           (. i.-                                                                    ":..ji!;>r o tU) flat T'i-During the years 1997 through 2004, Entergy subsidiaries, Entergy Services, Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, .and System Energy Resources reflected changes in tax depreciation, methods with respect to certain types of deprepiable property (e.g. street lighting, billing meters, and various generation plant equipment). As of December 31, 2004, the cumulative effect of these changes results in additional depreciation deductions generating a cash flow benefit of $45 million for Entergy Arkansas, $38. million for Entergy.Gqlf States, $32 million forEntergy Louisiana, $19 million for Entergy Mississippi, $6 million for Entergy New Qrleans, and $12 million for System Energy. As o.f December 31, 2004, the related IRS interest exposure if the deduction is ultimately disallowed is $13 million for Entergy Arkansas, $11 million for Entergy Gulf States, $9 million for Entergy Louisiana, $6 million for Entergy Mississippi, $2 million for Entergy New Orleans, -and ii'    million for System Energy. This benefit reverses over time and will also fluctuate with each year's addition to those types of assets. Due to the temporary nature of the tax benefit, the potential interest charge represents the total net exposure of the domestic utility companies and, System Energy.
For the years under audit, 1996-2001, the IAS clalleged Egys                                     classification' of these assets and proposed adjustments to the depreciation deductions taken. Entergy disagr es with the position of the IRS and has 322

Domestic utility companies and System Energy Notes to Respective Financial Statements protested the disallowance of these deductions to the Office of IRS Appeals. Entergy expects to receive a Notice of Deficiency in 2005 for this item, and plans to vigorously contest this matter. Entergy believes that the contingency provision established in its financial statements sufficiently covers the'tisk associated with this item..
Mark to Market of Certain Power Contracts                                                       '.       '            ,      C}i.i 4             :
In 2001, Entergy Louisiana changed its method of accounting for tax purpo'ses related to its wholesale electric power contracts. The most significant of these is the contract to purchase power from the Vidalia hydroelectric project>t -The'riew tax' accounting 'method has provided a cumulative cash flow benefit of approximately $790 million 'as of December 31, 2004. The related IRS, interest exposure is $93 million at December 31, 2004. This benefit is expected to reverse in the years 2005 through 2031. The election did not reduce book inomne tax'expense. The timing of the reversal of this betiWefi't depends on several variables, including the price of power. Due to the temporarynature of the tax beAefit, the p6tential interest charge represents Entergy's net earnings exposure. Ent&Srgy Louisiana's 2001 tax return is currently Under examination by the IRS, though no adjustments have yet been prdposed with 'respect to the mark to market election. Entergy believes that the contingency provision established in its financial statements will sufficiently cover the risk associated with this issue.
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CashPoint Bankruptcv (Entergy Arkansas, Entergy Gulf Statesr'ne'rky Louisiana, Entegy Mississippi, and Entergy New Orleans)
          -    In 2003 the domestic utility companies entered an agreement wlihtashPoint 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 goyernmental locations, rather than sending payments by mail. Approximately one-third of Entergy's utility customers use payment agents.                           t        : J 10                .ii            -;
W!i           Qn April, 19, 2004, CashPoinxt failed to pay funds due to the domestic utility companies that had been collected through payment agents. The domestic utility companies ihen obtained a temporary restraining order ftrom theCivil District Court for the Parish of Orleans, State of Louisiana, enjoining CashPoint from distributing fu ds belonging toEntergy, 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 SQuthernDistripct of New York.. Inresponse to these events, the domestic utility companies expanded an existing coqntract~with another cojmpany 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 aamount 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 estimates of maximunm6-6sure to loss are approximately as follows:
Amount (In Millions)                 ,    -                   ,
Entergy Arkansas                                 $1,8                           i        -       .
Entergy Gulf States                              $7
                                       . ... Entergy Louisiana,,             .                $8.8 ,         .
* L;Entergy MNississippi i                              i              $4 3                     iI.,.        a S.,    J     Entergy New Orleans               -.             $2.4 Environmental Issues (Ent,tr              Gulf Staes)                             v'   ii??:. ? 4/; -i~Xh                      .        ".!,
           '' Entergy Gulf States has been designated as a PRP for the cleanup of certain hazardous waste disposal sites.
As of December 31, 2004, Entergy Gulf States does not expect the remaining clean-up costs to exceed its recorded liability of $1.5 million for the remaining sites at which the EPA has designated Entergy Gulf States as a PRP.
323

Domestic utility companies and System Energy Notes to Respective Financial Statements City Franchise Ordinances (Entergy New Orleans)
Entergy New Orleans provides electric and gas service in the City of New Orleans pursuant to franchise ordinances. These ordinances contain a continuing option for the city to purchase Entergy New Orleans' electric and gas utility properties.                                                         .              ,
Waterford 3 Lease Obligations (Entergy Louisiana)
On September 28, 1989, Entergy Louisiana entered into, three identical transactions for the sale and leaseback of undivided interests (aggregating approximately 9.3/o)' in Waterford 3.; In July 1997, Entergy Louisiana caused the lessors to issue $307.6 million, aggregate principal amount, of Waterford 3 Secured Lease Obligation Bonds, 8.09% Series due 2017, to refinance the outstanding bonds originally issued to finance the purchase of the undivided interests by the lessors;. The lease payments were reduced to reflect the lower, interest costs. Upon the occurrence of certain events, Entergy Louisiana may be obligated to pay. amounts sufficient to permit the termination of the lease transactions and may be required to, assume the outstanding bonds, issued, to finance, in part, the lessors' acquisition of the undivided interests in Waterford 3. .-
Employment Litigation (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New. Orleans, and System Energy)                        .
Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy New Orleans, System Energy, or their affiliates, 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 Arkansas, Entergy Gulf States;, Entergy Louisiana, Entergy Mississippi; Entergy New Orleans, System Energy, and' their affiliates are vigorously defending these suits and deny any liability to the 'plaintiffs.,
Nevertheless, no assurance can be given as to the outcome of these cases.
Asbestos and Hazardous Material Litigation (Entergy Gulf States, Entergy Louisiana, Entergy New Orleans)
Numerous lawsuits have been filed in federal and state courts in 'Texas, Louisiana, and Mississippi primarily by contractor employees in the 1950-1980 timeframe against Entergy Gulf States, Entergy Louisiana, and Entergy New Orleans, and Entergy Mississippi as premises owners of power plants, for damages caused by alleged exposure to asbestos or other hazardous material. Many other defendants are named in these lawsuits as well.
Presently, there are'approximately 480 lawsuits involving approximately 10,000 claims. Management believes that adequate provisions have been established to cover any exposure. Additionally, negotiations continue with insurers to recover more reimbursement, while new coverage is being secured to minimize 'anticipated future potential exposures. Management believes that loss exposure has been 'and will continue to be handled' successfully so that the ultimate resolution of these matters will not be material, 'in the aggregate, to its financial position or results of operation.
Grand Gulf - Related Agreements Capital Funds Agreement (System Energy)
System Energy has entered into agreements with' Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans whereby they are obligated to purchase their respective entitlements of capacity and energy from System Energy's 90% interest in Grand Gulf, and to make payments that, together with other available funds, are adequate to cover System Energy's operating expenses. System Energy would have to secure funds from other sources, including Entergy Corporation's obligaiio'ns' under the Capital Funds Agreement, to cover any shortfalls from payments received from Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans under these agreements.
324

Domestic utility companies and System Energy Notes to Respective Financial Statements Unit Power Sales Agreement (Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and.System Energy)
System Energy has agreed to sell all of its 90% share of capacity and energy from Grand Gulf to Entergy Arkansas,- Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans in accordance with specified percentages (Entergy Arkansas-36%, Entirgy Louisiana-14%, Entergy Mississippi-33%, and Entergy New Orleahs-170/) as ordered by FERC. Charges under' this agreement are paid in consideration for the purchasing companies' respective entitlement to receive capacity and energy and are payable irrespective of the quantity of energy delivered so long as the unit remains in commercial operation. The agreement will remain in effect until terminated by the parties and the termination is approved by FERC, most likely upon Grand Gulfs retirement from service. Monthly obligations are based on actual capacity and energy costs. The average monthly payments for 2004 under the agreement are approximately $16.6 million for Entergy Arkansas, $6.7 million for Entergy Louisiana, $13.7 million for Entergy Mississippi, and $8.1 million for Entergy New Orleans.
Availability Agreement (Entergy Atkansas, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)
Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans are individually obligated to make payments or subordinated advances to System Energy in accordance with stated percentages (Entergy Arkansas-17. 1%, Entergy Louisiana-26.9%, Entergy Mississippi-31.3%, and Entergy New Orleans-24.7%) in amounts that, when added to amounts received under the Unit Power Sales Agreement or otherwise, are adequate to cover all of System Energy's operating expenses as defined, including an amount sufficient to amortize the cost of Grand Gulf 2 over 27 years. (See Reallocation Agreement terms below.) System Energy has assigned its rights to payments and advances to certain creditors as security for certain obligations. Since commercial operation of Grand Gulf 1, payments under the Unit Power Sales Agreement have exceeded the amounts payable under the Availability Agreement.' Accordingly, no payments under the Availability Agreement have ever been required. If Entergy Arkansas or Entergy Mississippi fails to make its Unit Power Sales Agreement payments, and System Energy is unable to obtain funds from other sources, Entergy Louisiana and Entergy New Orleans could become subject to claims or demands by Systert Energy or its creditors for payments or advances under the Availability Agreement (or the assignments thereof) equal to the difference between their required Unit Power Sales Agreement payments and their required Availability Agreement payments.
Reallocation Agreement (Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)                                                                   ,
System Energy, Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans entered into the Reallocation Agreement relating to the sale of capacity and energy from Grand Gulf and the related costs, in which Entergy Louisiana, Enterky Mississippi, and Entergy New Orleans agreed to assume all of Entergy Arkansas' responsibilities and obligations with respect to Grand Gulf under the Availability Agreement. FERC's decision allocating a portion of Grand Gulf 1 capacity and energy to Entergy Arkansas supersedes the Reallocation Agreement as it relates to Grand Gulf 1. Responsibility for any Grand Gulf 2 amortization amounts has been individually! allocated (Entergy rLouisiana-26.23%, Entergy Mississippi43.97%, and Entergy New Orleans-29.80%) under the terms of the Reallocation Agreement., However, the Reallocation Agreement does not affect Entergy Arkansas' obligation to System Energy's lenders under the assignments referred to in the preceding paragraph. Entergy Arkansas would be liable for its share of such amounts if Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans were unable to meet their contractual obligations. No payments of any amortization' amounts will be required so long as amounts paid to System Energy under the Unit Power Sales Agreement, including other funds available o' System Energy, exceed amounts required under the Availability Agreement, which is expected to be the case for the foreseeable future.
Reimbursement Agreement (System Energy)
In December 1988, System Energy entered into two separate, but identical, arrangements for the sale and leaseback of an approximate aggregate 11.5% ownership interest in Grand Gulf. In connection with the equity 325

Domestic utility companies and System Energy Notes to Respective Financial Statements funding of the sale and leaseback arrangements, letters of credit are required to be maintained to secure certain amounts payable for the benefit of the equity investors by System Energy under the leases, The current letters of credit are effective until May 29, 2009.
Under the provisions of the reimbursement agreement relating to the letters of credit, System Energy has agreed to a number of covenants regarding the maintenance of certain capitalization and fixed charge coverage ratios. System Energy agreed, during the term of the reimbursement agreement, to maintain a ratio of debt to total liabilities and equity less than or equal to 70%. In addition, System Energy must maintain, with respect to each fiscal quarter during the term of the reimbursement agreement, a ratio of adjusted net income to interest expense of at least 1.50 times earnings. As of December 31, 2004, System Energy's debt ratio was approximately, 32.5%, and its fixed charge coverage ratio for 2004 was approximately 4.12,, calculated, in each case, as prescribed in the reimbursement agreement.
NOTE 9.           LEASES (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and System Energy)
General As of December 31, 2004 the domestic utility companies had capital leases and non-cancelable operating leases for equipment, buildings, vehicles, and fuel storage facilities (excluding nuclear fuel leases and the sale and leaseback transactions) with minimum lease payments as follows:
Capital Leases-Entergy            Entergy      i Year                  __ .Arkansas              Mississippi  -
(In Thousands) 2005                                                    $9,610              $50 2006                                                      5,682           f  42 2007                                                    , 3,427    '         11.
2008                                                      1,754 2009                                                        237 Years thereafter                                          2,606                E Minimum lease payments                                  23,316              103 Less: Amount representing interest                        3,386 '         '    2 Present value of net minimum lease payments            $19,930             $101' Overating Leases Entergy          Entergy           Entergy        Entergy Year                  Arkansas        Gulf States'       Louisiana     Mississippi:
(In Thousands) 2005                                 $23,743           $26,744           $9,974          $7,421 2006                                  20,029             23,942           5,647           6,596 2007                                  17,563,:           17,223           5,109           3,552 2008                                  14,977              9,742           3,546           3,039 2009                                   8,622              9,108           2,346           2,676 Years thereafter                      54,339           115,216            2,524          11,068' Minimum lease payments.             $139,273         $201,975           $29,146         $34,352 326

Domestic utility companies and System Energy Notes to Respective Financial Statements Rental Expense Entergy        Entergy          Entergy        Entergy Year       Arkansas       Gulf States      Louisiana      Mississippi (In Millions) 2004            $17.4          $24.4           $11.9             $3.4 2003            $19.4          $26.5           $13.8             $5.4 2002            $20.8          $25.8           $13.6             $5.4 In addition to the above rental expense, railcar operating lease payments and oil tank facilities lease payments are recorded in fuel expense in accordance with regulatory treatment. Railcar operating lease payments were $9.3 million in 2004, $6.8 million in 2003, and $8.3 million in 2002 for Entergy Arkansas and $2.0 million in 2004, $1.8 million in 2003, and $2.0 million in 2002 for Entergy Gulf States. Oil tank facilities lease payments for Entergy Mississippi were $3.2 million for 2004 and $3.1 million for each of the years 2003 and 2002.
Nuclear Fuel Leases As of December 3i, 2004, arrangements to lease nuclear fuel existed in an aggregate amount up to $150 million for Entergy Arkansas, $105 million for Entergy Gulf States, $80 million for Entergy Louisiana, and $110 million for System Energy. As of.December 31, 2004, the unrecovered cost base of nuclear fuel leases amounted to approximately $93.9 million for Entergy Arkansas, $71.2 million for Entergy Gulf States, $31.7 million for Entergy Louisiana, and $65.6 million for System Energy. The lessors finance the acquisition and ownership of nuclear fuel through loans made under revolving credit agreements, the issuance of commercial paper, and the issuance of intermediate-term notes. The credit agreements for Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy each have a termination date of October 30, 2006. The termination dates may be 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 arranged 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 based on nuclear fuel use. The table below represents the total nuclear fuel lease payments (principal and interest) as well as the separate interest component charged to operations in 2004, 2003, and 2002:
2004                      2003                        2002 Lease                     Lease                      Lease Payments Interest          Payments Interest         Payments Interest (In Millions)
Entergy Arkansas            $53.0         $4.3        $49.9          $3.3         $49.6         $3.2 Entergy Gulf States          29.7          3.2         27.8           3.0          29.2          3.0 Entergy Louisiana            36.1          2.5         32.3           2.4          32.9          2.6
        -System Energy                 27.8          2.8         32.0           3.1          26.1          2.5 Total                       $146.6        $12.8       $142.0        $11.8        $137.8        $11.3 327

Domestic utility companies and System Energy Notes to Respective Financial Statements Sale and Leaseback Transactions Waterford 3 Lease Obligations (Entergy Louisiana)
In 1989, Entergy Louisiana sold and leased back 9.3% of its interest in Waterford 3 for the aggregate sum of $353.6 million. The lease has an approximate term of 28 years. The lessors financed the sale-leaseback through the issuance of Waterford 3 Secured Lease Obligation Bonds. The lease payments made by Entergy Louisiana are sufficient to service the debt.
In 1994, Entergy Louisiana did Inot exercise its option to repurchase the 9.3% interest in Waterford 3. As a result, Entergy Louisiana issued $208.2 million of non-interest bearing first mortgage bonds as collateral for the equity portion of certain amounts payable under the lease.
In 1997, the lessors refinanced the outstanding bonds used to finance the purchase of Waterford 3 at lower interest rates, which reduced the annual lease payments.
Upon the occurrence of certain events, Entergy Louisiana may be obligated to assume the outstanding bonds used to finance the purchase of the unit and to pay an amount sufficient to withdraw from the lease transaction. Such events include lease events of default, events of loss, deemed loss events, or certain adverse "Financial Events." "Financial Events" include, among other things, failure by Entergy Louisiana, following the expiration of any applicable grace or cure period, to maintain (i) total equity capital (including preferred stock} at least equal to 30% of adjusted capitalization, or (ii) a fixed charge coverage ratio of at least 1.50 computed on a rolling 12 month basis.
As of December 31, 2004, Entergy Louisiana's total 'equity capital (including preferred stock) was 51.33%
of adjusted capitalization and its fixed charge coverage ratio for 2004 was 3.76.
As of December 31, 2004, Entergy Louisiana had future minimum lease payments- (reflecting an overall implicit rate of 7.45%) in connection with the Waterford 3 sale and leaseback transactions;, which are' recorded as long-term debt, as follows:
(In Thousands) 2005                                                          $14,554 2006                                                           18,261 2007                                                           18,754 2008                                                           22,606 2009                                                           32,452 Years thereafter                                              334,062 Total                                                         440,689 Less: Amount representing interest                            192,964 Present value of net minimum lease payments                 $247,725 Grand Gulf Lease Obligations (System Energy)
In December 1988, System Energy sold 11.5% of its undivided ownership interest in Grand Gulf for the aggregate sum of $500 million. Subsequently, System Energy leased back its interest in the unit for a term of 26 1/2 years. System Energy has the option of terminating the lease and repurchasing the 11.5% interest in the unit at certain intervals during the lease. Furthermore, at the end of the lease term, System Energy has the option of renewing the lease or repurchasing the 11.5% interest in Grand Gulf.
In May 2004 System Energy caused the Grand Gulf lessors to refinance the outstanding bonds that they had issued to finance the purchase of their undivided interest in Grand Gulf. The refinancing is at a lower interest rate, and System Energy's lease payments have been reduced to reflect the lower interest costs.
328

Domestic utility companies and System Energy Notes to Respective Financial Statements System Energy is required to report the sale-leaseback as a financing transaction in its financial statements.
For financial reporting purposes, System Energy expenses the interest portion of the lease obligation and the plant depreciation. However, operating revenues include the recovery of the lease payments because the transactions are accounted for as a sale and leaseback for ratemaking purposes. .Consistent with a recommendation contained in a FERC audit report, System Energy recorded as a net regulatory asset the difference between the recovery of the lease payments and the amounts expensed for interest and depreciation and is recording this difference as a regulatory asset or liability on an ongoing basis, resulting in a zero net balance at the end of the lease term. The amount of this net regulatory asset was $75.4 million and $83.2 million as of December 31, 2004 and 2003, respectively.
As of December 31, 2004, System Energy had future minimum lease payments (reflecting an implicit rate of 5.01%), which are recorded as long-term debt as follows:
(In Thousands) 2005                                                            $45,423 2006                                                             46,019 2007                                                             46,552 2008-                                                            47,128 2009                                                             47,760 Years thereafter.                                               302,402 Total                                                           535,284 Less: Amount representing interest                              138,165 Present value of net minimum lease payments                    $397,119 NOTE 10.          RETIREMENT AND OTHER POSTRETIREMENT BENEFITS (Entergy Arkansas, Entergy Gulf States, Entergy,Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)
Pension Plans Entergy's domestic utility companies and System Entergy participate in two of Entergy's pension plans:
"Entergy Corporation Retirement Plan for Non-Bargaining Employees" and "Entergy Corporation Retirement Plan for Bargaining 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}}