安特吉 (ETR) 2002 Q3 法說會逐字稿

Good day, everyone, and welcome to the Entergy Corporation third quarter 2002 Earnings Conference Call. Today's call is being recorded. At this time for opening comments and introductions, I would like to turn the call over to Vice President of Investor Relations Ms. Nancy Morovich. Please go ahead, ma'am.

Good morning, everyone, ask we appreciate you joining us this morning. Each of you should have received our earnings release by now. If you have not, please call my assistant Maureen at 504-576-4846 and she'll immediately fax or E-mail the release to you.

We begin this morning with a caution statement regarding forward looking language. the following constitutes the safe harbor statement under the Private Securities Litigation Reform Act of 1995. Pardon me. the investors are cautioned that forward-looking statements made during this teleconference with respect to revenues, earnings, strategies, prospects or other aspects of the business of energy may involve he is risks and uncertainties. a number of factors could cause our actual results or outcomes to differ materially. and we refer investors to the full text of our release 10(k) and 10(q) filing. For additional information, pardon me today. In a moment I'll turn the call over to Wayne Leonard, Entergy's chief executive officer. Wayne?

Thanks, Nancy. Since we saw many of you last week at the EEI financial conference I'll keep my comments short today. the webcast is still available on our web site at Entergy.com. I'll review some highlights for the quarter and the turn the call over to Don Hintz our president and John Wilder our CFO to address some of the key issues. As always actions speak louder than words anyway and we're pleased to report an excellent quarter of operating results despite some of the difficult conditions the industry has ever experienced we are closing in on another record breaking year. But obviously we're far from satisfied. We remain sharply focused on operating excellence, risk management and the investment strategies which are essential to deliver better results to all our stakeholders in the months and years ahead.

In the utility Entergy employees deserve tremendous credit for their hard work and outstanding perform in preparing for and responding to two major storms a week apart. Between September 26 and October 3rd our service territory was hit by both tropical storm Isadore and hurricane Lillie In anticipation of these events we were able to mobilize over 20,000 workers from 23 states and the District of Columbia and as a result we exceeded all expectations in quickly returning service to almost 340,000 customers who lost power during the storms. In addition, our call centers received almost a half a million calls during this time and well over 90 percent of those calls were handled within 30 seconds. Most importantly, the mass restoration was completed without a single loss time or recruit duty accident. Total costs of both two storms are expected to be around the $100 million of which about a third is likely to be capitalized. We have approved storm reserves in all jurisdiction ands don't expect any argument over either the necessity for or the recovery of these expenditures. At Entergy all our nuclear units operated at very high capacy factors in the quarter including our newest unit Vermont Yankee and Entergy continues to demonstrate step change that has been achieved in the efficiency and duration of planned outages.

At Entergy commodity services we managed to deliver results in difficult market. (inaudible) gain/loss ratio recovered 2 to 1 after dipping below that level last quarter. In addition we continue to grow with the addition of two new physical optimation (ph) customers and our efforts to optimally harvest met with some additional success as we recorded a 9 cent per share gained primarily on the sale of two development sites in Spain where not a spade of dirt had been termed. One other point I'd like to highlight. We were notified September 4 Entergy successfully met stringent criteria added to the Dow Jones sustainability index. Entergy was ranked number 5 this worldwide in our sector. Listed companies not only demonstrate strong financial performance but also show outstanding leadership in environmental and social dimensions.

With one quarter left in 2002 the company's objectives for 2003 are in clear view. Management remains committed to the goal of 8 to 10 percent average annual earnings growth. We expect 6 percent annual growth in the company's core businesses and an additional 2 to 4 percent from step out investments utilizing the company's strong balance sheet and ongoing available cash. We are also commit today returning value created directly to our shareholders on a timely basis as was evidenced by our board's position last Friday to increase common dividend by 6 percent. The third year in a row we've implemented increase of 5 percent or more. This decision not only reflects our strong past performance but more importantly it reflects our confidence in the future. Now let me turn the call over to Don Hintz who will provide an update on our nuclear business. Don will also address our recent vessel head inspection A and 01 concerns we've been hearing about potential costs of inspection ands increased security at nuclear sites. After that John Wilder will address our strong liquidity position in addition to his regular review of results for the quarter. Don?

Thank you, Wayne. and good morning. We're aware that some nuclear Operators have indicated that they're seeing significantly higher costs as a result of primarily two issues. First, increased security measures in the aftermath of September 11th. and second, increase inspections following the discovery of serious corrosion of their actor vessel head at 1st Entergy's Davis (inaudible) plant last year. Let me emphasize at the out set that we expect neither of these issues to have a significant impact on our costs. While there are always things that come up that entail increased costs, we are constantly finding ways to reduce costs as well. In fact, the cost reductions we continue to achieve are far greater than any cost increases we've seen. For example, over the past five to six years, we have reduced outage duration's by 50 percent while reducing our outage costs by over 25 percent. We've achieved increases in capacity factors at newly acquired nuclear units much faster than we anticipated. and these increased capacity factors are driving the per megawatt our hour generation costs lower resulting in increased earnings in the plants in the northeast.

We have taken steps to enhance the already strong security at our nuclear site. While we have made significant improvements, the additional costs are not a significant factor in the overall costs of operating these plants. In fact, we expect security costs to drift back down as we hire permanent employees to reduce security personnel over time. We also understand that some Operators have seen significantly increased security costs for outages because of the increased requirements for badging contractors coming onto the site. One of the advantages of our large nuclear fleet is that we can move our own large and experienced team from site to site to staff outages. So we're not seeing the security cost increases that smaller nuclear Operators may face.

Let me turn now to the reactor head inspections. As Wayne mentioned, we have five refueling outages this fall. Grand gulf completed a 22 day outage in September, Vermont Yankee completed its first [inaudible] outage as part of the Entergy fleet in 21 days and Fitzpatrick is about to turn to full power tomorrow ending a 25 day outage. This leaves Arkansas nuclear one unit 1 and Indian point 2 both of which have outages underway.

Let me now discuss the reactor vessel head inspections of each of these plants. Grand gulf, Vermont Yankee and Fitzpatrick are boiling water reactors and therefore do not require inspections of the reactor head. The Indian point 2 unit is a pressure eyed water reactor but its head is much less susceptible to cracking than Davis Bessey (ph) based on the age of the plant and the materials used. Eprey (ph) the electric power research institute has set a target of 18 effective degradation years as a threshold for cracking. Indian point 2 is only at 8 effective degradation years or less than half of the threshold. No plant has shown cracking at this susceptible level. A visual examination prior to insulation removal has been performed and has not identified any leakage. We will have the head removed from the reactor and the insulation removed in three or four days to continue the thorough inspection. And on unit 1 is in the most crack susceptible category and I'd remind you that is the only plant that Entergy owns that is in that category. As I reported to many of you last week, we found one crack that requires a fairly straightforward fix which has been implemented at other sites. By the time the inspection was completed on Sunday, we also found 7 additional nozzles that have small indications that could develop into leaks in the future. It is important to note that these indications were identified with highly sensitive ultrasonic testing equipment which is designed to find cracks before they actually become leaks. We have already reviewed our findings with the N R C and we're in the process of making the repairs. These repairs are expected to cost 8 to $10 million and will be completed in about an industry average 40-day refueling outage length.

Before I conclude, let me reiterate that the inspection issue is not a major cost factor unless an Operator fails to thoroughly inspect reactor head and the company finds itself in a position where it has to replace the head but doesn't have a replacement available which could require a long shut down. We will not be in that position. We have already ordered a new reactor vessel head to be installed in 2005 in conjunction with the steam regenerator which will minimize the incremental cost of the reactor head replace many. And finally we will have the reactor head on-site for our 2004 refueling outage in the unlikely event that we determine that replacement is prudent at that time.

In summary, we still see continued cost reductions as a source of additional earnings growth going forward from our unregulated nuclear operations. the cost reductions may not be as significant as we've seen in the past few years as we have harvested the biggest opportunities first. But we continue to beat our targets for cost reductions while enhancing the safety, security and reliability of our nuclear fleet. and with that, I'll turn it over to John Wilder.

Thanks, Don, and good morning. I'd like to start with a quick summary of our financial achievements for the quarter. a 21 percent increase in consolidated operational EPS, a 45 percent increase in competitive business operational EPS, a 38 percent increase in operating cash flow, and an improvement in our net debt ratio of 3 percentage points. In addition, our operational net margin reached 9.9 percent to show an improvement for the fifth consecutive quarter and our return on equity topped 10.8 percent, the eighth consecutive quarter above 10 percent. I will cover several areas in more detail today including an overview of third quarter results, a breakdown of important drivers in each business, a quick review of key financial metrics, including our liquidity position, and finally I will discuss earnings guidance which we recently increased for 2002.

We move now to slide 3 which shows that third quarter earnings contributed to our well established track record of delivering consistently strong results for the quarter, Entergy reported earnings were $1.59 while operational earnings improved a $150 per share or 21 percent improvement. This is an excellent quarter for us particularly when you consider we had 4 cents of unfavorable weather. Next you will note on slide 4 that as reported earnings were affected by special item of 9 cents which is primarily related to a gain recorded on the sale of two development projects in Spain. Operational earnings by business is reflected on slide 5, shows solid improvement led by utility and nuclear results. We've also included on slide 5 the key factors driving results in each business, but if you'll turn to the following slide, I'll review these in a bit more detail.

Utility turned in solid results with 8 percent increase in operational earnings due primarily to the continued improvement and economic conditions as seen in both consumer growth and increased electricity usage. Earnings were also boosted by reduced operations and maintenance expenses which reflects our continuous effort to aggressively manage costs. Before I leave the subject of O&M cost let me mention that while we do expect slightly higher pension expenses next year, we do not expect the increase to materially impact earnings in '03 as many others have recently announced. This is due to a number of reasons. First because our utility nuclear pension plans are close to fully funded, second because our rate of return assumption is fairly conservative at 9 percent and it's reevaluated annually giving consideration to long term trends, and finally because our pension assets are diversified in a mix of fixed income and equity securities. Perhaps more importantly we anticipate that approximately 50 percent of any increase we do incur will flow through our regulatory rate mechanisms within 12 to 24 months.

As reflected on slide 7, we had an outstanding quarter in our non-utility nuclear business where we doubled our operational earnings compared to the third quarter last year. the increased output from the addition much two nuclear units and improved pricing more than offset higher production cost in that business. The improved pricing in this business reflects the addition of attractively priced P PA's associated with Vermont Yankee as well as seasonal pricing adjustments included in certain contracts for the warmer summer months. As seen on slide 8, the contribution from Entergy commodities services totaled 13 cents per share. the gulf south pipeline contributed 3 cents of this amount while trading contributed 12 cents. In total, E C S earnings were somewhat lower compared to third quarter last year. the decrease results from a slightly lower contribution from the gulf south pipeline and a slightly higher loss from our gas generation wholesale asset. Entergy (inaudible) trading results favor consistent with our third quarter 2001 results.

Our trading business continues to execute on a strong business model as depicted by the data in slide 9. Our daily earnings at risk is modest most our portfolio is based on market quotes and the duration of our trading book remains short. --- our mark to market earnings for the quarter made up only 8 percent of total consolidated operational earnings. and finally, we continue to be very diligent with respect to matching counter party risks with 81 percent of Entergy Cokes (ph) counter party credit exposure associated with specimen grade companies.

Before I leave the subject of trading, I want to address the recent repeal of the EITF issue number 98-10. Let me first say we have always supported the EITF 98-10 because it ensures the monitoring of open position something that is critical to managing the day to day trading operation. We are also aware as you are of the uses it has facilitated, particularly by those with long data books and creative market model techniques. Because of these uses, we support EITS decision to adopt a more conservative approach for reporting purposes, one that conforms to traditional accrual of accounting principals. Because of this we plan to adopt the new rule early in the fourth quarter of 2002 when we record a non-cash special charge to reflect the cumulative effect of this accounting change. What we have not yet completed our final analysis to estimate the amount of the charge, we can assure you of two things. First, that the amount does not expected to materially impact the partners capital of Entergy Coke (ph) or the shareholders equity of Entergy in a way that would jeopardize either company's credit rating. And second that the majority of future accrual income would be recognized over the next two years consistent with the short nature of Entergy Coke's (ph) book. Recognition of these earnings over the next two years will likely not be incremental however because they will offset mark to market earnings that have occurred if EITS 98-10 would have remained in effect. The charts on slide 10 reflect the underlying strength of our financial position with coverage's and net debt ratios that have been strong and continue to improve. We have worked aggressively over the past four years to create a cash and overall liquidity position that aligns with our long term financial strategy. Slide 11 reflects the strength of our net liquidity, as evidenced by an average of about $2 billion of net liquidity available through 2004. Slide 12 offers some insights on other liquidity levers we could initiate should demands on cash warrant such action. And finally, slide 13 reflects one of the most important benefits of our liquidity efforts today, which is a strong cash position that gives us the ability to pursue investment opportunities.

Our 2002 earnings guidance has been increased to a new range of 360 to 370 per share. This range reflects a 15 cent increase from the mid point of our previous range and is roughly consistent with the year to date amount of earnings we've received a result of Entergy Cokes (ph) share of arrangement. Let me take a moment it refresh everyone on how the disproportion share arrangement affects or earnings and earnings guidance.

During the early years of the venture we are likely to receive an allocation of actual partnership taxable income that exceeds our 50 percent ownership share in the venture. We call this additional allocation disproportionate sharing. Because this is only a temporary arrangement for the first three years of the venture, we have always issued annual earnings guidance based on 50/50 sharing. However, as we bank disproportionate sharing during the year, we adjust current year guidance to reflect actual results received. This is the case with the guidance revision we announced earlier this month. We increased guidance to reflect banked disproportionate sharing. Our guidance for 2003, however, remains unchanged because it continues to reflect 50/50 sharing consistent with our long term economic ownership in the venture. Looking ahead to 2003, I should note we are quite confident that our 375 to 395 range is well within our reach given the consistently solid performance and underlying strength of each of our businesses. and now our senior team will answer your questions.

Thank you. the question and answer session will be conducted electronically. If you would like to ask a question today, please press star 1 on your touch tone keypad. Again, that is * 1 to ask a question. and we'll pause for just a moment to assemble the roster. Again, that is star 1 to ask a question. Our first question will come from Andy Levi with Bear Wagner.

Andy Levi (ph): Hey, I'm first. How are you guys doing?

Hi, Andy.

Andy Levi (ph): Congratulations on the quarter.

Thank you.

Andy Levi (ph): Just a very quick question on the nuclear issue that you brought up. I just want to understand if for whatever reason you end up finding a larger problem when you take the thing apart, does that mean you would have to accelerate the replacement of the vessel head? Or what would that mean? And I have one other question relating to that.

You're talking about A and O unit 1? I'm sorry.

Andy Levi (ph): Yes.

What we found was probably similar to what we expected going into the outage, although when we did the inspect, the first two two-thirds of the inspection, we were a little bit more optimistic and then we found more indications in the final third. But based on what we found, we still believe that going till 2005 will not be an issue whatsoever, but we did want to have the head on-site just as a sort of insurance net in case we had to replace it in 2004. But with what we found in the repairs that we're doing, we fully expect that we'll replace that head in 2005 when we replace the steam generators and we only have to cut a hole in containment one.

Andy Levi (ph): Who ends up making that decision based on the findings after you take the vessel head apart?

We have the vessel head apart. We're making the final repairs as we speak.

Andy Levi (ph): Right. But you're the one who determines that, not the N A R C, right, so I understand?

This repair procedure and our plan has been approved by the N R C.

Andy Levi (ph): Good, good. and then just one other thing, just for more reference point going forward. --- is there any guidance you can give us for whatever reason, you know, it can't be fixed or something happens in the future, do you have a purchase power clause that allows you to recover the cost if the plant would go out of service for a prolonged period of time, or how would that work?

Yes, we do, the utility up in Arkansas.

Andy Levi (ph): Do you think they're begin be any debate over that or would it be pretty clean cut as far as the recovery of the purchase power expenses?

I think it would be pretty clean cut.

Andy Levi (ph): Great. Thank you guys. Congratulations again.

Thank you.

Thank you. Our next question will come from Carrie Stevens with Morgan Stanley.

Hi, guys, how are you?

Hi, Carrie.

Hi.

Couple questions. First, I was wondering if you have an idea how much you earned incrementally in 2001 for disproportionate sharing?

Gosh, Carrie, I don't have that number on hand.

I can follow-up off line about that.

It was about 20 cents?

It was about 20 cents?

Yeah.

Okay. and then just going through the outlook for 2003, I was reading your drivers which were really helpful. In terms of the rate relief at the utilities, is that kind of built into your guidance for '03? It seems like a portion maybe.

Do you mean the rate case in Mississippi particularly?

Yes.

It is.

Okay. and we'll know about that by December of this year, right?

December of this year.

Yeah, okay, great. and then for sales growth assumptions it says normal. So I was just kind of getting an idea exactly what you're assuming there.

A little over 1 percent.

And then just kind of lastly, I was just hoping maybe -- I know we kind of already talked about this at EEI, but really in your guidance for '03 at this point, how comfortable do you feel at what end of the range or side of the range at this point? And is it the higher end kind of more encompassed upon getting some level of reinvestment, you know, income for -- I know you're pursuing M&A opportunities or maybe you can kind of give us a discussion of that if at all possible.

We really don't have anything in our range for step out investment, so that would clearly drive us to the high end of the range disproportionate sharing drive us to the high end of the range. Warm weather could drive us to the high end of the range. But we pretty much guide with a mid point being our mid point case.

Okay, great. Thanks a lot.

Thank you, Carrie.

Thank you. Our next question will come from Devon Gogedden (ph) from Luminous Management.

Devon Gogedder (ph): Hi, congratulations on a good quarter. I just wanted to follow-up on the EITF 98-10 discussion. I'm not sure I totally understand what the impact is in terms of going forward. My understanding was that accrual accounting you required an asset in the region. Can you just go over that one more time?

Well, basically what you have to do, Devon, is for any tolling agreement, anything that's not marked to a derivative instrument like a weather contractor or inventory, you have to reverse off all of that income or loss that you've recorded over the past, take it as a one-time charge or cumulative accounting effect, and going forward you just use traditional accrual accounting for the income that you generate from that particular contract. Now, so the immediate reaction most people might have is although there will be a possibility for accretion going forward, if you take a one time charge for the ongoing accounting effect, but you will lose that mark to market earnings you would have received under 98-10 and in our case we think it would largely offset itself.

Devon Gogedder (ph): Okay. So I guess now, regardless of whether there's an asset in the region, most stuff is going to have to be mark to market -- accrual. Would this also affect the seasonal arbitrage that goes on with the [inaudible] ---?

I don't think it would, but Kyle, can you answer that question?

Certainly. the financial trading will not -to the extent that you're doing seasonal arbitrage with inventory, things of that nature, that would.

Devon Gogedder (ph): That would go to accrual?

Yes, sir.

Devon Gogedder (ph): Thank you very much.

Entergy contract, you're looking storage contracts, things that are backed by physical.

Did he have an, before you leave one thing, we'd like to make clear we don't anticipate, we strongly believe that this accounting change isn't going to make any difference whatsoever in our trading strategies or the way we run our trading company.

And cash generation is going to be staying the same it's an optical effect, is that what you're saying?

Pure cash event.

Devon Gogedder (ph): Thank you very much. Congratulations again.

Thank you.

Thank you. --- we'll now hear from Greg Gordon with Goldman Sachs.

Thanks. Two questions. One quick fume up. Can you refresh our memories as to when that -- my ear bent away from the phone. When is this accounting change going to become effect I have?

One-11-03 but we believe we'll be able to early adopt and we're headed down the path, Greg, of early adopting this to get it behind us.

Great. and then second question, obviously you guys have talked pretty wholesomely with investors about the concept of stepping out for other investments and what types of assets you'd be interested in. The equity markets and the -- have been pretty volatile. The companies seem to be, ones most likely to sell assets have been influx relative to their ability to gain financing the past several days. We've seen some, what seem to be positive developments. You sort of talk about how you see the market for assets over the next year, whether you see -- still see the same types of possibilities of opportunities you saw three, six months ago. Are the prices coming into its own where you really feel like you can get good value now with some of these companies getting their bank lines extended or are we going to see -- is there an opportunity -- is there a chance for a missed opportunity?

Greg, this is Wayne. I don't think our view on this has changed dramatically. I think on a number of calls over the last maybe six months or so we indicated that in this marketplace, first and foremost we're looking for value, immediate value. Assets that are priced fairly, deliver any immediate returns to our shareholders. with regard to that, things that are attractive are things that we can add to that value that's created by the pricing that we have -- the price we have to pay for the assets through things that we do. Like cost cutting, for example on nuclear plant, running it more efficiently, reduce the outage time, capacity factor, or reducing the cost on the pipeline like the gulf south Operators have shown the capability of doing. Or something that adds to our trading capability. And that could include, certainly, an asset that has, like we said, kind of bond like qualities that improves our balance sheet, allow them to do more trading, just because the balance sheet is bigger or allow them to trade around the asset which could be storage or could be relationships are created around the assets by being able to acquire more physical or financial (inaudible) customers. with regard to the timing of all this, I think it may have gotten extended out a bit longer maybe than we thought ---, the things certainly fall into this category are pipe lines and companies, things that have had some success on hanging onto some of the maybe more attractive assets for maybe a little longer than we thought that they maybe could have or should have, but ultimately we still believe that will come to market. with regard to plants, the plants that have come to market, frankly, have been not very attractive assets and I think in most cases they would like to just stop construction even though they may be 70, 80 percent complete. But the plants, there will be some attractive plants that will come to market over the six to nine months that will probably look attractive, more attractive than the ones that have. and we expect the pipes also to start to come in more ways over the next six, nine months. But we're going to be very patient and make sure that whatever we invest in, we're not betting on the calm its an immediate value creation and over and above that we'll be able to do something better than that with the opportunity it creates.

Thanks, Wayne.

Thank you. We'll next hear from Leslie Rich with Bank of America.

Yes. Of the 19 percent of your Entergy Corp. counterparty exposure that is non- investment grade, how do you manage the risk associated with that? Do you have letters of credit? What kind of collateral do you require and sort of how do you mitigate the risk of default?

Do you want to describe your credit processes?

What I'll do our CFO is here and to cover that and I'll back it up if needed.

Most of our contracts we have with those people would allow, some type of collateral thresholds as their investment grading would be downgraded we would increase the collateral amount we can't handle base based on our exposures to them. ---

Is it appropriate to think of it as sort of what percent of the total contract would be required posted collateral?

The sliding scales are different for each counter party, but after a drop below investment grade, it goes to zero as far as the exposure we take with them.

Okay. So you're basically 100 percent collateral?

As they go down, yes.

Okay. Thank you.

Leslie, this is John. We also seek to enter into netting agreements with all of our substantial counter parties, particularly in the U.S. that would enable us to net out our positions.

John, this is Kyle. Maybe one thing to add, it's interesting, this is a little higher than normally we have as far as a percent of non-investment grade. Obviously we've had a huge change in the industry in the last couple three months. But I would also say our counterparties we're dealing with are involving a year ago we were probably 80 percent of our exposure was probably what were called Entergy markets. Today it's probably 80 percent is more into L D.C.'s, utilities, industrial things of that nature. And the Entergy markets are probably less than 20 percent. So as this market changes and reliquifies (ph) which identifies, we'll basically be dealing with those ones that probably have the higher credit over time.

Thank you. ---

Thank you. Our next question will come from Dillion Windham (ph) with Pimko (ph).

Dillion Windham (ph): Hi, my question has been asked and answered.

Thanks Dillion

Thank you. Next we'll hear from Annie Sow (ph) with Alliance Capital.

Annie Sow (ph): My question has been asked, too.

Thank you, Annie.

Okay. and we'll now hear from Sam Mangia (ph) with CL securities.

Sam Mangia (ph): Hey, guys. Congratulations on a good result. Quick question. I was looking at your D U R number and it seems to have gone up pretty substantially, you know, from third quarter last year, just trying to understand that given the decline and volatility, etc. Does that mean you're putting more capital at risk here?

What we're seeing is that, first of all, because of liquidity being let's just say liquidity is down relative to what it was a year ago. You actually have to put a little bit more capital at risk for the same type of position that you had a year ago. So that's in reality yes, you are employing more capital for the same kind of return. So that's a reality. We've also seen that our return on let's just say point of view type trading has been down this quarter versus a year ago. Some pretty good reasons for it. Starting in June you really had a lot of companies kind of blowing out of their trading positions which created a lot of uncertainty in the market. You had a few other things that were going on at the same time but the transition from the A GAP measurements over to E I A and a lot of headlines with Iraq and things of that nature which caused a lot of uncertainty. the bottom line is you had a lot of uncertainty in your trading positions at the same time less liquidity. for this particular quarter we did see a lower return on our capital risk which you're seeing here in the terms of the higher D U R and the fact our earnings were flat. We do see that changing, though, right now to the positive side. We're starting to see a little bit more order in the market.

Sam Mangia (ph): That's great. Sorry. I just had one quick follow-up, again, to your presentation talking about do you see anything more in terms of optimization, origination, third risk party management, that part of the business.

Yes. One area that's been a real positive here shall it's a business really trying to grow. We are trying to grow what we call our optimization businesses which are basically origination oriented. We've seen about an 80 percent increase in our financial origination business. That's to producers, end users, hedge funds, things of na nature. Certainly because of our credit, we have seen a lot of new customers and people still need that type of product. and our asset optimization business has also grown. I think also based in part because of our credit status and hopefully the fact that we can execute. So we do see, out of all this turmoil, that's a real point of optimism for us that we can grow those two businesses.

Sam Mangia (ph): That's great. Thank you.

Thank you. We'll next hear from Jessica Rutledge (ph) with Lazard Asset management.

Jessica Rutledge (ph): Hi. I'm hoping I can get you to talk through the consequences of the ATF 9810 repeal sort of a little bit more in depth and specifically what I'm curious about is if we look at the composition of Entergy earnings, how much should we imagine that is currently mark to market that's getting switched to accrual just in percentage terms, and also if we could talk through a little bit more thoroughly how we're going to get to that write down and help us frame the magnitude of the balance sheet head, that would be really useful.

Okay. Jessica, it's normal it seems with your questions I can't give you more -

Jessica Rutledge (ph): Sorry, John.

-- but I will try to rephrase it in a way that will help give you some brackets. We have run preliminary analysis. This pronouncement is only a few days old, but we have some sense of what the consequences could be. There's a number of variables that are -- you can't interpret yet variables like the hedges that you have put on your inventory to protect your inventory positions, will those or won't those be able to be mark to market. But, nevertheless, we run a couple of different cases and we would expect when you analyze -- --- when the length of our book, particularly with our inventory which is the majority of our issue, that we would have a one time charge that would not be material as it relates to the partner capital in E K which is critical. We don't believe that there will be a substantial enough book impairment with that one time charge to cause any credit issues. So that kind -- that's the closest I can give you to sizing it. Secondly, those earnings would come back into the income statement in partner capital over the next couple years, at least 80 percent or so of those are. So I'd love to give you more, but it really would be premature. We are going to work on this like we always do, thoughtfully look at the various consequences of this ruling, as well as get some real meaningful third-party opinions about some of these interpretation issues that we have.

Jessica Rutledge (ph): Now, I don't so much need the numbers and I certainly understand why, you know, what three or four days after this ruling you wouldn't have them yet, but as I try to imagine in my own head what's going on, how far back does this potential write off look? I mean, you're reversing basically the marked portion of your book, right? Should we just think of in a very, very naive way looking at what your current mark to market earnings are and figuring that's going to somehow approximate the write off?

No, that really, that really won't do it, at least for us. Here's the way I would encourage you to think about it. You look at what's marked to model from what people release and as an example you look at ours, it's real small, that's one big component. You try to understand, like in our case, we're disclosing to you the length of our trades that are subject to the repeal 98-10. You put those two factors together and that gives you some sense of how big this thing might be to a company. and in our case, the best sense I can give you is we have over a billion dollars capital, partner capital in E K, and I'm guiding you that the one time charge is not going to materially impact that partner capital, particularly as it relates to the way the agencies view it. I'm not trying to give you weasel words, I'm trying to -- it's how we're thinking through it, but not how you want to think through it for us, but how you want to think through it for us others.

Jessica Rutledge (ph): I'm just looking through the process. I'm not accusing you of weaseling even a little John.

We want to adopt early. Let's get this thing -- we hope we can adopt early. There are some of these loose issues that are unresolved, we're somewhat at the mercy of FAnnie Sow (ph)-B and some others. But our goal would be to get this thing behind is. It's not going to be a big deal to us. It's not cash. It's not going to hurt our credit worthiness or E K's credit worthiness and we'll follow alt the accounting rules that the governing business pronounce them.

Jessica Rutledge (ph): Thanks.

Thank you.

Thank you. Again, if you would like to ask a question today, please press star 1. We'll now go to Rick Showbin (ph) with Decane Capital (ph).

Rick Showbin (ph): Hi, how are you guys doing?

Rick Showbin (ph): My question goes back to what carry Carrie asked regarding the rate increases, and then I have some other questions for you. In 2003, if I look at the mid point of your guidance, you guys are at something like 3.8 5. What for Entergy Mississippi and Entergy New Orleans, what would be the mid point as far as approximating what a rate increase would go for the guidance should and then if I look at the formula rate plans --- which you guys have proposed in gulf states in Louisiana, if those were to get implemented, how much cost cutting do you think would be -- that you guys could probably extract from those utilities over the given year or say over the six months, you know, once those formulary plans do go in place?

You know, let me have Rick Smith -- Rick -- drew Jackson is here also. Rick is overall of our utility operations and let me have him give you his sense of where -- what we're expecting in these rate cases.

In both Entergy New Orleans and Entergy Mississippi, we're looking at favorable orders out of those commissions. and probably with a return on equity around 12 percent. I didn't hear the second question. If you could repeat that.

Rick Showbin (ph): Basically I was just looking to find out what the potential impact for 2003 would be if the formula rate plans were put in place and what kind of cost cutting you would expect for 2003 and beyond. and then I just have another question regarding the trading business after that.

Rick, really the best way to think about that, if you look at our table 7 -- not table 17, but table 18, our 2003 earnings per share guidance bundled in that operational improvement and revenue, that 4 to 7 cents range it's a combination of the rate increases and the O&M efficiencies. and that's really the best advice we can give you.

Rick Showbin (ph): Is there -- do you guys have some sort of estimate as to over the life of that formula rate plan what you think the entire O&M in millions of dollars that you could potentially save from getting that implemented would be?

Not at this time.

Rick Showbin (ph): Okay. and then my follow-up question would be have you been seeing any sort of Entergy Coke (ph), any opportunities regarding marketing of power or gas and for example, Dinogian (ph) and Chevron have been breaking off their relations for the gas marketing business and if that was something you were actually thinking about doing and if you've actually talked to Chevron about it and if there were any opportunities like that or that scale that you've been seeing recently? ---

Rick, I'll give a quick answer, then I'll ask Kyle to comment. We can't comment, of course, on discussions we've had or might have with customers, but that is a business that we have shied away from in the past. But business that we are now getting a very interested in, we've seen the margins improve for that business. We're one of the -- if not the only big industry participant left with a good credit, we've had a number of these kind of customers that you're describing, not specifically but in general producers that have approached us and would like us to handle their business for them. It chews up a lot of capital so we'd be cautious about it. We are looking at the business with interest and excitement in a way that we haven't looked at it in several years. So, Kyle with kind of that as an intro, you might want to give some more specifics.

Nothing I can add a lot to what John said. I will tell you we have focused on the optimization business and the point of view trading, but we haven't been that big in the physical side. And the reason was the margins were lousy. What we're seeing now with reduced number of people available to handle it, we are starting to see more and more people want a viable counter party that can handle the physical side of the business for them so they don't have to go out and basically create their own trading shop. That being said we're start tog see margins at least for the physical business go up. Going up to the point that, you know, we are intrigued now about taking a look at maybe being a little bit bigger in that space. Whether that means working for a large producer or even -- many cases it's probably working with producers. I think that's a business we're going to look very closely at. We are open to any opportunity that would let us leverage our capabilities as long as it makes a good return.

Rick Showbin (ph): Steve, do you believe that the amount of capital that the trading book currently has would be enough -- basically the trading book is Entergy Coke (ph) equipped enough to handle the Chevron Texaco gas position? Would you be able to market that with the existing capital in the trading book?

I believe we could. I mean, I don't know if Chevron is interested in I guess -- I guess if they did break up their deal with Dinogian (ph). I don't know if they're interested. We have that capability, yes.

Rick Showbin (ph): Thank you very much.

Thank you. We'll next hear from Carlota Chan Ph) with J K Utility Advisory.

Carlota Chan (ph): Thank you. a quick question as a follow-up on Jessica's about 98-10. When you say that you're focused on growing the origination business going forward, how will you be reporting those results based on the new standards? and does it change, I guess? Is it sourced from physical inventory or otherwise?

Dennis, would you mind --- by Carlota (ph)-

Could you repeat the question, please? I'm sorry.

Carlota Chan (ph): I'm just curious on the origination business that you're going to focus on growing. How will you report that, given the new standards on 98-10?

You know, if it has physical, what is being labeled as Entergy labeled contracts, which some of them do and some of them don't, if they have energy trading contracts which flown to that are storage contracts, transportation contracts, those would not be allowed to be Mark to Moore ket. Those would be under the accrual accounting method. Not all of our deals are those. Some are, some are not.

Carlota Chan (ph): Okay. So if you're sourcing financially or through derivatives, you're still able to mark to market?

Thanks. FAnnie Sow (ph) 133 would still require you to mark to market those.

Carlota (ph), I'd like to mention again the introduction of this new standard won't change our interest in that business whatsoever. We'll be just as interested in that business, 1-1-03 as we were two weeks ago.

Carlota Chan (ph): John, can I also just clarify for the disproportionate sharing that -- are you expecting that it extends through all four quarters of 2003, or is there some anniversary date change with J V?

No, through '03.

Carlota Chan (ph): For all four quarters?

Correct.

Carlota Chan (ph): Okay. Thanks very much.

Thank you. As a final reminder if you'd like to ask a question, please press star 1. We'll now go to Lemar Richardson with Peg Capital Management.

Good morning, gentlemen. We're (inaudible) of your fine common stock and I wanted to ask a question and I think really goes to the future of the industry and has implications for your far flung freestanding nuclear plants up in New York State and New England. and that is, what's going to come of FERC is pushing for, which is standard market design and/or regional transmission organizations? What do you think is going to come out of all this?

Okay. This is Wayne. I don't know if we introduced Curt or not (inaudible)and curt has now been gone for over a year now, so he's able to comment maybe more freely than he has in the past on some of these issues, so let me turn it over to curt and get his opinions on where this is all headed.

Curt Abair (ph): Great. This is curt Abair. I thought you had a question on Sam Mangia (ph)D. and I pulled a couple remarks that were made by the staff and I quote to you, it says, and this is speaking to the draft order of C train and in the order when it came out, and that is the transmission system that you're familiar with that we're moving forward with and partnering with. And the quote is: "The draft order allows the use of participant funding of C transas (ph) part of the general framework of the system expansion." close quotes. You understand how important participant funding was not only to our rate payers, but everyone within the industry to make certain that there is cost benefit and those that cause cost pick up that cost. On the other side of that which is more important to your question, and I quote, from a F I R K staffer. Draft order clarifies a commissions intent not to overturn decisions made in this docket following issuance of the final standard market design rule". -- what that means to us is that when it comes to C trans FIRK has said through their order that we can follow through with what we've done with our commitment and not have to worry about S M.D. and final rules with S M.D. over turning that. What that means to the entire industry is somewhat interesting. As you know, legislature, U.S. Congress both House and Senate through their committees and the energy bill have looked at S M.D. trying to look at whether or not there would be some delay knelt issuance of S M.D. or whether or not they were outright repeal it is and say it shouldn't move forward. Participant issue was in there as well. the New York issue and where we go with nuclear power, I think is significant. If you look at the space in the northeast, especially what they need in the form of capacity, I think it positions us very well. If you look at what the nuclear industry has done , in what I would say has been the worst political storm since the 70s when it comes to nuclear power, they have held their head well, particularly this company has held its heads well for a lot of reasons. If you take the nuke-a-phobia which some of the people there rivers and others, and if you contrast that with the leadership that Wayne Leonard has had at this company and the stewardship and environmentally of this company evidenced here recently even by things of red river refuge, the headline on the front page there, Wall Street Journal, identifying remarks in the New York Times as well, shows that we are Stewards environmentally we do believe in clean air, we're on top of the rate of the four pollutant strategy. So I think the nuclear industry is something that's going to be very strong in the future and that is why you're seeing Entergy play a major role in that. But we are on the very front of the debate and we feel very good about our chances.

Well, in my mind, these very large facilities up in Indian point and up in Boston and even the smaller Yankee, Vermont Yankee, are these, the energy that these facilities can generate, is it going to be more attractive to you as the owner and Operator if there are something in business by these standard market design deals that the FEROC is pushing? Are you going to be better off or will this have no effect on you? I'm not talking any environmental issue.

Right. Let me just throw something out and Wayne Leonard may want to speak to this, but obviously that goes more to the pricing which goes more to locational marginal pricing which looks like it's going to have strong approval by the FERC. Certainly we've looked at those and we believe that those pricing strategies are strategies that work for the consumer and deliver good reasonable reliable energy, but at the same time deliver us the necessary pricing to make that a viable business.

Just a follow-up to that, these plants are all located in areas that had already committed to location marginal price methodologies. The New York power pool, P J M, (inaudible)pool.When we bought these plants they had contracted for power that ran to them basically through 2004 and longer --- in some cases, like the life of the unit, like the license in some cases, but we had already anticipated the use of locational marginal prices when the contracts were revolved, obviously we want to extend those contracts. My point is a unit that's very favorably positioned on the grid relative to the nodal prices that will exist in soft markets and should, when it comes up for renewal, there should be a number of parties very interested in that power for that reason.

Okay, gentlemen. Thank you, and continue to do well.

Thank you Lamar.

Thank you. We'll now go to Ragiat Jane (ph) with Montgomery Asset Management.

Rigiat Jane (ph): Yes, hi. Regarding your disproportionate sharing of the E K revenue, three questions. You mentioned (inaudible)for three years. When does it really end? Could you give me a fixed time? And second question, what would the sharing (inaudible)after this state, would it be 50/50 or less than 50 percent for you? And thirdly, your recent revision for '02 guidance, it was approximately up by 15 to 20 cents on October 7th. How much came from that disproportionate sharing of revenues?

The disproportionate taxable income sharing ends at the end of '03. It will then revert likely to 50/50.

Rigiat Jane (ph): Okay.

And 14 cents of that revised change was due to difficult proportionate sharing, so essentially all of the revision in the guidance was driven by disproportionate taxable income.

Rigiat Jane (ph): Thank you.

))Unidentified: You're welcome.

Thank you. and we'll now have a follow-up question from Sam Mangia. (ph)

Sam Mangia (ph): Just couldn't resist a question on the new accounting rules. Going back to that comment that anything that is backed up --- by physical, I guess you talked about the gas side. How about the power side? I mean, how does -- is that impacted at all?

It is. It's not a meaningful issue for us, but for some this will be absolutely a colossal issue. Any big long tolling deal will be impacted by this.

Sam Mangia (ph): So basically if you have physical generation then you know you did your origination deal and now you're carrying whatever billions of dollars on your book. You could have to take away all those mark to market earnings and basically come back to accrual.

We will have.

Sam Mangia (ph): Is there any latitude with that? I'm sure there must be a lot of exceptions within that.

I don't believe there will be. the principle has been repealed, so there's some interpretation issues around it, but I think 133 is very clear what a derivative contract is. 98-10 was very clear in how it covered the physical transactions, and there could, I guess, real clever people might find some ways to wiggle around this, but it's not obvious to us it will be.

Sam Mangia (ph): That's great. Appreciate it. Thank you.

You're welcome.

Thank you. and we'll now go to for a follow-up question with Annie Sow (ph) [inaudible] with Alliance Capital.

Annie Sow (ph): Hi, I do have a follow-up question on the 98-10 again. I'm looking at one of the pie charts that you have on the mark to market the realization of mark to market earnings. At the end of '03 just 80 percent, so does it mean with this new 98-10 you have to reverse all that and try to accrue it?

No, Annie. It means that any of those earnings that would apply to this 98-10, and in our case it would principally be inventory, we would take a onetime non-cash charge in the fourth quarter of this year for that amount, and then we would accrete that earnings back into income between 1-1-03 and the end of '03, using that statistic as a barometer. The way you're thinking about it is the right way. Over what time period will you accrete the earnings back into your income statement. and if you look at the realization chart on -- most companies, that will give you a good sense of that time period.

Annie Sow (ph): So out of the 80 percent, how much would it be?

Annie, it's just too early for us to provide you with an estimate. We've run a couple of cases. We've got some sense of what it will be, but it would be premature for us to disclose it now.

Annie Sow (ph): And would that have any impact to your '03 guidance then?

No.

Annie Sow (ph): Of the change?

No, none whatsoever.

Thank you. At this time I will turn the call back over to Nancy Morovich for any closing remarks.

Thank you, Operator. and thanks everyone for participating this morning. the conference call was taped and can be accessed for the next 7 days beginning this afternoon by dialing tone 719-457-0820. the confirmation number for that replay is 737934. This concludes our call. Thanks, everyone.

Thank you. That concludes today's conference call. Thank you for your participation and have a great day.