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Entergy Corporation (NYSE:ETR)

Q4 2006 Earnings Conference Call

January 30, 2007 11 am ET

Executives

Michele Lopiccolo - VP, IR

Wayne Leonard - Chairman & CEO

Leo Denault - CFO & EVP

Gary Taylor - CEO, Entergy Nuclear

Rick Smith - Group President, Utility Operations

Mark Savoff - EVP, Operations

Analysts

Dan Eggers - Credit Suisse

Greg Gordon - Citigroup

Andrew Levy - Brencourt

Ashar Khan - SAC Capital

Jonathan Arnold - Merrill Lynch

Michael Lapides - Goldman Sachs

Presentation

Operator

Good day, everyone, and welcome to the Entergy Corporation fourth quarter 2006 earnings conference call. Today's call is being recorded.

At this time for introductions and opening comments, I would like to turn the call over to Ms. Michele Lopiccolo. Please go ahead.

Michele Lopiccolo

Thank you for joining us. We'll begin this morning with comments from our Chairman and CEO, Wayne Leonard, and then Leo Denault, our CFO, will review results. After the Q&A session, I will close with the applicable legal statements.

Wayne?

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Wayne Leonard

Good morning. In the aftermath of Hurricanes Katrina and Rita, we committed to restore the system in order to put customers back in service as if the storms had never hit. And for those of who you have capitalized this Company and provided the necessary liquidity, we likewise committed to do everything possible to put you back to where you expected to be on key measures like earnings, dividends, debt ratios, as if the storms had never hit also.

A year and a half later, I believe we have made substantial progress towards that end due to the efforts of our employees, and the collaborative efforts of too many to mention at the federal, state and local jurisdiction levels. This progress reflects recognition that Entergy's efforts in unprecedented storm conditions exceeded all expectations, and that constructive legislation and regulation will produce substantial savings and security for customers through the Utility's ongoing ability to attract capital at reasonable rates.

Today I with ill highlight recent storm-related and other accomplishments, then turn the focus to our goals for the future. In December, the Public Utility Commission of Texas unanimously approved a constructive settlement in the Entergy Gulf States Texas storm restoration cost recovery case. The settlement, like the Mississippi order we received last June, had no finding of imprudence. It authorized Entergy Gulf States Texas to seek securitization for $353 million, an amount net of anticipated insurance proceeds. Subsequently, we filed to obtain a financing order authorizing issuances of securities -- securitized debt. We expect to receive that order no later than March 8th.

In Louisiana, testimony was filed last Friday by the commission staff and interveners in the Entergy Gulf States Louisiana and the Entergy Louisiana storm restoration cost recovery case. As expected, the testimony reflects an advocacy position on behalf of customers. But at the same time, it does not rely upon the abrogation of investor rights to recovery of storm costs under the law. It's professionally drafted, and while we may not agree on questions raised, we are encouraged that the result in Louisiana will be as constructive as it has been in Mississippi, Texas and in New Orleans.

And finally, at Entergy New Orleans, emergence from bankruptcy appears clearly in sight. Last Thursday, the bankruptcy judge ruled on the disclosure statement, paving the way for solicitation of two competing plans of reorganization. Because Entergy New Orleans no longer has exclusivity to file a plan of reorganization, creditors will have the ability to vote on either our plan, or an alternative plan put forth by the unsecured creditor's committee.

In many respects, the two plans are similar. The primary difference is that the unsecured creditors seek exit financing in order to accelerate the timing of emergence. Entergy New Orleans believes its plan is superior, because it is in the best interest of all creditors and customers. It does not require exit financing which could be extremely expensive, resulting in a cost to customers for an unsecured party's gain. Instead, the Entergy New Orleans plan is conditioned on the receipt of $200 million in Community Development Block Grant funding awarded by the State of Louisiana, and $50 million from insurers.

Entergy New Orleans believes both of these conditions can be satisfied in a timely manner, consistent with its objective to emerge from bankruptcy by the end of June this year. The CDBG funding request is currently awaiting HUD approval, having received approval first from Governor Blanco, and then the Louisiana legislature. We expect to make sufficient progress in negotiations with insurers to obtain partial payment necessary to meet the stated condition over the next few months as well.

In other recent events on the regulatory front, earlier this month, the LPSC approved Entergy Gulf States plan to divide into two separate operating companies, one in Louisiana and one in Texas. Entergy Gulf States is targeting separation at the end of 2007, depending upon a number of factors including remaining approvals from the FERC and ERC.

This has been a long process. But the positive outcome will allow Entergy Gulf States Louisiana and Entergy Gulf States Texas to develop and implement individual business and resource plans that are consistent with local public policy direction, including potentially pursuing a retail open access in Texas. On this front, Entergy Gulf States Texas made its required transition to competition filing at the end of 2006, pursuant to the legislation that was passed in 2005.

In its plan, Entergy Gulf States Texas proposes to join ERCOT. That seems an obvious choice, but is not a simple overnight solution. While there are substantial benefits in ERCOT to potentially offset the roughly $1 billion investment to electrically connect our Texas business with ERCOT, there are important conditions that must be addressed in order for Entergy Gulf States Texas to move forward with implementing this plan, and avoid off-ramps that will halt implementation if the conditions cannot be met.

These conditions include, among others, completing jurisdictional separation of Entergy Gulf States, determining that interconnection to ERCOT does not cause FERC jurisdiction to apply to ERCOT's wholesale electricity and transmission markets, and obtaining acceptable timely cost recovery in order to ensure there is no impairment of Entergy Gulf States Texas rights under the law to maintain its credit worthiness, and to be given a fair opportunity to earn a return equal to the expected return on investments of comparable risk. Under the critical assumption that all of these conditions can be resolved to the satisfaction of all parties, retail open access could commence in early 2013 after FERC interconnects investments are completed.

Finally, turning to the federal front, on November 1st, responsibility for the reliability coordination of Entergy's transmission system transferred to the Independent Coordinator of Transmission, a division of the Southwest Power Pool. On November 17th, the ICT was installed and began performing all of its ITC functions including tariff administration, AFC calculation, transmission planning and operation of the Entergy OASIS. Crossing these milestones were substantial events for us, as we have worked continuously for nearly a decade to align our transmission operations with changing FERC policy, while meeting local regulators and policy makers needs.

Turning now to Nuclear, the Northeast fleet had another outstanding year, closing out the year with a 95% capacity factor, while also completing the refueling outage at FitzPatrick in under 30 days during the quarter. And we formally announced our intention to renew the license of Indian Point, the final site in the Northeast fleet to initiate the relicensing process. Former Mayor Rudy Giuliani and Greenpeace Founder Dr. Patrick Moore joined us in announcing our Right for New York license extension campaign.

Obviously, there will be opposition. But we are confident our plan has a vital, safe and secure nature of Indian Point will prevail, and that we'll ultimately receive approval. On a similar front, Palisades received good news when the NRC renewed its operating license for an additional 20 years through 2031.

Moving now to our commitment to fairly compensate those who provided capital for storm restoration and those who made that possible by not selling into a market when we were issuing securities, I'm also able to report more progress. Today, having completed our previous $1.5 billion stock repurchase program in December, we are announcing a new $1.5 billion stock repurchase program effective immediately and to be completed over the next two years. Part of this program is targeted for underlying -- unwinding the equity units we issued as part of the storm recovery financing plan ahead of their 2009 conversion date.

We view this new program as another important step forward. Also realize that the dividend action is also long overdue. Last Friday, the Entergy Board voted to continue to maintain the quarterly dividend at its current level of $0.54 per share. This action is consistent with my own recommendation. The Board takes seriously its aspiration to grow the dividend, as evidenced by their action to adopt a new dividend policy last October that calls for targeting a 60% payout ratio over time.

You're also well aware that the current level is well below that target, and well below the average relative to our peers. It's personally frustrating to me and disappointing to the Board that we believe it is still premature to consider dividend action at this time. Nonetheless, it is at the top of our list when more certainty and clarity is achieved on other initiatives.

Having said that, let me turn to what we still have to do in 2007 and beyond. At the Utility, we are entering the year with a full regulatory agenda. First and foremost, we must bring closure to remaining storm related matters. That means obtaining the last storm recovery order in Louisiana, continuing to pursue the insurance recovery process, completing the securitization process, and removing the negative credit rating agency outlooks. It also means seeing Entergy New Orleans emerge from bankruptcy, consistent with our objective at the end of June.

In other regulatory matters, we will pursue constructive resolution of the outstanding issues in Arkansas, including our rate case filed last summer and the fuel recovery proceeding. We'll take the next steps to enable the long-awaited separation of Entergy Gulf States into two companies by the end of the year. And by mid year, we expect to receive direction from the Texas commission as to whether we will be allowed to pursue retail open access in Texas by first joining ERCOT.

Let me assure you, whether we are headed to retail open access or not, Entergy Gulf States Texas can and will file for a base rate increase given the end of the legally imposed rate freeze on June 30th. This filing will follow 16 years without an increase, and without any real opportunity to earn our allowed return in Texas without impairing customer service. Obtaining rate relief pursuant to this filing is also a necessary, but not sufficient condition to ensure that Entergy Gulf States Texas has the financial integrity to support the ERCOT investment program, if that is the direction the commission pursues.

On the federal front, while implementing FERC's rough production cost equalization remedy for the system agreement, we will continue to pursue a replacement agreement that balances the need to achieve economies and efficiencies for our Utility customers, while eliminating disputes and litigation that have characterized the period since the current system agreement was adopted more than 20 years ago.

In Nuclear, we'll continue our contracting efforts and will advance our fleet alignment initiative. In addition, Nuclear will aggressively push forward on license renewal applications for the Northeast fleet, with the goal of obtaining approvals in the 2008 through 2010 time frame. Finally, Nuclear will strive to close the Palisades acquisition in the second quarter and successfully transition the plant into the Entergy fleet over the course of the year.

From the capital deployment perspective, Entergy will remain a disciplined capital steward. Our portfolio transformation framework will guide the investing process for the Utility supply plan. This framework assures consistency with our dynamic market based point of view. It also ensures we optimize capital outflows in a manner that produces the lowest present value of revenue requirements for customers.

In part, by pricing all risks, and then managing those risks through efficient regulatory and financial mechanisms and structures. We expect to execute Utility supply contracts for the long-term, and limited and intermediate term RFPs that we initiated in 2006, including making a decision as to whether we'll pursue our Little Gypsy repowering project, utilizing the abundant petcoke supply in the area.

We'll also continue to preserve our option to participate in the next generation of new nuclear development. We expect to obtain our early site permit for Grand Gulf in the first quarter, and we will be seeking to obtain the necessary legislative support and regulatory mechanisms to enable efficient financing and timely cost recovery, must haves to proceed with the new resource development. At the same time, we'll continue develop combined construction and operating licenses for both Grand Gulf and River Bend.

Finally, return of capital to owners rounds out our capital deployment initiatives. We'll execute against our new repurchase program, and continue to make progress on our commitment to return our owners to where they would have been had the storms never happened. Since our last dividend increase was in 2004, and the Fed has increased interest rates 14 times since then, if you don't see some positive action on the dividend this year, then we'll be talking about a lot more unexpected disappointments than just that.

While 2007 will undoubtedly hold the typical challenges, rest assured, our focus will remain our financial aspirations, and on the principles of sustainable growth that have guided us in the past.

And with that, let me turn the call over to Leo.

Leo Denault

Thank you, Wayne, and good morning, everyone. In my remarks today, I will first cover quarterly results, followed by liquidity and cash flow performance, and I'll close with a recap of '07 guidance.

Looking first at our financial results for the quarter, slide two shows that the fourth quarter of '06 as reported earnings increased significantly compared to one year ago. Operational earnings also reflect a substantial improvement in the current period, rising 34% compared to the fourth quarter of '05. The increase in operational earnings came from higher results at Utility, Parent and Other. Results at Entergy Nuclear served to partially offset the increase, while earnings at the non-Nuclear wholesale business were comparable to fourth quarter last year.

Slide three shows the factors that drove the quarter-on-quarter increase in Utility, Parent and Other. These included additional revenue from sales growth and rate actions implemented during '06, income recorded in connection with a regulatory order received in Texas, and lower income tax expense. Partially offsetting these factors were higher operation and maintenance expenses, and higher interest expense.

Let me take a moment to provide a few details on the most important quarterly drivers. Utility sales volume increase was comprised of essentially flat residential volume, while all other sectors increased, particularly in the industrial sector. This pattern reflects the reality of storm recovery across our customer base, as business segments are recovering more quickly than residential customers.

While this is somewhat encouraging, it also highlights the possibility that it will be some time before these segments stabilize. In looking at sales growth going forward, we project just under 2% for '07, and we anticipate quarterly comparisons for the first quarter or two to continue to be affected by storm-related load and billing issues.

The next item I'll discuss is the regulatory order we received in Texas. As Wayne mentioned, we reached a constructive settlement in Entergy Gulf States Texas storm cost recovery case, and an element of that settlement permitted the recovery of some carrying costs. As you know, we financed upfront the significant costs associated with repairing heavily damaged infrastructure.

The Texas Commission agreed that a fair outcome would include recovery of approximately $37 million of carrying costs associated with our financing needs. A regulatory asset was recorded in the fourth quarter results to reflect the Commission's order, consistent with Generally Accepted Accounting Principals.

The final item that contributed to this quarter's improvement at Utility, Parent and Other was lower tax expense. During the fourth quarter of '06, we received final tax and interest computations from the IRS on several audits. The settlement of previously open issues included in these audits allowed us to reduce overall tax reserves. Partially offsetting the quarterly improvement at Utility, Parent and Other was higher operation and maintenance expense. Increased benefits costs was the largest contributor.

Also, you'll recall that a significant level of storm recovery work was taking place throughout the fourth quarter of '05. This effort shifted resources away from many typical O&M activities, thereby reducing expenses in the '05 period. The return to a normal expense pattern this year increased current period O&M on a quarter-to-quarter basis. Another factor producing higher O&M was the addition of the Attala plant in early 2006.

Moving to Entergy Nuclear, we recorded lower earnings at this business in the current quarter. Entergy Nuclear had a solid operational quarter and benefited from higher contract pricing, which contributed an additional $0.03 in the current period compared to the fourth quarter of '05. However, higher expenses at Entergy Nuclear more than offset the effects of higher energy pricing. The increase in expenses came primarily from our standard year-end tax accrual true-up. Also, higher O&M, due primarily to increased benefits, contributed to higher Nuclear expense.

At the non-Nuclear wholesale business, results in the current period were comparable to the same period last year. However, the components were different. In the fourth quarter of '06, results included the benefit of lower income tax expense, while earnings in the fourth quarter of '05 were driven primarily by the sale of SO2 allowances.

Before leaving our discussion of quarterly results, I would like to review the special items we recorded in the current period, which were listed back on slide two. Starting with Entergy New Orleans, the loss of $0.09 per share reflects an increase in both O&M and interest expense recorded this quarter. Consistent with a recently filed amendment to its plan of reorganization, Entergy New Orleans is now offering to pay first mortgage bondholders previously waived interest in the amount of $13 million upon emergence. This offer was made to encourage support from this creditor class for the Company's plan. Also, ENOI began making their normal first mortgage bond interest accrual this quarter.

The second special item was also recorded at Utility, Parent and Other. We received the final cash proceeds from the late 2004 sale of Entergy Coke Trading. Consistent with generally accepted accounting principles, we recorded the gain on these transactions upon receipt of the cash proceeds. The after-tax gain amounted to about $55 million, which was slightly below our original estimates, but still a very positive outcome for Entergy.

A third item recorded as special reflects tax benefits associated with the liquidation of the holding company that owned our investment in Entergy Coke Limited Partnership. This item contributed $0.49 per share to as-reported earnings. The next item came from the discontinued competitive retail business. Consistent with previous quarters since the announcement of the sale of this business, costs associated with transition activities were recorded as a special. And the final special reduced as reported earnings by $0.13 and resulted from certain capital losses previously recorded, that we now project we will not utilize.

Moving to full year results, slide four shows as reported and operational results for '06 compared to '05. As reported results were significantly higher reflecting an increase of 28%, with most of the increase coming from Utility, Parent and Other. Full year operational earnings improved by 7%, with both Utility and Nuclear contributing to the increase.

Sales growth and the effective constructive rate actions and lower income taxes all contributed to the year-over-year increase of 6% in operational earnings at Utility, Parent and Other. Entergy Nuclear's 11% earnings increase in '06 compared to '05 was driven primarily by higher pricing on energy sold and increased generation available.

The higher output was made possible by the upgrade completed earlier in '06 at the Vermont Yankee plant, as well as fewer outages for the fleet overall. Higher income tax expense at Entergy Nuclear in '06 served to partially offset the positive factors in full year's results. And finally, operational results for the year at the Non-Nuclear wholesale business were essentially unchanged compared to its contribution in '05.

Slide five includes a snapshot of our cash flow performance this quarter and for the year, both of which were very strong. For the quarter, recovery of storm costs through CDBG funding in Mississippi and the collection of previously deferred fuel costs were the key drivers to an increase of more than 200% in cash flow from operations. In addition, the improvement in cash flow resulted from a significant reduction in storm-related cash payments in the current quarter compared to a year ago.

On slide six, we look ahead at our overall liquidity position, which remains very solid. Our net cash available over the '07 to '09 period is $1 billion after folding in the effects of the new share repurchase program. We currently expect to execute our new program over the next two years.

As was the case with the last share repurchase program completed in late '06, the new program reflects our Board's commitment to balance several key objectives, including returning capital to owners in a timely and efficient manner, maintaining balance sheet strength consistent with our risk profile and our focus on credit quality, and maintaining flexibility to take advantage of opportunities that may arise. Additionally, we have the flexibility to alter our repurchase activity if events or investment activity warrant.

It is worth reiterating our investment interests have not changed. We continue to favor investments in additional nuclear assets and attractive generation assets to add to our Utility portfolio. And as Wayne stated earlier, dividend increases remain a priority as we look to advance toward a 60% payout ratio over time. We continue to see our '07 as reported and operational earnings guidance in the range of $5.40 to $5.70 per share.

Slide seven details the components of guidance, which have shifted somewhat from last quarter to reflect '06 results. At Utility, Parent and Other, sales growth and improved pricing coming from rate actions are expected to make a positive contribution to earnings. With respect to growth, we are projecting some continued storm-related impact at Entergy Louisiana, as a portion of their customer base has not yet returned. Higher O&M, depreciation and higher interest expense are also forecasted for the utility in '07. These items, along with an adjustment for normal weather, will offset the positive drivers at the Utility.

The contribution to '07 earnings from Nuclear pricing is projected to be significant, at $0.70 per share, and increased capacity revenues will add an additional $0.10. Also, we currently expect to close the Palisades transaction in the second quarter, and revenue from that plant will also add to Nuclear's results. Higher O&M and the impact of two additional refueling outages, including one at Palisades, will be partially offsetting.

I'd like to make one final additional point on Nuclear's contribution to '07 guidance. The timing of scheduled refueling outages and the Palisades transaction's closing will potentially result in an earnings pattern that is backend loaded for this year.

Moving to the final component of our '07 guidance, we currently expect -- estimate increased losses at the wholesale business. This item, added to all the other guidance components, results in a consolidated midpoint of $5.55 per share. While we are affirming our '07 guidance range of $5.40 to $5.70 per share, it is important to note that there are components that have the potential to move our actual results higher or lower.

For example, the timing and amount of shares repurchased under our new program should have a positive effect. At the same time, however, the pace of customer returns in the Utility's residential sector could fall short of our expectations. And in Nuclear, Northeast power prices could move against us for the 5% of our output that is not sold forward, or they could also move in our direction. Consistent with our past practice with an entire year of results ahead of us, we are holding to our stated range.

As we look ahead to the rest of '07, we have a full to-do list, as Wayne described, that we will executing on with the goal of exceeding your expectations. We remain committed to returning value to you, our owners, and we believe our ability to do so is enabled by achieving our long-term financial aspirations. These aspirations include investing in positive NPD projects in a non-regulated business, producing solid returns in the Utility through operations and investing in assets that provide reliable service to our customers, growing EPS by approximately $1 per share through 2010, targeting a 60% dividend payout ratio overtime, and achieving top quartile total shareholder returns.

With that, we will now turn to our Q&A session. And our senior team is available to answer your questions.

Question-and-Answer-Session

Operator

Thank you. [Operator Instructions]

And our first question today will come from Dan Eggers with Credit Suisse.

Dan Eggers - Credit Suisse

Hi. Good morning.

Wayne Leonard

Good morning, Dan.

Dan Eggers - Credit Suisse

First question, I guess on table nine, I hate to point to a detailed table, but on table nine when you guys show the capital structure changes including net share repurchases and new debt, and I look at this table versus the last one, that number has fallen from about $2.6 billion to $400 million.

Obviously, the share repurchase is in there. But can you help explain where that other $700 million is?

Leo Denault

When you go through -- this is Leo, Dan. When you go through the process of putting in a share repurchase program, it has an impact on both sides of the equation. The share repurchase program, obviously reduces the equity component, increases the debt component at the same time.

So there's a little difference when you are doing the math between a share repurchase program or if you are investing it in a capital project, for example, which doesn't impact both sides of the equation.

Dan Eggers - Credit Suisse

So the old 2.6 was assuming that kind of a levered CapEx number before that?

Leo Denault

You are right. It was just levering up the balance sheet to that, you know, 50%, 55% level. But the use of proceeds wasn't necessarily dedicated towards a share repurchase. It was available for either.

Dan Eggers - Credit Suisse

Okay. Got it. And then can you guys talk a little bit about some of the O&M cost pressures you're seeing? You're not the first company that's talked about it this quarter. Are you seeing a lot of wage pressure inflation at the Nuclear side or is it just kind of general costs?

Wayne Leonard

Leo will go ahead and start that. And then with specifics, maybe Gary Taylor with Nuclear, or Rick who runs our Utility business, could amplify, if needed. Leo?

Leo Denault

Some of the O&M increases, as I mentioned, Dan, are associated with things like Attala that was purchased in '06, a full year. You're looking at both Perryville and Attala showing up for the first time in full year. We do see benefits costs, overall compensation costs, health and welfare, pensions, OPEB and the like, being somewhat of the largest driver.

That's why we put in place a lot of programs that'll, by and large, hit in the '07 and beyond timeframe, like the HealthStrides program that we've mentioned before around healthcare to keep a lid on some of those benefits costs.

Also, Palisades showing up in the numbers for the first time is going to have an impact for a portion of the year in '07 and then first time be a full-year in '08. Other than that, what we have seen on the Nuclear front is not as much on the wage side. And Gary can expound on that, but also NRC fees, security costs and the like.

Gary Taylor

Yes, I think Leo really hit a couple of them. One is, you know, we seeing an increase as the NRC staffs up, which is increasing at all our sites as far as additional costs. We're seeing some costs associated again with continuing security that we have to put in.

We're seeing a little bit of pressure on [upgrading] and fuel price. Even though we're hedged out, we're still seeing some impact on that. And like I think you've heard in some of the other people that have talked, we're seeing some of the same type of issues that we think are more short-term materials issues in PWRs and BWRs.

But as we prioritize those, I think we feel pretty good about how we'll manage those going forward. But it is putting, I think, some short-term, in that case, pressures on our costs.

Dan Eggers - Credit Suisse

Gary, can I ask just one more? As we think about nuclear fuel, what kind of cost pressure are you seeing looking at, you know, where things have been, to where you are signing new contracts as we look out into the next decade as far as fuel plus reprocessing? Are you comfortable talking about that yet?

Gary Taylor

Well, when you say reprocessing, I guess --

Dan Eggers - Credit Suisse

Or processing, I'm sorry.

Gary Taylor

Okay. Processing. I mean we're seeing what everybody else is seeing. You know, we're fairly hedged out for the next several years. So we've been able to mitigate that. But as those contracts roll out, we've seen basically a factor of fixed increase in the fuel component in those latter years.

I think this January, you've seen price now like $71 a pound for uranium. But we're also offsetting that in some ways by being able to use less material by a little bit more innovative strategy. So that tends to mitigate that. But I think you're going to see as we move forward that continue to move.

And about every $10 movement in that price of uranium is about $1 a megawatt-hour. So I mean if you believe that this will stay from the ultimate lows of $10, that goes up to where we're 60s and 70s, I think you can get an idea about where that might move.

Dan Eggers - Credit Suisse

Okay. Thank you, guys.

Operator

And next we'll go to Greg Gordon with Citigroup.

Greg Gordon - Citigroup

Thanks. Two questions. One on the buyback. I know you guys have indicated your base case plan is to buy the stock back over the next two years. Is there any flexibility in that plan in terms of potentially completing the buyback over a shorter duration?

Or should we assume, unless something material changes in your financial outlook that that would be sort of a ratable buyback over a few years?

Leo Denault

Hi, Greg. This is Leo. The -- I guess for modeling purposes, the easiest thing to do is just to spread it over the two-year period. And I guess I would say that the potential is probably more for it to be front-end loaded than back-end loaded. But you asked if there was flexibility, it's set up to be exactly that, flexible.

We anticipate finishing it over the next couple of years. And we have the opportunity to move it around depending on, as I said in my prepared remarks, what kind of investment opportunities we have or if there's any events that occur or the like. But there is flexibility. And I'd say if there was -- if you were going to have a bias, it would be more front-end than back-end.

Greg Gordon - Citigroup

Thanks. Second question is on Nuclear, on the hedge profile. You know, if you blend -- I'm looking at table five. You know, you go from 93% hedged in '07 to 60% hedged in '09, 39% hedged in '10 on a blended basis.

Just wondering, as you look at hedging '09 and '10, do you feel that those markets accurately -- are accurate reflective -- reflecting, you know, the implementation of RGGI, tightening market heat rates, the increase in capacity values?

I mean, do you feel like those markets are adequately compensating you for all of those factors? Or are they not? And is that why we're less hedged as we go out through time?

Leo Denault

There's a variety of factors that go into that. The first one, I guess, the easy one, is liquidity out there. We have seen a pickup in liquidity in the longer-dated strip, particularly for our products just because of the reliability and everything we've had at the units.

And because of the number of players who have a different profile than had when we originally started. But I think that all of the things you touched on, Greg, are things that we see as upsides. We see RGGI and the implementation of that when the rules finally end up completely solidified in each of the states that are adopting it.

So as you get out into 2009 and you look at what impact that could have on power prices, I don't believe that that's adequately baked into everything that's out there. We also have some pressure on heat rate that we think will be showing up in that time frame, as well as capacity prices.

All of those go to be, I think, neutral at worst, and positive is probably most likely. So we're pretty -- we believe that those are going to be things that will show up as time goes on. Certainly, the forward capacity markets, as they start to be implemented now, those are going to show up in the unsold capacity that we have at Pilgrim and Vermont Yankee.

And we also see the New York ISO prices for the capacity markets increasing. So all in all, we see those all as being positive, and I don't think they're all fully baked into the market yet.

Greg Gordon - Citigroup

Thanks. Last question, Wayne, at the EEI conference, you talked a little bit about different concepts for the future of the Company from a strategic perspective. And I think your basic gist was, there's a possibility that smaller could be better, in terms of the makeup of the Company, the different operating subsidiaries potentially being standalone public entities. How's your thought process evolved on that front?

Wayne Leonard

You know, it was -- not everybody interpreted it I think maybe the same way that you did, Greg. That's our point of view, relative to getting bigger at this point in time. And kind of like when we formed the Entergy Coke venture, we had a certain point of view how value could be created. The value was created.

Then we had a point of view relative to future value creation. And we made a decision at that time to sell it to the more natural owner. And that's kind of the point we're making I think at EEI that there maybe more natural owners, lower costs of capital, or of, in particular, joint ventures that could create more value than kind of the standalone structure we have today.

The big one of course, on everybody's mind is nuclear. All of the things that Leo just talked about. There's a limit at some point in time, probably, to how much we can do in terms of cutting costs. We're at 95% capacity factor already. And how big the market might be, just on a unit contingent versus the retail market.

And we're trying to find a way to bridge that gap, which is substantial. Doing it alone doesn't make sense to us, for a whole lot of reasons. And we've had a number of, I think, people hear what we said at EEI, and take that as meaning we want to sell those assets. There was some fire sale involved. And we've listened to what they had to say, and made it clear that's not going to happen.

And we also, at the same time, we've had some real legitimate interests, which we had before, also, from people who own companies who own assets in the area, or have some innovative ideas about how to market and manage the risk in that area, where the joint venture might well be a pretty good answer and be viable.

To do that, it has to be the right partner at the right price, the right structure, the right allocation of risks. And it has to be at the right -- obviously, at the right time. But the big thing in particular, being somebody who's got the wherewithal to buy into a venture with us with what we think these assets are worth.

And not everybody does. Some of the other things we talked about, and Texas in particular is an obvious one, with the business being split up and we'll need partners. We'll need to do something to be competitive on that scale. That's pretty far down the road.

But we have had some legitimate interests from parties that we hadn't talked to before, who, when the right time comes, would probably be a pretty good partner in Texas, and assuming the price and all things can be worked out. Nothing is imminent in that regard.

The whole discussion is very consistent with our overall point of view that we've always exercised in trying to find ways to add value, in particular by not doing some of these things all by ourselves, or taking all this risk ourselves.

So our thought process really hasn't changed. We sill believe in the areas we discussed. There's value to be had. It's a matter of, again, timing and developing the right structure and at the right price.

Greg Gordon - Citigroup

Thank you, gentlemen.

Operator

And our next question will come from Andrew Levy with Brencourt.

Andrew Levy - Brencourt

Hey, guys. I'm all set. Thank you.

Operator

And next we will go to Ashar Khan with SAC.

Ashar Khan - SAC Capital

Hi. Good morning. Leo, just going back to you mentioned you're expecting bankruptcy at ENI to be resolved by the middle of the year to come out. If I read the last financial documents, it kind of indicated that it could earn, like, $0.10 a share or so.

I'm just trying to get a value as to if it comes back in July, what is an annual impact of ENI coming back into the Entergy fold in terms of earning contribution? Is $0.10 the right number? Or could you guide us toward something?

Leo Denault

I think what you saw in the plan we forecasted, I think about $8.8 million of earnings in '07. It does have the potential, I think, to come out of bankruptcy by the middle of the year because of those CDBG funds that have been allocated if we get the right insurance. And I think that it's a fair plan for everybody.

And as Wayne mentioned, we feel superior to the competing plan. I think that what you'll see out in New Orleans is a slow recovery coming out of it, as we're still at only 65% of the load. We've still got a significant residential customer base that is not back into the city.

So with constructive rate relief, with the CDBG funds, with active management and -- of the business by the operating folks, in terms of managing costs and everything, we believe that it can get back to being a financially viable entity.

But it's going to be a slow road for New Orleans coming out of the situation because of the customer base, because of the infrastructure costs associated with the gas rebuild, etcetera.

So it'll come back. And it'll come back as a financially viable entity, which is what's important to the region, what's important to the city to have. And -- but it'll take a lot of management to keep it going that way.

Ashar Khan - SAC Capital

But you said how much was the contribution you're expecting? You said $8.8 million?

Leo Denault

I believe so, yes.

Ashar Khan - SAC Capital

That's an annualized basis?

Leo Denault

In 2007.

Ashar Khan - SAC Capital

Okay. But what would be a 2008 approximate number? Is that just half year?

Leo Denault

Yes. In 2008 it grows, I think, to about $18 million.

Ashar Khan - SAC Capital

Okay. That's what I had. So it's like $0.10 or so, right?

Leo Denault

Pardon me?

Ashar Khan - SAC Capital

That's approximately $0.10?

Leo Denault

Yes, yes. Of course, we had a big loss in a quarter, the fourth quarter this year.

Ashar Khan - SAC Capital

Okay. Okay. My second question is just going back to this $1.5 billion buyback is over two years. That if I'm right, you said that includes acquiring the equity linked securities?

Could you just emphasize, I guess you issued some equity linked securities two years ago, right? Or year and a half when the hurricanes happened. You're planning to take those out, as well as the buyback? I'm just trying to understand what's happening?

Leo Denault

Technically speaking, the $1.5 billion buyback will just take out common shares. The equity linked securities, we issued $500 million of those, as you recall. You're right, Ashar. When we did the financing plan back in 2000 and -- I guess it was the end of 2005 right after the hurricanes.

Physically, we're not doing anything to those equity linked securities. But as you know, when they, in 2009 when they convert, there'll be issuance of common equity at that point.

So as Wayne mentioned, the way to think about it is we have got a $1.5 billion program. Part of that is unwind of the financing plan associated with the hurricanes, and that you could effectively assume that the shares that are to be issued in 2009 associated with that purchase contract, that we're effectively offsetting that now. When we get -- .

Ashar Khan - SAC Capital

With this buyback?

Leo Denault

Correct.

Ashar Khan - SAC Capital

Okay.

Leo Denault

But when we get to -- and then the way to think about it past 2008, is that 2009 and beyond we'll just be looking at our cap structure, our investment opportunities like we always do, without specifically identifying any one single security to offset other than the equity ownership plans, like we do on a regular basis now.

Ashar Khan - SAC Capital

Okay. And then, if I can just go a little bit to the filing in Texas at the end of the year. I guess the schedule by which the PUCT has to come up with a decision, and just reading your filing and all of the exhibits, it's like to me, it's like I call it a pretty impossible task in terms of $1 billion expenditure for the PUCT to say okay, and say okay for you guys to go ahead.

I mean it's -- that was a huge amount of data in your filing. And just looking at how the commissions usually try to juggernaut and get the thing. I just thought the schedule is pretty aggressive, which is of course legislatively mandated, for them to come up with an opinion in such a short period of time.

So I was just trying to get a little bit of your feedback, that what chance of success are you saying in terms of the PUCT making a decision? And then, are these $1 billion of expenditures factored into your CapEx plans going forward?

How should we look at them? And then partly Wayne, I just talked with so many permissions needed and changing to this area agreement, I just thought that only Entergy has to own these assets to really go through all of this ERCOT joining, because it's going to require so many other entities to make changes on the reciprocal side, which are owned under the Entergy family.

So it's like -- to me it's like if you go ahead with this, it's a commitment to stay in Texas. I don't know if you can give me some feedback on the success rate, the level of investment, and isn't this a sign that you are, I guess, committed to the Texas portion now?

Wayne Leonard

Ashar, let me turn this one over to Rick Smith, and then I'll follow-up or Leo can follow up, too, if he doesn't maybe cover everything or something. But let me have Rick take off on this one. Rick?

Rick Smith

Ashar, although it is $1 billion in capital expenditures to tie into ERCOT to really create a fence between Louisiana and Texas, the benefits are greater than $1 billion. And it isn't something that we have just been working on over the last couple of months when we made a filing in December.

We really started this with ERCOT Commission, a year ago. I mean, we had to make a January 2006 filing. We did that. We've had technical conferences with interveners and staff. I think it was April of '06 on which way to go, and ERCOT was involved in that. We had some preliminary numbers mid-year last year.

And then, the final numbers came out, I think, in early October. So as it relates to the investments that will be required to get to ERCOT, I think those have been looked at quite a bit with the staff at the Commission and with the ERCOT staff. So the Commission staff has been involved in this with us and other key interveners for over a year.

Now that was one of the reasons that we suggested a rule making process, which allows us to talk about these things. But with Commission and the legislature as we move forward on some legislative certainty around cost recovery. So the law does require that they come up with an answer.

They don't have to approve the capital expenditures and those type things. They just have to, by mid-year, say we agree ERCOT is the right answer, move forward on that. And then we'll have to go through the cost recovery part of that with Commission subsequent to that.

The $1 billion is not in the capital budget at this point in time, because it's sitting out there a couple of years, past '07 before we really get into any significant dollars. And I think I'll turn it back over to Wayne.

I mean, as it relates to the system agreement, I could weigh in on that. I mean, we've been through how Texas can exit the system when it goes to retail open access. We have a FERC commission order out of that. There would be -- so it really doesn't exit the Entergy system until we get tied into ERCOT and those type things.

So I think -- and with the jurisdictional separation, we're looking at probably the largest generation component being owned by Louisiana, which would be the nuclear plant at River Bend. And all the other plants would be PPAs and those type things. So I mean, we do PPAs -- or we do joint ownerships and long-term PPAs between different affiliates and third parties every day of the week. I mean those wouldn't be unique, and I don't think would be a hindrance to really looking at what we would do in Texas.

Ashar Khan - SAC Capital

Okay.

Wayne Leonard

Yes, Ashar. I think Rick covered it. The Texas commission is going to make these calls, and we're going to take it one step at a time. We're thinking two, three, four steps down the line, depending upon what they decide. But, you know as we go one step at a time, we'll give them a lot of different options on how we do this, and kind of back to Greg's point.

We've had a number of people, come up with other options that we hadn't necessarily thought of, in terms of how we might finance this $1 billion or whether it's necessary for Entergy to even make that investment under all circumstances, if we get to that point. And if the commission decides that they do want to us do it, and the financing.

And the financial wherewithal for Entergy Gulf States is secure enough for that to happen then that's what we'll do. But there are a lot of alternatives and regulatory mechanisms for recovery and financing that we'll be rolling out to the commission and to the markets at the appropriate time.

Ashar Khan - SAC Capital

Okay. I appreciate it. And if I could just end up, Leo, in this. What kind of cap structure have you assumed in Dan Eggers' reply question when you kind of mentioned that you -- the lowering of the share buyback reduce? What kind of a cap structure are you using in your modeling assumptions?

Leo Denault

Well, when we do the table, it assumes a 55% debt to total cap.

Ashar Khan - SAC Capital

55% debt to total cap. Thank you. Congratulations.

Operator

And our next question today will come from Jonathan Arnold with Merrill Lynch.

Jonathan Arnold - Merrill Lynch

Good morning guys.

Leo Denault

Good morning Jonathan.

Wayne Leonard

Good morning Jonathan.

Jonathan Arnold - Merrill Lynch

I had a couple of things. One, just this buyback question again, just to make sure I understood what you said, Leo. You'll effectively take out -- buy back $1.5 billion of shares over the next two years, but then the equity linked securities will actually, all other things being equal, lead to share count going back up again in '09. Is that accurate?

Leo Denault

That's correct, Jonathan. And I guess what I was trying to point out, is that when we look at 2009, '10, '11, whatever they may be, just like what we've looked at here, is we're trying to manage to a certain balance sheet strength, financial flexibility, and we're looking at the opportunity set that we have over the course of that timeframe going forward.

And when we revisit '09, we aren't going to specifically identify anything other than the equity ownership plans for offset. What we will do is look at our cap structure, our opportunity set, our dividend profile, how much cash available we have, including maintaining that level of debt to total cap, our coverage ratios, and everything consistent with solid credit quality.

And if a share repurchase program makes sense at that time, we'll do it. We won't just specifically say, well, now we've got to take out the equity unit underlying.

Jonathan Arnold - Merrill Lynch

How many shares do they convert into, roughly?

Leo Denault

I think it's about 5.7, 6 million, something like that 5.7 million shares.

Jonathan Arnold - Merrill Lynch

Thank you. And just one other thing was like. On hedging, you made your comments that you see positive drivers in the markets out in that longer dated time frame. When I look at your hedge percentages on the three year out timeframe, you're more hedged now than you've typically been in the past, at this stage.

And I suspect that's partly because you've got Palisades with the long-term contract now, which you didn't have before. But what's the general thought about, given what your statements on the market do you suspect you'll leave yourselves more open than you have been doing in the out years?

Wait for that to show up in the markets? Or will you kind of follow this typical pattern of getting to something in the 90s, 80s, and 60s on a rolling basis?

Leo Denault

Well, certainly we'll maintain the current pattern. We like to stay hedged, obviously, as much as we can, consistent with our point of view. The issue that you've got in the near-term, is a lot of those things we discussed. One, the capacity market is something that is developing now. And we're hedging consistent with our point of view around that.

But the big gains in the capacity auctions, as well as what's going to happen with RGGI are still a couple of years out. And that's consistent with where you see our open position growing. The near-term hedging that we've done, particularly as it relates to '07, was consistent with where we were last year with our point of view on gas prices more, than environmental and capacity markets.

The gas price -- heat rate trades that we were trying to look at in terms of what's going on in the '07 and '08 market is what prompted us to be where we are right now.

Jonathan Arnold - Merrill Lynch

So we should expect '09 and '10 to be kind of, you know, where '08 and '09 are now, a year from now?

Leo Denault

Yes. We would expect it, and we would expect that as we get into those timeframes that get closer. We're going to execute on those hedges, though, with an understanding, and not only by us, but our counter parties, of what carbon and what capacity and all that is going to turn out to be.

Now fortunately in the forward capacity markets, that's got it's own -- in NEPOOL, it's got a method over the course of the next couple of years going into the auctions, that'll take place. I guess, starting in '08 for the 2010 and beyond timeframe. But as far as carbon, that's more a wildcard that RGGI, obviously, how that takes place will impact how we hedge out.

Jonathan Arnold - Merrill Lynch

Thank you very much.

Leo Denault

Thank you.

Operator

And we have time for one final question today and that will come from Michael Lapides with Goldman Sachs.

Michael Lapides - Goldman Sachs

Hi, guys. Congratulations on a great 2006. One quick question, just kind of coming back to the utility and thinking about supply plan and rate based growth. Can you give us an update in terms of not just Little Gypsy, but also other potential fuel diversity plans for Louisiana?

Wayne Leonard

Okay. Let me -- Rick's pointing at somebody else. I'm trying to point at Rick. The -- Mark Savoff, is -- I don't know that we've introduced you to Mark before. Mark is the Executive Vice President over Operations. And he's really in charge of the portfolio transformation, in addition to our environmental efforts and other things. And he's really the expert in this area. So let me have Mark say a couple of words on that. Mark?

Mark Savoff

Thanks, Wayne. Just to refresh everybody's memory, we went out with the long-term RFP middle of last year. And we were seeking, approximately 1,000 megawatts of combined cycle capacity, and about 1,000 megawatts of solid fuel capacity over for about a 30 year period for the solid fuel, in 20 years for the combined cycle. As you know, we received the proposals, we've evaluated the proposals we've short listed bidders and we went through and we made the final selections.

And this is a highly scrutinized process that we went through. We had two independent market monitors following us on this, and being involved in every step of the process. And tomorrow, the number of the selected proposals and the capacity of each of those proposals in the combined cycle gas turbine and also on the solid fuel will be posted on the RFP website.

And assuming that we can come to agreement with the counter parties, we expect to sign contracts in the second quarter probably for the CCGTs, and in the third quarter for the solid fuel. And then just along those lines, for the intermediate term RFP, which we let out last October, we're looking for one to three years of base load CCGT capacity, and also some peaking resources.

We expect to announce in mid-February the selections out of that particular process. And then also to have contracts executed there by the second quarter.

Wayne Leonard

And Mark did that with absolutely no notes in front of him. Rick has something he wants to add.

Rick Smith

Well, I mean, the only thing I would add to that, Michael, is that what we are looking at will have a positive impact on the mix of generation that we have in the Louisiana.

So it's going to help its production costs, and also other jurisdictions will be involved in this, also. So it'll be moving in the direction that we want it to move, as it relates to the mix.

Michael Lapides - Goldman Sachs

What is your target, meaning long-term? Not just next two to three years, but well beyond that. What do you view as the right amount of your energy being supplied from baseload capacity versus other capacity?

Rick Smith

Well, traditionally, you match it with, kind of, what's your -- almost your residential and commercial load, and then a portion of your industrial. And I mean, that can vary between anywhere from 45% to 65%, so it'll be in that range.

And long-term, you know, we're looking at possibly adding some new nuclear to the portfolio. So there's things we're looking at four, five, ten years out. I mean that's what we're starting to look at today.

Wayne Leonard

Okay. Michael, this is Wayne. You know, this is a really complicated area and it's one of the reasons we have, Mark, working on this so hard. Because really all bets are off at this point in time, in terms of what utilities have currently they have typically planned for, in terms of baseload and intermediate and peaking.

And you know, that's where, I think as I mentioned, our dynamic market point of view really comes into play, not just when we're in the unregulated markets, but in the regulated markets.

And building anything new is pretty expensive right now. All of the various commodity prices have gone up by absolutely exorbitant amounts in many cases over the last few months alone.

And so we all have to step back and look at what our mix is relative to maybe building more transmission or using more intermediate capacity for baseload. If you could lock up gas reserves or something of that nature, I mean, it might be cheaper than kind of the typical rule of thumb that solid fuels for baseload always makes more sense.

At the right price, you can do a lot of things differently, with expanded transmission or whatever. So that's why our integrated model to the market, we don't have any fixed rules, it's going to be this way or that way. Like I say, we're going to look at the long-term, the least present value of revenue requirements for customers.

And that may involve some different solutions than typically what utility planners might have came up with in the past. So we'll have better answers for you, but it's a dynamic market right now.

Michael Lapides - Goldman Sachs

Great. Thanks, guys.

Wayne Leonard

Thanks, Michael.

Operator

And that will conclude our question-and-answer session for today. We thank everyone for their participation. I'll turn things back over to our speakers for any additional or closing remarks.

Michele Lopiccolo

Thank you, operator. And thanks to you all for participating this morning. Before we close, we remind to you refer to our release and website for Safe Harbor and Regulation G compliance statements. Our call was recorded, and can be accessed for the next seven days by dialing 719-457-0820, confirmation code 2310470.

This concludes our call. Thank you.

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