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

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

In 2005, two storms unprecedented in strength and size tested our company and our employees to their very limits. Not only did our employees respond brilliantly, they demonstrated the enormous potential that exists in each of us when called upon to serve a cause that is right and dear to our hearts and minds.

CATASTROPHE TIMES TWO

On August 29, Hurricane Katrina stormed ashore near Buras, Louisiana, southeast of New Orleans. A strong Category 3 storm of unprecedented physical size, Katrina leveled much of a 400-mile section of coastline stretching from central Louisiana, across Mississippi, into Alabama and western Florida; and devastated the city of New Orleans. With damage estimates topping $75 billion, Katrina ranks as the costliest natural disaster in U.S. history; and with more than 1,300 lives lost, it was also one of the deadliest. More than one million of our customers in Louisiana and Mississippi lost power and extensive flooding in New Orleans left the city and our headquarters offices uninhabitable.

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

Making landfall in Sabine Pass, Texas, Hurricane Rita caused massive damage to our infrastructure in Louisiana and Texas – knocking 14 generation units offline and damaging more than 3,800 miles of transmission lines. More than 800,000 customers lost power.

When the storm passed, our employees – exhausted both mentally and physically – were faced with another enormous restoration effort and a wholly different set of issues. All transmission connections from Louisiana west to Texas were severed, making restoration much more difficult. In addition, several refineries with an aggregate capacity of 2.27 million barrels of crude oil per day lost power. Considered vital to the U.S. economy, restoration was urgent and had to be coordinated with each customer as well as the Departments of Energy and Homeland Security. Through extraordinary efforts and genuine creativity and innovation, 13 days after Rita’s landfall, 85 percent of customers who could take power had power.

The heroic efforts of our employees – and the huge number of outside workers who came to our assistance – are impossible to truly put into words. Even as they struggled to put their personal lives back together, they gave everything they had in the service of our customers. Randy Helmick, vice president of transmission and our official “storm boss,” led the restoration efforts with outstanding results.

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

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

FINANCIAL RECOVERY

Even as the physical restoration began to wind down, we faced an enormous financial recovery. We incurred restoration costs for Hurricanes Katrina and Rita of approximately $1.5 billion, just over half of which was paid in 2005. This cost estimate does not include other storm effects such as estimated lost net revenue, uncollectible utility customer receivables, and the longer-term accelerated replacement of the gas distribution system in New Orleans. Based on standard, long-accepted, and applied regulatory principles, these costs should be recoverable in the retail ratemaking process. That is a well-settled principle of law, reinforced by historical practices. The company’s preparation for and response to the hurricanes and their aftermath has been, in our view, prudent under the circumstances. Although storm costs should be recoverable in rates, we do have as a primary objective that rates are both “just and reasonable.” Given the fact we serve some of the poorest communities in the country, maintaining “reasonable” rates in the aftermath of this catastrophe will test not only our effectiveness and efficiency as operators, but also our creativity and resolve as managers. We have pursued several initiatives to recover these costs through various sources and to maintain affordable rates while restoring our liquidity to its pre-hurricane position. While we are encouraged by the response we have received, our efforts continue along multiple fronts.

• Insurance is one avenue for cost recovery, and we expect it to cover a portion of our losses related to our generation assets and gas distribution properties. Losses related to transmission and distribution assets, representing roughly 80 percent of our restoration costs, are generally uninsurable.
  
• We continue to seek federal relief from Congress – a combination of Community Development Block Grants and tax benefits, as well as other federal relief. In late 2005, the Gulf Opportunity or GO Zone legislation and the Katrina Relief Bill were passed by Congress and signed into law. The GO Zone legislation permits public utilities to accelerate the realization of tax benefits for Hurricane Katrina casualty losses and repair costs. The Katrina Relief Bill provides $11.5 billion of Community Development Block Grants and includes language that permits funding for infrastructure restoration. The Department of Housing and Urban Development has already allocated specific amounts to each of the states affected by Hurricanes Katrina, Rita, and Wilma and those states are responsible for administering the actual grants. We intend to pursue CDBG funding in Louisiana, Mississippi, and Texas, and we are working with state leaders on behalf of our customers to make the case for federal assistance through support of the operating companies in the affected areas. To be clear, these monies, if made available to utilities, are not a “shareholder” or “lender” bail-out but go directly to reducing rates that customers would otherwise struggle to afford. We are still working at the federal level to create additional opportunities to recover our storm costs so that we can continue to serve our customers in the manner they deserve and at rate levels that encourage and promote continued development and restoration.
  
• At the state level, we have made filings to request interim recovery of nearly $600 million of storm costs in Louisiana and Mississippi. And in Texas, the public utility commission has initiated a project to review exceptional storm damage costs caused by Hurricane Rita. We are also working with state regulators to possibly securitize our restoration costs – essentially spread the impact on rates over an extended period by accessing low-cost financing sources. Through securitization, we could recover our costs on a timely basis while our customers would benefit by incurring a smaller rate increase on their utility bills over a longer timeframe.

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

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

As our recovery initiatives progress and liquidity rises, we believe that unwinding our financing plan could be effected easily and at a reasonable cost. However, in the short term, we believe combining our cost recovery efforts with a comprehensive financing plan is highly consistent with the aspirations we have previously outlined – to reliably serve our customers and deliver top-quartile shareholder returns – while keeping our overall risk profile on solid footing.

WHAT OF NEW ORLEANS?

While most of our service territory is on the road to recovery, the city of New Orleans is in a different situation. Extensive flooding from breaches in the levee system left much of the city uninhabitable. At the end of 2005, roughly two-thirds of the city’s population had not yet returned and when or if they will return is a very open question.

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

Given this difficult situation and the extreme liquidity constraints placed upon it, Entergy New Orleans took a necessary step on September 23, 2005 of filing a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. To ensure restoration efforts continued uninterrupted, we also filed a simultaneous motion for debtor-in-possession financing that would permit Entergy Corporation making loans of up to $200 million to Entergy New Orleans. To date, debtor-in-possession loans of $100 million have been made to Entergy New Orleans. In a major development, on December 7, 2005, the bankruptcy judge granted our request that Entergy Corporation’s debtor-in-possession financing prime all existing debt, including Entergy New Orleans’ first mortgage bondholders. In effect, Entergy New Orleans now has first claim on all property, plant, and equipment plus post-bankruptcy petition acquired assets, including insurance proceeds. This action by the bankruptcy court strengthens Entergy’s hand in trying to rebuild the Entergy New Orleans system.

As prudent stewards of our shareholders’ money, given the uncertainty surrounding the future of New Orleans, we cannot and will not fund Entergy New Orleans’ shortfall indefinitely. No law or agreement exists that would force the company to continue to provide service at a loss. We continue to work with the federal government, and state and local regulators to resolve the bankruptcy in a manner that allows its customers to be served by a financially viable entity as required by the law.

We are also redefining our corporate headquarters. Previously we had 1,500 employees and multiple functions operating out of the city of New Orleans. Given the failure of the levees to withstand Category 3 hurricane strengths and the time required to reinforce and redo or redesign and rebuild the levee system, we are assessing the various alternative locations for critical business continuity functions in order to lessen the risk posed by any single event. Like everyone, we learned many lessons from the events of 2005 and identified many opportunities to reduce our risks from uncontrollable events. The reconfiguration of our headquarters is one that we intend to pursue in 2006.

2005 FINANCIAL RESULTS

The excellent emergency response and operating performance delivered by our employees in 2005 is reflected in our financial performance. In spite of the severe impact of the two hurricanes, as-reported earnings were $898.3 million, or $4.19 per share, in 2005, compared to $909.5 million, or $3.93 per share, in 2004. Operational earnings were $943.1 million, or $4.40 per share, compared to $879.5 million, or $3.80 per share, in the prior year.

While the impact of the hurricanes depressed earnings at our utility business in 2005, we still saw an overall improvement in operational earnings – up 16% on a per share basis over 2004 – primarily from the result of strong contributions from our competitive businesses and accretion from our share repurchase program.

Entergy Nuclear delivered excellent results throughout 2005, largely due to higher contract pricing, higher generation, and lower operating and maintenance expense. Nuclear operational initiatives were implemented effectively and efficiently in 2005 despite the huge distraction of storm restoration – further testimony to the depth and strength of our nuclear team.

With the passage of the Energy Policy Act of 2005 and its incentives for new nuclear unit construction and operation, NuStart – a consortium of industry leaders – announced it had selected Grand Gulf as one of two sites to pursue a Construction and Operating License, a COL. Separately, we are pursuing an Early Site Permit for Grand Gulf and a COL for our River Bend site. In our point of view, nuclear remains the only economically viable and technically proven source for the large scale needs for clean, affordable power and we plan to preserve our opportunities to pursue the avenues presented in the new Energy Policy.

Finally, our non-nuclear wholesale assets business delivered improved results in 2005 due to the sale of SO₂ allowances that were freed up as a result of our strong environmental programs and leadership. Some of the generating assets in this business have operating attributes that produce excess allowances, which we are periodically able to monetize.

While we had repurchased more than $1.1 billion of outstanding shares as part of our $1.5 billion share repurchase program, we halted our repurchase activity following Hurricane Katrina. Prior to that, we had expected to complete our repurchase program by the end of 2006. Instead, our Board of Directors extended the program ending date into 2008 so that we may continue to return available cash to our shareholders once our financial flexibility is restored.

In 2005, we also welcomed three new members to our Board of Directors – Gary W. Edwards, Stuart L. Levenick, and W.J. “Billy” Tauzin. Their collective experience spans a wide range of industries as well as public service and our company will greatly benefit from their expert insights and knowledge. We would like to thank two departing Board members – Claiborne P. Deming and Kathleen A. Murphy – for their exceptional leadership. We appreciate their many contributions and wish them well in their future endeavors.

RECLAIMING LOST GROUND

We come out of the tests of 2005 more determined than ever to be the best-in-class at safely providing clean, reliable, and affordable power to our customers. Financially, we realize we lost ground in 2005 and we will take measured steps to not only make it up, but return to where we would have been if Katrina and Rita had never hit.

• In our utilities, we expect in 2006 to have hurricane regulatory recovery mechanisms in place, a decision on our request for federal relief, and a clear line of sight on a resolution for Entergy New Orleans. By 2007, we expect our utility business to be back on track.
  
• In our nuclear business, we continue to see strong upside potential for efficient nuclear generators which can deliver reliable power. Faced with the alternative supplies from expensive natural gas-fueled plants, our nuclear business continues to enter into new contracts with attractive pricing for both new and existing customers and to generate excellent results. As we did in 2005, we will adjust our hedging strategy to enable us to take measured market risks going forward and to conform to our dynamic point of view on market pricing for natural gas or other alternative fuels. In addition, we continue to assess opportunities to broaden our nuclear portfolio. We will act only when we find opportunities that are fairly priced and leverage our existing asset base and operational expertise.
  
• One strategy that was significantly impacted by the events of 2005 is our plan to return cash to our shareholders. With the unexpected drain on our liquidity, we were forced to halt our share repurchases and forego any increase in our dividend level. As we restore our financial flexibility, we will consider making more aggressive changes – like a step increase in our dividend or accelerated share repurchases, for example – to make up the ground we lost in this area.
  

Even with the massive disruption we experienced last year, our long-term aspirations remain intact. As we move to make up lost ground, the choices we make will be guided by our long-term aspirations. For example, we will continue to make investments that improve our customer service and reliability, the safety of our operations, our impact on the environment, and our cost position.

THE MOST IMPORTANT WORDS OF ALL

All of us who survived the devastation of Hurricanes Katrina and Rita – whether young or old, rich or poor, strong or weak – have come to appreciate the significance of two simple words: “thank you.” You survive an event of this magnitude only through the help of others. At Entergy, we have many to thank.

First, always first, we thank our employees for their courage and dedication under unbelievable hardship. Their individual stories were often a source of inspiration during some of the darkest moments. We are proud to serve with these people – our employees, our heroes.

We thank others in our industry for the massive assistance provided to restore power following the storms. We thank our suppliers and business partners for the support they generously gave.

We thank all of you for the time, goods, and money you donated following Katrina and Rita. Firefighters from around the country, volunteers in local shelters, churches that gathered needed goods, and the millions of Americans who gave to the relief efforts – your help made a tremendous difference.

We especially thank those who contributed to the Power of Hope Fund. With a $1 million contribution from Entergy Corporation, we established the Power of Hope Fund in September 2005. Contributions to the Fund – whose purpose is to help disaster victims rebuild their lives following the storms – reached nearly $4 million. By the end of 2005, $1.8 million had been awarded to more than 2,200 individuals and families – including 293 Entergy employees – all thanks to your generous contributions.

TURNING LOSS INTO OPPORTUNITY

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

We learned ways to improve our safety practices and we will continue to relentlessly focus on safety until we can perform every job without accident or loss of life. We gained a greater appreciation for the improbable and will develop new strategies to mitigate risk throughout our organization. We learned much about how to respond to overlapping catastrophic events that we will incorporate in our future planning and preparations.

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

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