Entergy 2002 Annual Report Download - page 43

the PPAs for Entergy’s Non-Utility Nuclear plants;
capacity purchases and sales by the U.S. Utility companies;
and
forward contracts that will result in physical delivery.
Fair value estimates of the commodity instruments that are
marked to market are made at discrete points in time based on
relevant market information. Market quotes are used in deter-
mining fair value whenever they are available. When market
quotes are not available (e.g., of a long-dated commodity con-
tract), other information is used, including transactional data
and internally developed models. Fair value estimates based on
these other methodologies are necessarily subjective in nature
and involve uncertainties and matters of significant judgment.
These uncertainties include projections of macroeconomic
trends and future commodity prices, including supply and
demand levels and future price volatility. The impact of these
uncertainties, however, is lessened by the relatively short-term
nature of the mark-to-market positions held by Entergy and EKT.
In addition, the EITF reached a consensus to rescind Issue
No. 98-10 effective January 1, 2003. Rescinding Issue No. 98-10
will result in some energy-related contracts being accounted for
on an accrual basis that were previously accounted for on a
mark-to-market basis. Contracts that meet the provisions of
SFAS 133 to qualify as derivatives will be marked to market in
accordance with the guidance in SFAS 133. Contracts such as
capacity, transportation, storage, tolling, and full requirements
contracts that are based on physical assets and do not meet the
provisions of SFAS 133 to qualify as derivatives will be accounted
for using accrual accounting. Energy commodity inventories
held by trading companies, such as physical natural gas, will be
accounted for at the lower of cost or market. The adoption of
the consensus will have minimal cumulative and ongoing earn-
ings effects for Entergy’s Energy Commodity Services business.
PENSION AND OTHER POSTRETIREMENT BENEFITS
Entergy sponsors defined benefit pension plans which cover
substantially all employees. Additionally, Entergy provides
postretirement health care and life insurance benefits for
substantially all employees who reach retirement age while still
working for Entergy. Entergy’s reported costs of providing these
benefits, as described in Note 11 to the consolidated financial
statements, are impacted by numerous factors including the
provisions of the plans, changing employee demographics and
various actuarial calculations, assumptions, and accounting
mechanisms. Because of the complexity of these calculations,
the long-term nature of these obligations, and the importance
of the assumptions utilized, Entergy’s estimate of these costs is a
critical accounting estimate for the U.S. Utility and Non-Utility
Nuclear segments.
Assumptions
Key actuarial assumptions utilized in determining these costs
include:
discount rates used in determining the future benefit
obligations;
projected health care cost trend rates;
expected long-term rate of return on plan assets; and
the rate of increase in future compensation levels.
Entergy reviews these assumptions on an annual basis and
adjusts them as necessary. The falling interest rate environment
and poor performance of the financial markets over the past
several years have impacted Entergy’s funding and reported
costs for these benefits. In addition, these trends have caused
Entergy to make a number of adjustments to its assumptions.
In selecting an assumed discount rate, Entergy reviews market
yields on high-quality corporate debt. Based on recent market
trends, Entergy reduced its discount rate from 7.5% in 2000
and 2001 to 6.75% in 2002. Entergy reviews actual recent cost
trends and projected future trends in establishing health
care cost trend rates. Based on this review, Entergy increased
its health care cost trend rates from a range in 2001 of 8%
gradually decreasing to 5% to a range in 2002 of 10% gradually
decreasing to 4.5%.
In determining its expected long-term rate of return on plan
assets, Entergy reviews past long-term performance, asset alloca-
tions, and long-term inflation assumptions. Entergy targets an
asset allocation for its plan assets of roughly 65% equity securi-
ties and 35% fixed income securities. Based on recent market
trends, Entergy decreased its expected long-term rate of return
on plan assets from 9% in 2000 and 2001 to 8.75% for 2002.
The trend of reduced inflation caused Entergy to reduce its
assumed rate of increase in future compensation levels from
4.6% in 2000 and 2001 to 3.25% in 2002.
Cost Sensitivity
The following chart reflects the sensitivity of pension cost to
changes in certain actuarial assumptions (in thousands):
Actuarial Change in Impact on 2002 Impact on Projected
Assumption Assumption Pension Cost Benefit Obligation
Increase/(Decrease)
Discount rate (0.25%) $3,043 $70,313
Rate of return
on plan assets (0.25%) $4,335 $ –
Rate of increase
in compensation 0.25% $2,376 $15,556
The following chart reflects the sensitivity of postretirement
benefit cost to changes in certain actuarial assumptions
(in thousands):
Impact on 2002 Impact on Accumulated
Actuarial Change in Postretirement Postretirement
Assumption Assumption Benefit Cost Benefit Obligation
Increase/(Decrease)
Health care
cost trend 0.25% $3,379 $20,900
Discount rate (0.25%) $2,105 $24,348
Each fluctuation above assumes that the other components of
the calculation are held constant.
ENTERGY CORPORATION AND SUBSIDIARIES 2002 41