Entergy 2002 Annual Report Download - page 44

Accounting Mechanisms
In accordance with SFAS No. 87, “Employers’ Accounting for
Pensions,” Entergy utilizes a number of accounting mechanisms
that reduce the volatility of reported pension costs. Differences
between actuarial assumptions and actual plan results are
deferred and are amortized into cost only when the accumulated
differences exceed 10% of the greater of the projected benefit
obligation or the market-related value of plan assets. If necessary,
the excess is amortized over the average remaining service period
of active employees.
Additionally, Entergy smoothes the impact of asset perform-
ance on pension expense over a twenty-quarter phase-in period
through a “market-related” value of assets calculation. Since the
market-related value of assets recognizes investment gains or
losses over a twenty-quarter period, the future value of assets will
be impacted as previously deferred gains or losses are recognized.
As a result, the losses that the pension plan assets experienced in
2002 may have an adverse impact on pension cost in future years
depending on whether the actuarial losses at each measurement
date exceed the 10% corridor in accordance with SFAS 87.
Costs and Funding
In 2002, Entergy’s total pension cost was $38 million and
funding was $13 million. Taking into account asset performance
and the changes made in the actuarial assumptions, Entergy
does not anticipate 2003 pension cost to be materially different
from 2002. Pension funding for 2003 is anticipated to be
$39 million.
Due to negative pension plan asset returns over the past
several years, Entergy’s accumulated benefit obligation at
December 31, 2002 exceeded plan assets. As a result, Entergy
was required to recognize an additional minimum liability of
$208.1 million ($175 million net of related pension assets) as
prescribed by SFAS 87. This resulted in a charge to other
comprehensive income of $11 million, after reductions for the
unrecognized prior service cost, amounts recoverable in rates,
and taxes. Net income for 2002 was not affected.
Total postretirement health care and life insurance benefit
costs for Entergy in 2002 were $81 million. Because of a number
of factors, including the increased health care cost trend rate,
Entergy expects 2003 costs to approximate $108 million.
OTHER CONTINGENCIES
Entergy, as a company with multi-state domestic utility opera-
tions, and which also had investments in international projects,
is subject to a number of federal, state, and international laws
and regulations and other factors and conditions in the areas in
which it operates, which potentially subject it to environmental,
litigation, and other risks. Entergy periodically evaluates its
exposure for such risks and records a reserve for those matters
which are considered probable and estimable in accordance
with generally accepted accounting principles.
Environmental
Entergy must comply with environmental laws and regulations
applicable to the handling and disposal of hazardous waste.
Under these various laws and regulations, Entergy could incur
substantial costs to restore properties consistent with the various
standards. Entergy conducts studies to determine the extent of
any required remediation and has recorded reserves based
upon its evaluation of the likelihood of loss and expected dollar
amount for each issue. Additional sites could be identified
which require environmental remediation for which Entergy
could be liable. The amounts of environmental reserves
recorded can be significantly affected by the following external
events or conditions:
changes to existing state or federal regulation by govern-
mental authorities having jurisdiction over air quality, water
quality, control of toxic substances and hazardous and solid
wastes, and other environmental matters;
the identification of additional sites or the filing of other
complaints in which Entergy may be asserted to be a poten-
tially responsible party; and
the resolution or progression of existing matters through
the court system or resolution by the EPA.
Litigation
Entergy has been named as defendant in a number of lawsuits
involving employment, ratepayer, and injuries and damages
issues, among other matters. Entergy periodically reviews
the cases in which it has been named as defendant and assesses
the likelihood of loss in each case as probable, reasonably
estimable, or remote and records reserves for cases which
have a probable likelihood of loss and can be estimated.
Notes 2 and 9 to the consolidated financial statements include
more detail on ratepayer and other lawsuits and manage-
ment’s assessment of the adequacy of reserves recorded for
these matters. Given the environment in which Entergy
operates, and the unpredictable nature of many of the cases
in which Entergy is named as a defendant, however, the
ultimate outcome of the litigation Entergy is exposed to has
the potential to materially affect the results of operations of
Entergy, or its operating company subsidiaries.
Sales Warranty and Tax Reserves
Entergy’s operations, including acquisitions and divestitures,
require Entergy to evaluate risks such as the potential tax effects
of a transaction, or warranties made in connection with such a
transaction. Entergy believes that it has adequately assessed and
provided for these types of risks, where applicable. Any reserves
recorded for these types of issues, however, could be signifi-
cantly affected by events such as claims made by third parties
under warranties, additional transactions contemplated by
Entergy, or completion of reviews of the tax treatment of certain
transactions or issues by taxing authorities. Entergy does not
expect a material adverse effect from these matters.
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MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS concluded