Entergy 2003 Annual Report Download - page 61

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ENTERGY CORPORATION AND SUBSIDIARIES 2003
EARNINGS PER SHARE
The following table presents Entergy’s basic and diluted
earnings per share (EPS) calculation included on the consol-
idated income statement (in millions, except per share data):
For the years ended December 31, 2003 2002 2001
$/share $/share $/share
Income before cumulative
effect of accounting change $789.9 $599.4 $702.7
Average number of common
shares outstanding - basic 226.8 $3.48 223.0 $2.69 220.9 $3.18
Average dilutive effect of:
Stock options (1) 4.1 (0.062) 3.9 (0.046) 3.6 (0.052)
Equity awards 0.2 (0.004) 0.4 (0.005) 0.2 (0.002)
Average number of common
shares outstanding - diluted 231.1 $3.42 227.3 $2.64 224.7 $3.13
Earnings applicable to
common stock $926.9 $599.4 $726.2
Average number of common
shares outstanding - basic 226.8 $4.09 223.0 $2.69 220.9 $3.29
Average dilutive effect of:
Stock options (1) 4.1 (0.073) 3.9 (0.046) 3.6 (0.054)
Equity awards 0.2 (0.004) 0.4 (0.005) 0.2 (0.002)
Average number of common
shares outstanding - diluted 231.1 $4.01 227.3 $2.64 224.7 $3.23
(1) Options to purchase approximately 15,231, 109,897, and 148,500 shares of common
stock at various prices were outstanding at the end of 2003, 2002, and 2001,
respectively, that were not included in the computation of diluted earnings per
share because the exercise prices were greater than the average market price of
the common shares at the end of each of the years presented.
STOCK-BASED COMPENSATION PLANS
Entergy has two plans that grant stock options, which are
described more fully in Note 8 to the consolidated financial
statements. Prior to 2003, Entergy applied the recognition
and measurement principles of APB Opinion 25,
“Accounting for Stock Issued to Employees,” and related
Interpretations in accounting for those plans. No stock-
based employee compensation expense is reflected in 2002
and 2001 net income as all options granted under those
plans have an exercise price equal to the market value of the
underlying common stock on the date of grant. Effective
January 1, 2003, Entergy prospectively adopted the fair
value based method of accounting for stock options
prescribed by SFAS 123, “Accounting for Stock-Based
Compensation.” Awards under Entergy’s plans vest over
three years. Therefore, the cost related to stock-based
employee compensation included in the determination of net
income for 2003 is less than that which would have been
recognized if the fair value based method had been applied to
all awards since the original effective date of SFAS 123. The
following table illustrates the effect on net income and
earnings per share if Entergy would have historically
applied the fair value based method of accounting to stock-based
employee compensation. (In thousands, except per share data)
For the years ended December 31, 2003 2002 2001
Earnings applicable
to common stock $926,943 $599,360 $726,196
Add back: Stock-based compensation
expense included in earnings
applicable to common stock, net
of related tax effects 2,818 – –
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects 24,518 28,110 19,472
Pro forma earnings applicable
to common stock $905,243 $571,250 $706,724
Earnings per average common share:
Basic $4.09 $2.69 $3.29
Basic - pro forma $3.99 $2.56 $3.20
Diluted $4.01 $2.64 $3.23
Diluted - pro forma $3.92 $2.51 $3.14
APPLICATION OF SFAS 71
The domestic utility companies and System Energy currently
account for the effects of regulation pursuant to SFAS 71,
“Accounting for the Effects of Certain Types of Regulation.”
This statement applies to the financial statements of a rate-
regulated enterprise that meets three criteria. The enterprise
must have rates that (i) are approved by a body empowered
to set rates that bind customers (its regulator); (ii) are cost-
based; and (iii) can be charged to and collected from
customers. These criteria may also be applied to separable
portions of a utility’s business, such as the generation or
transmission functions, or to specific classes of customers.
If an enterprise meets these criteria, it capitalizes costs that
would otherwise be charged to expense if the rate actions of
its regulator make it probable that those costs will be recov-
ered in future revenue. Such capitalized costs are reflected
as regulatory assets in the accompanying financial state-
ments. A significant majority of Entergy’s regulatory
assets, net of related regulatory and deferred tax liabilities,
earn a return on investment during their recovery periods.
SFAS 71 requires that rate-regulated enterprises assess the
probability of recovering their regulatory assets at each
balance sheet date. When an enterprise concludes that recov-
ery of a regulatory asset is no longer probable, the regulatory
asset must be removed from the entity’s balance sheet.
SFAS 101, “Accounting for the Discontinuation of
Application of Financial Accounting Standards Board
(FASB) Statement No. 71,” specifies how an enterprise that
ceases to meet the criteria for application of SFAS 71 for all