Entergy 2005 Annual Report Download - page 56

ENTERGY CORPORATION AND SUBSIDIARIES 2005
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Cost Sensitivity
The following chart reflects the sensitivity of qualified pension cost
to changes in certain actuarial assumptions (dollars in thousands):
Impact on Impact on
Actuarial Change in 2005 Qualified Qualified Projected
Assumption Assumption Pension Cost Benefit Obligation
Increase/(Decrease)
Discount rate (0.25%) $10,564 $105,990
Rate of return
on plan assets (0.25%) $ 4,705 –
Rate of increase
in compensation 0.25% $ 5,510 $ 33,091
The following chart reflects the sensitivity of postretirement
benefit cost to changes in certain actuarial assumptions (dollars
in thousands):
Impact on
Impact on 2005 Accumulated
Actuarial Change in Postretirement Postretirement
Assumption Assumption Benefit Cost Benefit Obligation
Increase/(Decrease)
Health care
cost trend 0.25% $4,511 $24,536
Discount rate (0.25%) $3,082 $29,341
Each fluctuation above assumes that the other components of the
calculation are held constant.
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 amor-
tized over the average remaining service period of active employees.
Additionally, Entergy accounts for the effect of asset performance
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 2005, Entergy’s total qualified pension cost was $118.3 million.
Entergy anticipates 2006 qualified pension cost to increase to
$131.6 million due to a decrease in the discount rate (from 6.00%
to 5.90%), actual return on plan assets less than 8.5%, and a plan
amendment at Non-Utility Nuclear. Pension funding was $131.8
million for 2005, and under current law, is projected to be $349 mil-
lion in 2006. This projection may change pending passage of pen-
sion reform legislation. In January 2006, $109 million was funded.
$107 million of this contribution was originally planned for 2005;
however, it was delayed as a result of the Katrina Emergency Tax
Relief Act. The rise in pension funding requirements is due to
declining interest rates and the phased-in effect of asset underper-
formance from 2000 to 2002, offset by the Pension Funding Equity
Act relief passed in April 2004.
Entergy’s qualified pension accumulated benefit obligation at
December 31, 2005, 2004, and 2003 exceeded plan assets. As a
result, Entergy was required to recognize an additional minimum
pension liability as prescribed by SFAS 87. At December 31, 2005,
Entergy increased its qualified pension plans’ additional minimum
pension liability to $406 million ($382 million net of related pension
assets) from $244 million ($218 million net of related pension assets)
at December 31, 2004. Other comprehensive income increased to
$15 million at December 31, 2005 from $6.6 million at December
31, 2004, after reductions for the unrecognized prior service cost,
amounts recoverable in rates, and taxes. Net income for 2005, 2004,
and 2003 was not affected.
Total postretirement health care and life insurance benefit costs
for Entergy in 2005 were $83.7 million, including $24.3 million in
savings due to the estimated effect of future Medicare Part D subsi-
dies. Entergy expects 2006 postretirement health care and life insur-
ance benefit costs to approximate $94.1 million, including a project-
ed $27.8 million in savings due to the estimated effect of future
Medicare Part D subsidies. The increase in postretirement health
care and life insurance benefit costs is due to the decrease in the dis-
count rate (from 6.00% to 5.90%) and an increase in the health care
cost trend rate used to calculate benefit obligations.
MANAGEMENT’S FINANCIAL DISCUSSION and ANALYSIS continued