Entergy 2005 Annual Report Download - page 57

ENTERGY CORPORATION AND SUBSIDIARIES 2005
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OTHER CONTINGENCIES
As a company with multi-state domestic utility operations and a
history of international investments, Entergy 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 governmental
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 com-
plaints in which Entergy may be asserted to be a potentially
responsible party.
■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 8 to the consolidated financial
statements include more detail on ratepayer and other lawsuits and
management’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 litiga-
tion 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 trans-
action, 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 significantly affected by
events such as claims made by third parties under warranties, addi-
tional transactions contemplated by Entergy, or completion of
reviews of the tax treatment of certain transactions or issues by tax-
ing authorities. Tax reserves not expected to reverse within the next
year are reflected as non-current taxes accrued in the financial state-
ments. Entergy does not expect a material adverse effect on earnings
from these matters.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2005, Entergy implemented Financial Accounting
Standards Board (FASB) Interpretation 47, “Accounting for
Conditional Asset Retirement Obligations – an interpretation of
FASB Statement No. 143”, (FIN 47), effective as of that date, which
required the recognition of additional asset retirement obligations
other than nuclear decommissioning which are conditional in
nature. The obligations recognized upon implementation represent
Entergy’s obligation to remove and dispose of asbestos at many of its
non-nuclear generating units if and when those units are retired
from commercial service and dismantled. For the U.S. Utility busi-
ness, the implementation of FIN 47 for the rate-regulated business
of the domestic utility companies was recorded as regulatory assets,
with no resulting effect on Entergy’s net income. Entergy recorded
these regulatory assets because existing rate mechanisms in each
jurisdiction allow for the recovery in rates of the ultimate costs of
asbestos removal, either through cost of service or in rate base, from
current and future customers. As a result of this treatment, FIN 47
is expected to be earnings neutral to the rate-regulated business of
the domestic utility companies. Upon implementation of FIN 47 in
December 2005, assets increased by $28.8 million and liabilities
increased by $30.3 million for the U.S. Utility segment as a result of
recording the asset retirement obligations at their fair values of
$30.3 million as determined under FIN 47, increasing utility plant
by $2.7 million, increasing accumulated depreciation by $1.8 mil-
lion, and recording the related regulatory assets of $27.9 million.
The implementation of FIN 47 for the portion of Entergy Gulf
States not subject to cost-based ratemaking decreased earnings by
$0.9 million net-of-tax.
MANAGEMENT’S FINANCIAL DISCUSSION and ANALYSIS concluded