Entergy 2008 Annual Report Download - page 41

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ENTERGY CORPORATION AND SUBSIDIARIES 2008
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Management’s Financial Discussion and Analysis continued Management’s Financial Discussion and Analysis continued
ENTERGY CORPORATION AND SUBSIDIARIES 2008
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The LPSC had approved the temporary suspension of Phase II of
the Little Gypsy proceedings because Entergy Louisiana needed to
update its estimated project cost and schedule in order to support
the request to recover cash earnings on its construction work in
progress (CWIP) costs. On October 16, 2008, Entergy Louisiana,
together with Entergy Gulf States Louisiana, filed an application
to resume Phase II of the proceeding. The Phase II filing seeks
certification for Entergy Gulf States Louisiana to participate in a
one-third ownership share in the repowering project. In addition,
Entergy Louisiana and Entergy Gulf States Louisiana seek
recovery of approximately 79% of their construction financing
costs through the recovery of cash earnings on CWIP costs. The
LPSC previously found that the recovery of CWIP for a large
baseload project may be in the public interest as cash earnings
may be needed to protect the utility’s financial integrity, maintain
an acceptable credit rating, prevent an undue increase in the
utility’s cost of capital, or to accomplish phasing in of the cost of a
large capital project for the benefit of customers. In Phase II, the
LPSC would rule on Entergy Gulf States Louisiana’s certification
request, determine the appropriate amount of CWIP costs, if any,
to be recovered and would develop the allocation, accounting
and rate recovery mechanisms for such recovery. The LPSC also
would determine the appropriate procedure or mechanism for
synchronizing base rate recovery of Little Gypsy’s fixed or non-fuel
costs with its commercial in-service date. In addition, the LPSC
consolidated, into the Little Gypsy Phase II proceeding, the issue
of whether Entergy Louisiana would be permitted to recover cash
earnings on its CWIP costs for the Waterford 3 Steam Generator
Replacement Project discussed below. After a status conference in
November 2008, a procedural schedule was established for Phase
II that includes a hearing on April 28-30, 2009. Entergy Louisiana
and Entergy Gulf States Louisiana have requested that the case be
decided in time to permit the recovery of cash earnings on CWIP
beginning in July 2009.
Entergy Louisiana and Entergy Gulf States Louisiana currently
expect that the project would cost $1.76 billion (including
AFUDC), including $1.1 billion for the 2009-2011 period.
Waterford 3 Steam Generator Replacement Project
Entergy Louisiana plans to replace the Waterford 3 steam
generators, along with the reactor vessel closure head and
control element drive mechanisms, in 2011. Replacement of these
components is common to pressurized water reactors throughout
the nuclear industry. The nuclear industry continues to address
susceptibility to stress corrosion cracking of certain materials
associated with these components within the reactor coolant
system. The issue is applicable to Waterford 3 and is managed
in accordance with standard industry practices and guidelines.
Routine inspections of the steam generators during Waterford
3’s Fall 2006 refueling outage identified additional degradation
of certain tube spacer supports in the steam generators that
required repair beyond that anticipated prior to the outage.
Corrective measures were successfully implemented to permit
continued operation of the steam generators. While potential
future replacement of these components had been contemplated,
additional steam generator tube and component degradation
necessitates replacement of the steam generators as soon as
reasonably achievable. The earliest the new steam generators can
be manufactured and delivered for installation is 2011. A mid-
cycle outage performed in 2007 supports Entergy Louisiana’s
2011 replacement strategy. The reactor vessel head and control
element drive mechanisms will be replaced at the same time,
utilizing the same reactor building construction opening that is
necessary for the steam generator replacement.
In June 2008, Entergy Louisiana filed with the LPSC for approval
of the project, including full cost recovery. The petition seeks relief
in two phases. Phase I seeks certification within 120 days that the
public convenience and necessity would be served by undertaking
this project. Among other relief requested, Entergy Louisiana is
also seeking approval for a procedure to synchronize permanent
base rate recovery when the project is placed in service, either by a
formula rate plan or base rate filing. In Phase II, Entergy Louisiana
will seek cash earnings on construction work in progress.
Following discovery and the filing of testimony by the LPSC staff
and an intervenor, the parties entered into a stipulated settlement
of the proceeding. The LPSC unanimously approved the settlement
in November 2008. The settlement resolved the following issues: 1)
the accelerated degradation of the steam generators is not the result
of any imprudence on the part of Entergy Louisiana; 2) the decision
to undertake the replacement project at the current estimated cost
of $511 million is in the public interest, is prudent, and would
serve the public convenience and necessity; 3) the scope of the
replacement project is in the public interest; 4) undertaking the
replacement project at the target installation date during the 2011
refueling outage is in the public interest; and 5) the jurisdictional
costs determined to be prudent in a future prudence review are
eligible for cost recovery, either in an extension or renewal of the
formula rate plan or in a full base rate case including necessary
proformas. Upon completion of the replacement project, the LPSC
will undertake a prudence review with regard to the following
aspects of the replacement project: 1) project management; 2) cost
controls; 3) success in achieving stated objectives; 4) the costs of
the replacement project; and 5) the outage length and replacement
power costs. The settlement also provides that Phase II of the
proceeding will be consolidated with Phase II of the Little Gypsy
proceeding, and the LPSC has consolidated them.
Entergy Louisiana estimates that it will spend approximately
$511 million on this project, including $377 million over the 2009-
2011 period.
Dividends and Stock Repurchases
Declarations of dividends on Entergy’s common stock are made
at the discretion of the Board. Among other things, the Board
evaluates the level of Entergy’s common stock dividends based
upon Entergy’s earnings, financial strength, and future investment
opportunities. At its January 2009 meeting, the Board declared a
dividend of $0.75 per share, which is the same quarterly dividend
per share that Entergy has paid since third quarter 2007. Entergy
paid $573 million in 2008 and $507 million in 2007 in cash
dividends on its common stock.
In accordance with Entergy’s stock-based compensation plan,
Entergy periodically grants stock options to its key employees,
which may be exercised to obtain shares of Entergy’s common
stock. According to the plan, these shares can be newly issued
shares, treasury stock, or shares purchased on the open market.
Entergy’s management has been authorized by the Board to
repurchase on the open market shares up to an amount sufficient
to fund the exercise of grants under the plans.
In addition to the authority to fund grant exercises, in January
2007 the Board approved a program under which Entergy is
authorized to repurchase up to $1.5 billion of its common stock.
In January 2008, the Board authorized an incremental $500
million share repurchase program to enable Entergy to consider
opportunistic purchases in response to equity market conditions.
Entergy expects to complete both of these programs in 2009. As
of December 31, 2008, $1.4 billion of share repurchases have been
made pursuant to these programs. Entergy’s financial aspirations
following the consummation of the planned Non-Utility Nuclear