Entergy 2008 Annual Report Download - page 53

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ENTERGY CORPORATION AND SUBSIDIARIES 2008
Management’s Financial Discussion and Analysis continued
accordance with Statement of Financial Accounting Standards
as promulgated by FASB (SFAS) 143.
n SPENT FUEL DISPOSAL – Federal regulations require the
United States Department of Energy (DOE) to provide a
permanent repository for the storage of spent nuclear fuel,
and legislation has been passed by Congress to develop
this repository at Yucca Mountain, Nevada. Until this site is
available, however, nuclear plant operators must provide for
interim spent fuel storage on the nuclear plant site, which
can require the construction and maintenance of dry cask
storage sites or other facilities. The costs of developing and
maintaining these facilities can have a significant effect (as
much as 16% of estimated decommissioning costs). Entergy’s
decommissioning studies may include cost estimates for
spent fuel storage. However, these estimates could change in
the future based on the timing of the opening of the Yucca
Mountain facility, the schedule for shipments to that facility
when it is opened, or other factors. Entergy is pursuing
damages claims against the DOE for its failure to pick up
spent fuel timely.
nTECHNOLOGY AND REGULATION – To date, there is limited
practical experience in the United States with actual
decommissioning of large nuclear facilities. As experience
is gained and technology changes, cost estimates could also
change. If regulations regarding nuclear decommissioning
were to change, this could have a potentially significant effect
on cost estimates. The effect of these potential changes is
not presently determinable. Entergy’s decommissioning cost
studies assume current technologies and regulations.
In the third quarter 2008, Entergy’s Non-Utility Nuclear business
recorded an increase of $13.7 million in decommissioning liabilities
for certain of its plants as a result of revised decommissioning cost
studies. The revised estimates resulted in the recognition of a $13.7
million asset retirement obligation asset that will be depreciated
over the remaining life of the units.
In the fourth quarter of 2007, Entergy’s Non-Utility Nuclear
business recorded an increase of $100 million in decommissioning
liabilities for certain of its plants as a result of revised
decommissioning cost studies. The revised estimates resulted in
the recognition of a $100 million asset retirement obligation asset
that will be depreciated over the remaining life of the units.
In the third quarter of 2006, Entergy’s Non-Utility Nuclear
business recorded a reduction of $27 million in decommissioning
liability for a plant as a result of a revised decommissioning cost
study and changes in assumptions regarding the timing of when
decommissioning of the plant will begin. The revised estimate
resulted in miscellaneous income of $27 million ($16.6 million
net-of-tax), reflecting the excess of the reduction in the liability
over the amount of undepreciated asset retirement cost recorded
at the time of adoption of SFAS 143.
UN B I L L E D RE V E N U E
As discussed in Note 1 to the financial statements, Entergy records
an estimate of the revenues earned for energy delivered since the
latest customer billing. Each month the estimated unbilled revenue
amounts are recorded as revenue and a receivable, and the prior
month’s estimate is reversed. The difference between the estimate
of the unbilled receivable at the beginning of the period and the
end of the period is the amount of unbilled revenue recognized
during the period. The estimate recorded is primarily based upon
an estimate of customer usage during the unbilled period and
the billed price to customers in that month, including fuel price.
Therefore, revenue recognized may be affected by the estimated
price and usage at the beginning and end of each period and fuel
price fluctuations, in addition to changes in certain components
of the calculation.
IM P A I R M E N T O F LO N G -LI V E D AS S E T S A N D
TR U S T FU N D IN V E S T M E N T S
Entergy has significant investments in long-lived assets in all of its
segments, and Entergy evaluates these assets against the market
economics and under the accounting rules for impairment
whenever there are indications that impairments may exist.
This evaluation involves a significant degree of estimation and
uncertainty, and these estimates are particularly important in
Entergy’s Utility business and the non-nuclear wholesale assets
business. In the Utility business, portions of River Bend and Grand
Gulf are not included in rate base, which could reduce the revenue
that would otherwise be recovered for the applicable portions
of those units’ generation. In the non-nuclear wholesale assets
business, Entergy’s investments in merchant generation assets are
subject to impairment if adverse market conditions arise.
In order to determine if Entergy should recognize an impairment
of a long-lived asset that is to be held and used, accounting standards
require that the sum of the expected undiscounted future cash
flows from the asset be compared to the asset’s carrying value. If
the expected undiscounted future cash flows exceed the carrying
value, no impairment is recorded; if such cash flows are less than
the carrying value, Entergy is required to record an impairment
charge to write the asset down to its fair value. If an asset is held for
sale, an impairment is required to be recognized if the fair value
(less costs to sell) of the asset is less than its carrying value.
These estimates are based on a number of key assumptions,
including:
nFUTURE POWER AND FUEL PRICES – Electricity and gas prices
have been very volatile in recent years, and this volatility is
expected to continue. This volatility necessarily increases the
imprecision inherent in the long-term forecasts of commodity
prices that are a key determinant of estimated future cash flows.
nMARKET VALUE OF GENERATION ASSETS – Valuing assets held for
sale requires estimating the current market value of generation
assets. While market transactions provide evidence for this
valuation, the market for such assets is volatile and the value of
individual assets is impacted by factors unique to those assets.
n FUTURE OPERATING COSTS – Entergy assumes relatively
minor annual increases in operating costs. Technological or
regulatory changes that have a significant impact on operations
could cause a significant change in these assumptions.
As disclosed in Note 1 to the financial statements, unrealized
losses that are not considered temporarily impaired are recorded
in earnings for Non-Utility Nuclear. Non-Utility Nuclear
recorded charges to interest income of $50 million in 2008 and
$5 million in 2007 resulting from the recognition of impairments
of certain securities held in its decommissioning trust funds that
are not considered temporary. No impairments were recorded in
2006. Given the current market events and volatility in the debt
and equity markets, additional impairments could be recorded in
2009 to the extent that then current market conditions change
the evaluation of recoverability of unrealized losses.
QU A L I F I E D PE N S I O N A N D OT H E R PO S T R E T I R E M E N T BE N E F I T S
Entergy sponsors qualified, defined benefit pension plans which
cover substantially all employees. Additionally, Entergy currently
provides postretirement health care and life insurance benefits
for substantially all employees who reach retirement age while still
working for Entergy. Entergy’s reported costs of providing these
benefits, as described in Note 11 to the financial statements, are
impacted by numerous factors including the provisions of the
plans, changing employee demographics, and various actuarial
calculations, assumptions, and accounting mechanisms. Because
of the complexity of these calculations, the long-term nature of
these obligations, and the importance of the assumptions utilized,
Entergy’s estimate of these costs is a critical accounting estimate
for the Utility and Non-Utility Nuclear segments.