Entergy 2010 Annual Report Download - page 51

ENTERGY CORPORATION AND SUBSIDIARIES 2010
Management’s Financial Discussion and Analysis continued
Critical Accounting Estimates
The preparation of Entergy’s financial statements in conformity
with generally accepted accounting principles requires
management to apply appropriate accounting policies and to
make estimates and judgments that can have a significant effect on
reported financial position, results of operations, and cash flows.
Management has identified the following accounting policies and
estimates as critical because they are based on assumptions
and measurements that involve a high degree of uncertainty,
and the potential for future changes in the assumptions and
measurements that could produce estimates that would have a
material effect on the presentation of Entergy’s financial position
or results of operations.
Nuclear Decommissioning Costs
Entergy subsidiaries own nuclear generation facilities in both
its Utility and Entergy Wholesale Commodities business units.
Regulations require Entergy subsidiaries to decommission the
nuclear power plants after each facility is taken out of service,
and money is collected and deposited in trust funds during the
facilities’ operating lives in order to provide for this obligation.
Entergy conducts periodic decommissioning cost studies to
estimate the costs that will be incurred to decommission the
facilities. The following key assumptions have a significant effect
on these estimates:
n COST ESCALATION FACTORS – Entergy’s current
decommissioning cost studies include an assumption that
decommissioning costs will escalate over present cost levels
by annual factors ranging from approximately 3% to 3.5%. A
50 basis point change in this assumption could change the
ultimate cost of decommissioning a facility by as much as an
approximate average of 20% to 25%. To the extent that a high
probability of license renewal is assumed, a change in the
estimated inflation or cost escalation rate has a larger effect
on the undiscounted cash flows because the rate of inflation is
factored into the calculation for a longer period of time.
n TIMING – In projecting decommissioning costs, two
assumptions must be made to estimate the timing of plant
decommissioning. First, the date of the plant’s retirement
must be estimated. A high probability that the plant’s license
will be renewed and operate for some time beyond the original
license term has currently been assumed for purposes of
calculating the decommissioning liability for a number of
Entergy’s nuclear units. Second, an assumption must be made
whether decommissioning will begin immediately upon plant
retirement, or whether the plant will be held in “safestore”
status for later decommissioning, as permitted by applicable
regulations. While the effect of these assumptions cannot be
determined with precision, a change of assumption of either
renewal or use of a “safestore” status can possibly change
the present value of these obligations. Future revisions to
appropriately reflect changes needed to the estimate of
decommissioning costs will affect net income, only to the
extent that the estimate of any reduction in the liability
exceeds the amount of the undepreciated asset retirement
cost at the date of the revision, for unregulated portions of
Entergy’s business. Any increases in the liability recorded
due to such changes are capitalized and depreciated over the
asset’s remaining economic life.
n SPENT FUEL DISPOSAL – Federal law requires the DOE to
provide for the permanent storage of spent nuclear fuel,
and legislation has been passed by Congress to develop a
repository at Yucca Mountain, Nevada. However the DOE
has not yet begun accepting spent nuclear fuel and is in
non-compliance with federal law. The DOE continues to delay
meeting its obligation and Entergy is continuing to pursue
damages claims against the DOE for its failure to provide
timely spent fuel storage. Until a federal 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 an average
of 20% to 30% 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 an appropriate
facility designated by the federal government to receive spent
nuclear fuel.
n TECHNOLOGY AND REGULATION – Over the past several years,
more practical experience with the actual decommissioning
of facilities has been gained and that experience has been
incorporated in to Entergy’s current decommissioning
cost estimates. However, given the long duration of
decommissioning projects, additional experience, including
technological advancements in decommissioning, could occur
and affect current cost estimates. 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.
n INTEREST RATES – The estimated decommissioning costs that
form the basis for the decommissioning liability recorded
on the balance sheet are discounted to present values using
a credit-adjusted risk-free rate. When the decommissioning
cost estimate is significantly changed requiring a revision to
the decommissioning liability and the change results in an
increase in cash flows, that increase is discounted using a
current credit-adjusted risk-free rate. Under accounting rules,
if the revision in estimate results in a decrease in estimated
cash flows, that decrease is discounted using the previous
credit-adjusted risk-free rate. Therefore, to the extent that one
of the factors noted above changes resulting in a significant
increase in estimated cash flows, current interest rates will
affect the calculation of the present value of the additional
decommissioning liability.
In the first quarter 2009, Entergy Arkansas recorded a revision
to its estimated decommissioning cost liabilities for ANO 1
and 2 as a result of a revised decommissioning cost study. The
revised estimates resulted in an $8.9 million reduction in its
decommissioning liability, along with a corresponding reduction
in the related regulatory asset.
In the second quarter 2009, System Energy recorded a revision
to its estimated decommissioning cost liability for Grand Gulf as
a result of a revised decommissioning cost study. The revised
estimate resulted in a $4.2 million reduction in its decommissioning
liability, along with a corresponding reduction in the related
regulatory asset.
49