Entergy 2011 Annual Report Download - page 52

MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS continued
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 2.5% 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 SAFSTOR status for later decommissioning, as permitted
by applicable regulations. SAFSTOR is decommissioning a
facility by placing it in a safe stable condition that is maintained
until it is subsequently decontaminated and dismantled to levels
that permit license termination, normally within 60 years from
permanent cessation of operations. While the effect of these
assumptions cannot be determined with precision, a change of
assumption of either the probability of license renewal or use
of a SAFSTOR period 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, funding for the Yucca
Mountain repository was almost completely eliminated from the
federal budget for the current and prior years, and hearings on
the facility’s NRC license have been suspended indefinitely. 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 into 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 2011, 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 $38.9 million reduction in its decommissioning liability, along with
a corresponding reduction in the related regulatory asset.
In the fourth quarter 2011, Entergy Wholesale Commodities recorded
a reduction of $34.1 million in its decommissioning cost liability for a
plant as a result of a revised decommissioning cost study obtained to
comply with a state regulatory requirement. The revised cost study
resulted in a change in the undiscounted cash flows and a credit to
decommissioning expense of $34.1 million ($21 million net-of-tax) was
recorded, reflecting the excess of the reduction in the liability over the
amount of undepreciated assets.
Unbilled Revenue
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.
Therefore, revenue recognized may be affected by the estimated price
and usage at the beginning and end of each period, in addition to changes
in certain components of the calculation.
Impairment of Long-Lived Assets and
Trust Fund Investments
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. In the
Utility business, portions of River Bend are not included in rate base,
which could reduce the revenue that would otherwise be recovered
for the applicable portions of its generation. In the Entergy Wholesale
Commodities business, Entergy’s investments in merchant nuclear
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