Entergy 2011 Annual Report Download - page 53

Entergy Corporation and Subsidiaries 2011
MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS continued
generation assets are subject to impairment if adverse market
conditions arise, if a unit ceases operation, or for certain units if
their operating licenses are not renewed. Entergy’s investments in
merchant non-nuclear generation assets are subject to impairment if
adverse market conditions arise or if a unit ceases operation.
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.
The carrying value of the asset includes any capitalized asset
retirement cost associated with the recording of an additional
decommissioning liability, therefore changes in assumptions that
affect the decommissioning liability can increase or decrease the
carrying value of the asset subject to impairment. 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.
n TIMING – Entergy currently assumes, for a number of its nuclear
units, that the plant’s license will be renewed. A change in that
assumption could have a significant effect on the expected future
cash flows and result in a significant effect on operations.
For additional discussion regarding the continued operation of
the Vermont Yankee plant, see “Impairment of Long-Lived Assets” in
Note 1 to the financial statements.
Effective January 1, 2009, Entergy adopted an accounting
pronouncement providing guidance regarding recognition and
presentation of other-than-temporary impairments related to
investments in debt securities. The assessment of whether an
investment in a debt security has suffered an other-than-temporary
impairment is based on whether Entergy has the intent to sell or
more likely than not will be required to sell the debt security before
recovery of its amortized costs. Further, if Entergy does not expect to
recover the entire amortized cost basis of the debt security, an other-
than-temporary-impairment is considered to have occurred and it is
measured by the present value of cash flows expected to be collected
less the amortized cost basis (credit loss). For debt securities held
as of January 1, 2009 for which an other-than-temporary impairment
had previously been recognized but for which assessment under
the new guidance indicates this impairment is temporary, Entergy
recorded an adjustment to its opening balance of retained earnings
of $11.3 million ($6.4 million net-of-tax). Entergy did not have
any material other than temporary impairments relating to credit
losses on debt securities in 2011, 2010 or 2009. The assessment of
whether an investment in an equity security has suffered an other
than temporary impairment continues to be based on a number of
factors including, first, whether Entergy has the ability and intent to
hold the investment to recover its value, the duration and severity
of any losses, and, then, whether it is expected that the investment
will recover its value within a reasonable period of time. Entergy’s
trusts are managed by third parties who operate in accordance with
agreements that define investment guidelines and place restrictions
on the purchases and sales of investments. As discussed in Note 1 to
the financial statements, unrealized losses that are not considered
temporarily impaired are recorded in earnings for Entergy Wholesale
Commodities. Entergy Wholesale Commodities recorded charges
to other income of $0.1 million in 2011, $1 million in 2010, and $86
million in 2009 resulting from the recognition of impairments of
certain securities held in its decommissioning trust funds that are not
considered temporary. Additional impairments could be recorded in
2012 to the extent that then current market conditions change the
evaluation of recoverability of unrealized losses.
Qualified Pension and Other
Postretirement Benefits
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 and meet
certain eligibility requirements 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 Entergy
Wholesale Commodities segments.
ASSUMPT IONS
Key actuarial assumptions utilized in determining these costs include:
n Discount rates used in determining future benefit obligations;
n Projected health care cost trend rates;
n Expected long-term rate of return on plan assets;
n Rate of increase in future compensation levels;
n Retirement rates; and
n Mortality rates.
Entergy reviews the first four assumptions listed above on an
annual basis and adjusts them as necessary. The falling interest
rate environment and volatility in the financial equity markets have
impacted Entergy’s funding and reported costs for these benefits.
In addition, these trends have caused Entergy to make a number of
adjustments to its assumptions.
The retirement and mortality rate assumptions are reviewed
every three to five years as part of an actuarial study that compares
these assumptions to the actual experience of the pension and
other postretirement plans. The 2011 actuarial study reviewed plan
experience from 2007 through 2010. As a result of the 2011 actuarial
study, changes were made to reflect the expectation that participants
have longer life expectancies and different retirement patterns than
previously assumed. These changes are reflected in the December
31, 2011 financial disclosures and are a significant factor in the
increase in 2012 pension and other postretirement costs compared
to the 2011 costs.
In selecting an assumed discount rate to calculate benefit
obligations, Entergy reviews market yields on high-quality corporate
debt and matches these rates with Entergy’s projected stream of
benefit payments. Based on recent market trends, the discount rates
used to calculate its qualified pension benefit obligation decreased
from a range of 5.6% to 5.7% for its specific pension plans in 2010 to
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