Entergy 2012 Annual Report Download - page 96

Entergy Corporation and Subsidiaries 2012
Medicare Prescription Drug, Improvement and
Modernization Act of 2003
In December 2003, the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 became law. The Act introduces a
prescription drug benefit cost under Medicare (Part D), which started
in 2006, as well as a federal subsidy to employers who provide a
retiree prescription drug benefit that is at least actuarially equivalent
to Medicare Part D.
The actuarially estimated effect of future Medicare subsidies
reduced the December 31, 2012 and 2011 Accumulated Postre-
tirement Benefit Obligation by $316.6 million and $274 million,
respectively, and reduced the 2012, 2011, and 2010 other postretire-
ment benefit cost by $31.2 million, $33.0 million, and $26.6 mil-
lion, respectively. In 2012, Entergy received $6 million in Medicare
subsidies for prescription drug claims.
Defined Contribution Plans
Entergy sponsors the Savings Plan of Entergy Corporation and Sub-
sidiaries (System Savings Plan). The System Savings Plan is a defined
contribution plan covering eligible employees of Entergy and its sub-
sidiaries. The employing Entergy subsidiary makes matching contri-
butions for all non-bargaining and certain bargaining employees to
the System Savings Plan in an amount equal to 70% of the partici-
pants’ basic contributions, up to 6% of their eligible earnings per pay
period. The 70% match is allocated to investments as directed by
the employee.
Entergy also sponsors the Savings Plan of Entergy Corporation
and Subsidiaries IV (established in 2002), the Savings Plan of Entergy
Corporation and Subsidiaries VI (established in April 2007), and the
Savings Plan of Entergy Corporation and Subsidiaries VII (established
in April 2007) to which matching contributions are also made. The
plans are defined contribution plans that cover eligible employees, as
defined by each plan, of Entergy and its subsidiaries. Effective June
3, 2010, employees participating in the Savings Plan of Entergy Cor-
poration and Subsidiaries II (Savings Plan II) were transferred into
the System Savings Plan when Savings Plan II merged into the System
Savings Plan.
Entergy’s subsidiaries’ contributions to defined contribution plans
collectively were $43.7 million in 2012, $42.6 million in 2011, and
$41.8 million in 2010. The majority of the contributions were to the
System Savings Plan.
NOTE 12. STOCK-BASED COMPENSATION
Entergy grants stock options, restricted stock, performance units, and
restricted unit awards to key employees of the Entergy subsidiaries
under its Equity Ownership Plans which are shareholder-approved
stock-based compensation plans. The Equity Ownership Plan, as
restated in February 2003 (2003 Plan), had 743,129 authorized
shares remaining for long-term incentive and restricted unit awards
as of December 31, 2012. Effective January 1, 2007, Entergy’s
shareholders approved the 2007 Equity Ownership and Long-Term
Cash Incentive Plan (2007 Plan). The maximum aggregate number of
common shares that can be issued from the 2007 Plan for stock-based
awards is 7,000,000 with no more than 2,000,000 available for non-
option grants. The 2007 Plan, which only applies to awards made on
or after January 1, 2007, will expire after 10 years. As of December
31, 2012, there were 1,075,702 authorized shares remaining for
stock-based awards, all of which are available for non-option grants.
Effective May 6, 2011, Entergy’s shareholders approved the 2011
Equity Ownership and Long-Term Cash Incentive Plan (2011 Plan).
The maximum number of common shares that can be issued from
the 2011 Plan for stock-based awards is 5,500,000 with no more
than 2,000,000 available for incentive stock option grants. The
2011 Plan, which only applies to awards made on or after May 6,
2011, will expire after 10 years. As of December 31, 2012, there
were 4,263,138 authorized shares remaining for stock-based awards,
including 1,447,600 for incentive stock option grants.
Stock Options
Stock options are granted at exercise prices that equal the closing
market price of Entergy Corporation common stock on the date of
grant. Generally, stock options granted will become exercisable in
equal amounts on each of the first three anniversaries of the date
of grant. Unless they are forfeited previously under the terms of the
grant, options expire ten years after the date of the grant if they are
not exercised.
The following table includes financial information for stock
options for each of the years presented (in millions):
2012 2011 2010
Compensation expense included in
Entergy’s consolidated net income $7.7 $10.4 $15.0
Tax benefit recognized in Entergy’s
consolidated net income $3.0 $ 4.0 $ 5.8
Compensation cost capitalized as
part of fixed assets and inventory $1.5 $ 2.0 $ 2.9
Entergy determines the fair value of the stock option grants by
considering factors such as lack of marketability, stock retention
requirements, and regulatory restrictions on exercisability in accor-
dance with accounting standards. The stock option weighted-average
assumptions used in determining the fair values are as follows:
2012 2011 2010
Stock price volatility 25.11% 24.25% 25.73%
Expected term in years 6.55 6.64 5.46
Risk-free interest rate 1.22% 2.70% 2.57%
Dividend yield 4.50% 4.20% 3.74%
Dividend payment per share $3.32 $3.32 $3.24
Stock price volatility is calculated based upon the daily public stock
price volatility of Entergy Corporation common stock over a period
equal to the expected term of the award. The expected term of the
options is based upon historical option exercises and the weighted
average life of options when exercised and the estimated weighted
average life of all vested but unexercised options. In 2008, Entergy
implemented stock ownership guidelines for its senior executive
officers. These guidelines require an executive officer to own shares
of Entergy Corporation common stock equal to a specified multiple
of his or her salary. Until an executive officer achieves this ownership
position the executive officer is required to retain 75% of the after-
tax net profit upon exercise of the option to be held in Entergy
Corporation common stock. The reduction in fair value of the stock
options due to this restriction is based upon an estimate of the call
option value of the reinvested gain discounted to present value over
the applicable reinvestment period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
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