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Entergy 10-Q 2011 Documents found in this filing:__________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
__________________________________________________________________________________________
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrants have submitted electronically and posted on Entergy’s corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Entergy Corporation, Entergy Arkansas, Inc., Entergy Gulf States Louisiana, L.L.C., Entergy Louisiana, LLC, Entergy Mississippi, Inc., Entergy New Orleans, Inc., Entergy Texas, Inc., and System Energy Resources, Inc. separately file this combined Quarterly Report on Form 10-Q. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company reports herein only as to itself and makes no other representations whatsoever as to any other company. This combined Quarterly Report on Form 10-Q supplements and updates the Annual Report on Form 10-K for the calendar year ended December 31, 2010 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, filed by the individual registrants with the SEC, and should be read in conjunction therewith.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2011
ENTERGY CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2011
ENTERGY CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2011
In this combined report and from time to time, Entergy Corporation and the Registrant Subsidiaries each makes statements as a registrant concerning its expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “intend,” “expect,” “estimate,” “continue,” “potential,” “plan,” “predict,” “forecast,” and other similar words or expressions are intended to identify forward-looking statements but are not the only means to identify these statements. Although each of these registrants believes that these forward-looking statements and the underlying assumptions are reasonable, it cannot provide assurance that they will prove correct. Any forward-looking statement is based on information current as of the date of this combined report and speaks only as of the date on which such statement is made. Except to the extent required by the federal securities laws, these registrants undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Forward-looking statements involve a number of risks and uncertainties. There are factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, including those factors discussed or incorporated by reference in (a) Item 1A. Risk Factors in the Form 10-K, (b) Management’s Financial Discussion and Analysis in the Form 10-K and in this report, and (c) the following factors (in addition to others described elsewhere in this combined report and in subsequent securities filings):
FORWARD-LOOKING INFORMATION (Concluded)
Certain abbreviations or acronyms used in the text and notes are defined below:
DEFINITIONS (Continued)
MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS
Entergy operates primarily through its two, reportable, operating segments: Utility and Entergy Wholesale Commodities.
In the fourth quarter 2010, Entergy finished integrating its former Non-Utility Nuclear business segment and its non-nuclear wholesale asset business into the new Entergy Wholesale Commodities business in an internal reorganization. The prior period financial information in this Form 10-Q has been restated to reflect the change in reportable segments.
Second Quarter 2011 Compared to Second Quarter 2010
Following are income statement variances for Utility, Entergy Wholesale Commodities, Parent & Other, and Entergy comparing the second quarter 2011 to the second quarter 2010 showing how much the line item increased or (decreased) in comparison to the prior period:
Refer to "ENTERGY CORPORATION AND SUBSIDIARIES -SELECTED OPERATING RESULTS>" for further information with respect to operating statistics.
Net Revenue
Utility
Following is an analysis of the change in net revenue comparing the second quarter 2011 to the second quarter 2010.
The retail electric price variance is primarily due to:
These were partially offset by a formula rate plan decrease at Entergy New Orleans effective October 2010. See Note 2 to the financial statements in the Form 10-K and herein for further discussion of these proceedings.
The volume/weather variance is primarily due to an increase of 730 GWh in billed electricity usage in all sectors, including the effect of more favorable weather on the residential and commercial sectors. Industrial sales growth leveled off somewhat after significant growth since the beginning of 2010. Entergy’s service territory continues to benefit from expansions, while there has been some pullback in the paper and wood segments and small industrials.
The purchased power capacity variance is primarily due to price increases for ongoing purchased power capacity and additional capacity purchases.
The net wholesale revenue variance is primarily due to lower margins on co-owner contracts and higher wholesale energy costs.
Entergy Wholesale Commodities
Following is an analysis of the change in net revenue comparing the second quarter 2011 to the second quarter 2010.
As shown in the table above, net revenue for Entergy Wholesale Commodities decreased by $56 million, or 11%, in the second quarter 2011 compared to the second quarter 2010 primarily due to lower pricing in its contracts to sell power.
Following are key performance measures for Entergy Wholesale Commodities’ nuclear plants for the second quarter 2011 and 2010:
Overall, including its non-nuclear plants, Entergy Wholesale Commodities billed 10,652 GWh in the second quarter 2011 and 10,498 GWh in the second quarter 2010, with average realized revenue per MWh of $52.32 in the second quarter 2011 and $58.15 in the second quarter 2010.
Realized Price per MWh
See the Form 10-K for a discussion of Entergy Wholesale Commodities nuclear business’s realized price per MWh, including the factors that influence it and the decrease in the annual average realized price per MWh to $59.16 in 2010 from $61.07 for 2009. Entergy Wholesale Commodities’ nuclear business is almost certain to experience a decrease again in 2011 because, as shown in the contracted sale of energy table "Market and Credit Risk Sensitive Instruments," Entergy Wholesale Commodities has sold forward 96% of its planned nuclear energy output for the remainder of 2011 for an average contracted energy price of $54 per MWh. In addition, Entergy Wholesale Commodities has sold forward 87% of its planned nuclear energy output for 2012 for an average contracted energy price of $49 per MWh.
Other Income Statement Items
Utility
Other operation and maintenance expenses increased from $471 million for the second quarter 2010 to $485 million for the second quarter 2011 primarily due to:
These increases were partially offset by a decrease of $11 million in fossil expenses resulting from a greater number and scope of outages in second quarter 2010 compared to second quarter 2011.
Other income increased due to:
These increases were partially offset by a decrease due to $8 million in carrying charges on storm restoration costs recorded in the second quarter 2010.
Interest expense decreased primarily due to the refinancing of long-term debt at lower interest rates by certain of the Utility operating companies. Also contributing to the decrease was interest expense accrued in 2010 related to the expected result of the LPSC staff audit of the fuel adjustment clause for the period 1995 through 2004.
Entergy Wholesale Commodities
Other operation and maintenance expenses decreased from $250 million for the second quarter 2010 to $231 million for the second quarter 2011 primarily due to:
Parent & Other
The increase in other operation and maintenance expenses is primarily due to activity, which eliminates in consolidation, between the parent company and the two reportable business segments.
Interest expense increased primarily due to $1 billion of Entergy Corporation notes payable issued in September 2010 with the proceeds used to pay down the borrowings outstanding on Entergy Corporation’s revolving credit facility, which were at a lower interest rate.
Income Taxes
The effective income tax rates for the second quarters 2011 and 2010 were 32% and 38.9%, respectively. The difference in the effective income tax rate versus the statutory rate of 35% for the second quarter 2011 is primarily due to a settlement regarding an issue which had previously been considered an uncertain tax position. These factors were partially offset by a Michigan tax law change that repealed the business tax and enacted a corporate income tax, which eliminates a deduction that was available under the business tax; state income taxes; and certain book and tax differences for Utility plant items. The difference in the effective income tax rate versus the statutory rate of 35% for the second quarter 2010 was primarily due to state income taxes and certain book and tax differences for Utility plant items.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
Following are income statement variances for Utility, Entergy Wholesale Commodities, Parent & Other, and Entergy comparing the six months ended June 30, 2011 to the six months ended June 30, 2010 showing how much the line item increased or (decreased) in comparison to the prior period:
Refer to “ENTERGY CORPORATION AND SUBSIDIARIES - SELECTED OPERATING RESULTS>” for further information with respect to operating statistics.
Net Revenue
Utility
Following is an analysis of the change in net revenue comparing the six months ended June 30, 2011 to the six months ended June 30, 2010.
The retail electric price variance is primarily due to:
These were partially offset by a formula rate plan decrease at Entergy New Orleans effective October 2010. See Note 2 to the financial statements in the Form 10-K for further discussion of these proceedings.
The volume/weather variance is primarily due to an increase of 1,202 GWh in weather-adjusted usage across all sectors. Weather-adjusted residential retail sales growth reflected an increase in the number of customers. Industrial sales have realized sustained growth since the beginning of 2010 and the first half of 2011 continued the trend. Entergy’s service territory has benefitted from the national manufacturing economy as well as industrial facility expansions. Industrial customers in Entergy’s service territory also have benefitted from the need to re-stock inventory and export trends. The weather effect declined, despite the experience of favorable weather in the first half of 2011, primarily because the near-record-setting cold weather experienced in the first quarter 2010 was even more favorable.
The net gas revenue variance is primarily due to milder weather as compared to last year.
The purchased power capacity variance is primarily due to price increases for ongoing purchased power capacity and additional capacity purchases.
The net wholesale revenue variance is primarily due to lower margins on co-owner contracts and higher wholesale energy costs.
Entergy Wholesale Commodities
Following is an analysis of the change in net revenue comparing the six months ended June 30, 2011 to the six months ended June 30, 2010.
As shown in the table above, net revenue for Entergy Wholesale Commodities decreased by $96 million, or 9%, in the six months ended June 30, 2011 compared to the six months ended June 30, 2010 primarily due to lower pricing in its contracts to sell power and lower volume resulting from an increase in forced outages for Entergy Wholesale Commodities’ nuclear fleet in 2011.
Following are key performance measures for Entergy Wholesale Commodities’ nuclear plants for the six months ended June 30, 2011 and 2010:
Overall, including its non-nuclear plants, Entergy Wholesale Commodities billed 21,171 GWh in the six months ended June 30, 2011 and 21,626 GWh in the six months ended June 30, 2010, with average realized revenue per MWh of $54.64 in the six months ended June 30, 2011 and $58.23 in the six months ended June 30, 2010. See also the discussion in “Realized Price per MWh” in the Second Quarter 2011 Compared to Second Quarter 2010 section.
Other Income Statement Items
Utility
Other operation and maintenance expenses increased from $906 million for the six months ended June 30, 2010 to $933 million for the six months ended June 30, 2011 primarily due to:
These increases were partially offset by a decrease of $18 million in fossil expenses resulting from more outages in the first half of 2010 and an increase of $6 million in nuclear insurance refunds received in 2011 as compared to the same period in 2010.
Other income increased due to an increase in distributions of $12 million earned by Entergy Louisiana and $7 million earned by Entergy Gulf States Louisiana on investments in preferred membership interests of Entergy Holdings Company. The distributions on preferred membership interests are eliminated in consolidation and have no effect on Entergy’s net income because the investment is in another Entergy subsidiary. See Note 2 to the financial statements in the Form 10-K for discussion of these investments in preferred membership interests. This was partially offset by a decrease due to $8 million in carrying charges on storm restoration costs recorded in the second quarter 2010.
Interest expense decreased primarily due to the refinancing of long-term debt at lower interest rates by certain of the Utility operating companies. Also contributing to the decrease was interest expense accrued in 2010 related to the expected result of the LPSC staff audit of Entergy Gulf States Louisiana’s fuel adjustment clause for the period 1995 through 2004.
Entergy Wholesale Commodities
Other operation and maintenance expenses decreased from $510 million for the six months ended June 30, 2010 to $440 million for the six months ended June 30, 2011 primarily due to:
Other income decreased primarily due to a decrease in interest income earned on loans to the parent company, Entergy Corporation, and a decrease of $9 million in realized earnings on decommissioning trust fund investments.
Interest expense decreased primarily due to the write-off of $37 million of debt financing costs in the first quarter 2010, primarily incurred for a $1.2 billion credit facility that will not be used, in connection with Entergy’s decision to unwind the infrastructure created for the planned spin-off of its non-utility nuclear business.
Parent & Other
Interest expense increased primarily due to $1 billion of Entergy Corporation notes payable issued in September 2010 with the proceeds used to pay down the borrowings outstanding on Entergy Corporation’s revolving credit facility, which were at a lower interest rate.
Income Taxes
The effective income tax rates for the six months ended June 30, 2011 and 2010 were 35.4% and 39.5%, respectively. The difference in the effective income tax rate versus the statutory rate of 35% for the six months ended June 30, 2011 is primarily due to a settlement regarding an issue which had previously been considered an uncertain tax position. This was partially offset by:
The difference in the effective income tax rate versus the statutory rate of 35% for the six months ended June 30, 2010 was primarily due to:
These factors were partially offset by:
See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources" in the Form 10-K for a discussion of Entergy’s capital structure, capital expenditure plans and other uses of capital, and sources of capital. Following are updates to that discussion.
Capital Structure
Entergy’s capitalization is balanced between equity and debt, as shown in the following table.
Net debt consists of debt less cash and cash equivalents. Debt consists of notes payable, capital lease obligations, and long-term debt, including the currently maturing portion. Capital consists of debt, common shareholders’ equity, and subsidiaries’ preferred stock without sinking fund. Net capital consists of capital less cash and cash equivalents. Entergy uses the net debt to net capital ratio in analyzing its financial condition and believes it provides useful information to its investors and creditors in evaluating Entergy’s financial condition.
As discussed in the Form 10-K, Entergy Corporation has in place a revolving credit facility that expires in August 2012. Entergy Corporation has the ability to issue letters of credit against the total borrowing capacity of the facility. As of June 30, 2011, the capacity and amounts outstanding under the credit facility are:
Entergy Corporation’s credit facility requires it to maintain a consolidated debt ratio of 65% or less of its total capitalization. The calculation of this debt ratio under Entergy Corporation’s credit facility is different than the calculation of the debt to capital ratio above. Entergy is currently in compliance with this covenant. If Entergy fails to meet this ratio, or if Entergy Corporation or one of the Utility operating companies (except Entergy New Orleans) defaults on other indebtedness or is in bankruptcy or insolvency proceedings, an acceleration of the facility’s maturity date may occur.
See Note 4 to the financial statements herein for additional discussion of the Entergy Corporation credit facility and discussion of the Registrant Subsidiaries’ credit facilities.
Capital Expenditure Plans and Other Uses of Capital
See the table and discussion in the Form 10-K under "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources - Capital Expenditure Plans and Other Uses of Capital,"> that sets forth the amounts of planned construction and other capital investments by operating segment for 2011 through 2013. Following are updates to the discussion in the Form 10-K.
Acadia Unit 2 Purchase Agreement
See the Form 10-K for a discussion of the agreement Entergy Louisiana signed to acquire Unit 2 of the Acadia Energy Center, a 580 MW generating unit located near Eunice, La., from Acadia Power Partners, LLC, an independent power producer. Entergy Louisiana acquired the plant on April 29, 2011.
Summer 2009 Long-Term Request for Proposal
As discussed in the Form 10-K, the construction or purchase of three resources identified in the Summer 2009 Long-Term Request for Proposal were included in the 2011-2013 capital expenditure estimates in the Form 10-K. In addition to the self-build option at Entergy Louisiana’s Ninemile site noted in the Form 10-K, in April 2011 two Entergy Utility operating companies announced that they have signed agreements to acquire the other two resources, the 620 MW Hot Spring Energy Facility and the 450 MW Hinds Energy Facility.
Ninemile Point Unit 6 Self-Build Project
In June 2011, Entergy Louisiana filed with the LPSC an application seeking certification that the public necessity and convenience would be served by Entergy Louisiana’s construction of a combined-cycle gas turbine generating facility (Ninemile 6) at its existing Ninemile Point electric generating station. Ninemile 6 will be a nominally-sized 550 MW unit that is estimated to cost approximately $721 million to construct, excluding interconnection and transmission upgrades. Entergy Gulf States Louisiana joined in the application, seeking certification of its purchase under a life-of-unit power purchase agreement of up to 35% of the capacity and energy generated by Ninemile 6. The Ninemile 6 capacity and energy is proposed to be allocated 55% to Entergy Louisiana, 25% to Entergy Gulf States Louisiana, and 20% to Entergy New Orleans. Entergy New Orleans has filed a request with the City Council to approve its purchase under a life-of-unit power purchase agreement of this capacity and energy. If the City Council does not approve this power purchase agreement in a timely manner, then an allocation of 65% to Entergy Louisiana and 35% to Entergy Gulf States Louisiana is proposed. If approvals are obtained from the LPSC and other permitting agencies, Ninemile 6 construction is expected to begin in 2012, and the unit is expected to commence commercial operation by mid-2015.
Hot Spring Energy Facility Purchase Agreement
In April 2011, Entergy Arkansas announced that it has signed an asset purchase agreement to acquire the Hot Spring Energy Facility, a 620 MW natural gas-fired combined-cycle turbine plant located in Hot Spring County, Arkansas, from a subsidiary of KGen Power Corporation. The purchase price is expected to be approximately $253 million. Entergy Arkansas also expects to invest in various plant upgrades at the facility after closing and expects the total cost of the acquisition to be approximately $277 million. A transmission study estimates that the acquisition could require investment for supplemental upgrades in the Entergy transmission system, but there are still uncertainties associated with the results of this study that must be resolved. The purchase is contingent upon, among other things, obtaining necessary approvals, including full cost recovery, from various federal and state regulatory and permitting agencies. These include regulatory approvals from the APSC and FERC, as well as clearance under the Hart-Scott-Rodino anti-trust law. Closing is expected to occur in mid-2012. In July 2011, Entergy Arkansas filed its application with the APSC requesting approval of the acquisition and full cost recovery.
Hinds Energy Facility Purchase Agreement
In April 2011, Entergy Mississippi announced that it has signed an asset purchase agreement to acquire the Hinds Energy Facility, a 450 MW natural gas-fired combined-cycle turbine plant located in Jackson, Mississippi, from a subsidiary of KGen Power Corporation. The purchase price is expected to be approximately $206 million. Entergy Mississippi also expects to invest in various plant upgrades at the facility after closing and expects the total cost of the acquisition to be approximately $246 million. A transmission study estimates that the acquisition could require investment for supplemental upgrades in the Entergy transmission system, but there are still uncertainties associated with the results of this study that must be resolved. The purchase is contingent upon, among other things, obtaining necessary approvals, including full cost recovery, from various federal and state regulatory and permitting agencies. These include regulatory approvals from the MPSC and FERC, as well as clearance under the Hart-Scott-Rodino anti-trust law. Closing is expected to occur in mid-2012. In July 2011, Entergy Mississippi filed with the MPSC requesting approval of the acquisition and full cost recovery.
Waterford 3 Steam Generator Replacement Project
See the Form 10-K for a discussion of the Waterford 3 Steam Generator Replacement project. With regard to the delay in the delivery of the steam generators, Entergy Louisiana worked with the manufacturer to fully develop and evaluate repair options, and expects the replacement steam generators to be delivered in time for the Fall 2012 refueling outage. Extensive inspections of the existing steam generators at Waterford 3 in cooperation with the manufacturer were completed in April 2011. The review of data obtained during these inspections supports the conclusion that Waterford 3 can operate safely for another full cycle before the replacement of the existing steam generators. Entergy Louisiana is required to report formally its findings to the NRC through a report made 180 days after plant start up. At this time, a requirement to perform a mid-cycle outage for further inspections in order to allow the plant to continue operation until its Fall 2012 refueling outage is not anticipated. Entergy Louisiana currently expects the cost of the project, including carrying costs, to increase to approximately $687 million if the replacement occurs during the Fall 2012 refueling outage.
Entergy Louisiana’s existing formula rate plan provides for rate treatment of the Waterford 3 project costs, including in-service rate recovery without regulatory lag and treatment outside of the formula rate plan earnings sharing formula; however, these provisions contemplated the project being placed in service during the term of the current formula rate plan and will not apply at the time of the expected in-service date in the Fall 2012. Entergy Louisiana will seek to reestablish comparable rate recovery provisions for the project through renewal or extension of the current formula rate plan provisions or through a base rate filing.
Dividends and Stock Repurchases
Declarations of dividends on Entergy’s common stock are made at the discretion of the Board. Among other things, the Board evaluates the level of Entergy’s common stock dividends based upon Entergy’s earnings, financial strength, and future investment opportunities. At its January, April, and July 2011 meetings, the Board declared dividends of $0.83 per share, which is the same quarterly dividend per share that Entergy has paid since second quarter 2010.
Cash Flow Activity
As shown in Entergy’s Consolidated Statements of Cash Flows, cash flows for the six months ended June 30, 2011 and 2010 were as follows:
Operating Activities
Entergy's cash flow provided by operating activities decreased by $491 million for the six months ended June 30, 2011 compared to the six months ended June 30, 2010, primarily due to a decrease in deferred fuel cost collections and an increase of $163 million in pension contributions. See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – >Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for a discussion of qualified pension and other postretirement benefits funding. A $42 million increase in incentive compensation payments, which occur in the first quarter, and the decrease in Entergy Wholesale Commodities net revenue that is discussed above also contributed to the decrease, as well as several other individually insignificant factors.
Investing Activities
Net cash used in investing activities increased by $654 million for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 primarily due to:
Financing Activities
Financing activities provided $86 million of cash for the six months ended June 30, 2011 compared to using $670 million of cash for the six months ended June 30, 2010 primarily because long-term debt activity provided approximately $519 million of cash in 2011 and used approximately $249 million of cash in 2010. For details of Entergy's long-term debt activity in 2011 see Note 4 to the financial statements herein. Offsetting these increases in sources of cash, Entergy repurchased $160 million of its common stock in the six months ended June 30, 2011 and repurchased $138 million of its common stock in the six months ended June 30, 2010. Entergy’s share repurchase programs are discussed in the Form 10-K.
See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - >Rate, Cost-recovery, and Other Regulation" in the Form 10-K for discussions of rate regulation, federal regulation, and related regulatory proceedings.
State and Local Rate Regulation and Fuel-Cost Recovery
See Note 2 to the financial statements herein for updates to the discussion in the Form 10-K regarding these proceedings.
Federal Regulation
See the Form 10-K for a discussion of federal regulatory proceedings. Following are updates to that discussion.
System Agreement and Independent Coordinator of Transmission (ICT)
As discussed in the Form 10-K, in November 2010 the FERC issued an order accepting the Utility operating companies’ proposal to extend the ICT arrangement with SPP by an additional term of two years, providing time for analysis of longer term structures. In addition, in December 2010 the FERC issued an order that granted the Entergy Regional State Committee (E-RSC) additional authority over transmission upgrades and cost allocation. The E-RSC, comprised of one representative from each of the Utility operating company retail regulators, was formed in 2009 to consider several of the issues related to the Entergy transmission system. The Utility operating companies expect that the E-RSC will review the cost-benefit analysis, discussed below, that the Utility operating companies submitted in May 2011 to each of their respective retail regulators comparing the ICT arrangement to joining the SPP RTO or the Midwest Independent Transmission System Operator (MISO).
Also as discussed in the Form 10-K, in February 2010 the APSC issued a show cause order opening an inquiry to conduct an investigation regarding the prudence of Entergy Arkansas’s entering a successor pooling agreement with the other Entergy Utility operating companies, as opposed to becoming a standalone entity upon exit from the System Agreement in December 2013, and whether Entergy Arkansas, as a standalone utility, should join the SPP RTO. The APSC subsequently added evaluation of Entergy Arkansas joining MISO on a standalone basis as an alternative to be considered. In August 2010, the APSC directed Entergy Arkansas and all parties to compare five strategic options at the same time as follows: (1) Entergy Arkansas Self-Provide; (2) Entergy Arkansas with 3rd party coordination agreements; (3) Successor Arrangements; (4) Entergy Arkansas as a standalone member of SPP RTO; and (5) Entergy Arkansas as a standalone member of MISO.
On April 25, 2011, Entergy announced that each of the Utility operating companies propose joining MISO, which is expected to provide long-term benefits for the customers of each of the Utility operating companies. MISO is a regional transmission organization that operates in 13 U.S. states (Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Montana, North Dakota, Ohio, Pennsylvania, South Dakota, and Wisconsin) and also in Canada. The Utility operating companies provided analysis in May 2011 to their retail regulators supporting this decision. The APSC has requested additional information from both Entergy and MISO. The APSC’s procedural schedule for the proceeding includes an evidentiary hearing scheduled for September 7, 2011. Entergy’s May 2011 filings estimate that the expected transition and implementation costs of joining MISO are approximately $105 million if all of the Utility operating companies join MISO, most of which will be spent in late 2012 and 2013. Maintaining the viability of the alternatives of Entergy Arkansas joining MISO alone or standing alone within an ICT arrangement is expected to result in an additional cost of approximately $35 million, for a total cost of approximately $140 million. This amount could increase with extended litigation in various regulatory proceedings. It is expected that costs will be incurred to obtain regulatory approvals, to revise or implement commercial and legal agreements, to integrate transmission and generation facilities, to develop back-office accounting and settlement systems, and to build out communications infrastructure. The Utility operating companies also expect to make filings later in 2011 with their retail regulators regarding the transfer of control of their transmission assets to MISO. The target implementation date for joining MISO is December 2013.
In June 2011, MISO filed with the FERC a request for a transitional waiver of provisions of its open access transmission energy and operating reserve markets tariff regarding allocation of transmission network upgrade costs, in order to establish a transition for the integration of the Utility operating companies. Several parties have intervened in the proceeding, including Entergy, the APSC, the LPSC, and the City Council, and some of the parties have also filed comments or protests. A procedural schedule has not been established.
Commodity Price Risk
Power Generation
As discussed more fully in the Form 10-K, the sale of electricity from the power generation plants owned by Entergy Wholesale Commodities, unless otherwise contracted, is subject to the fluctuation of market power prices. Following is an updated summary of the amount of Entergy Wholesale Commodities nuclear power plants’ planned energy output that is sold forward under physical or financial contracts as of August 2, 2011 (2011 represents the remainder of the year):
Entergy estimates that a $10 per MWh change in the annual average energy price in the markets in which the Entergy Wholesale Commodities nuclear business sells power, based on June 30, 2011 market conditions, planned generation volume, and hedged position, would have a corresponding effect on pre-tax net income of $9 million in 2011.
Some of the agreements to sell the power produced by Entergy Wholesale Commodities’ nuclear power plants contain provisions that require an Entergy subsidiary to provide collateral to secure its obligations under the agreements. The Entergy subsidiary is required to provide collateral based upon the difference between the current market and contracted power prices in the regions where Entergy Wholesale Commodities sells power. The primary form of collateral to satisfy these requirements is an Entergy Corporation guaranty. Cash and letters of credit are also acceptable forms of collateral. At June 30, 2011, based on power prices at that time, Entergy had liquidity exposure of $61 million under the guarantees in place supporting Entergy Nuclear Power Marketing (a subsidiary in the Entergy Wholesale Commodities segment) transactions, $20 million of guarantees that support letters of credit, and $6 million of posted cash collateral to the ISOs. As of June 30, 2011, the credit exposure associated with Entergy Wholesale Commodities assurance requirements would increase by $116 million for a $1 per MMBtu increase in gas prices in both the short-and long-term markets. In the event of a decrease in Entergy Corporation’s credit rating to below investment grade, based on power prices as of June 30, 2011, Entergy would have been required to provide approximately $53 million of additional cash or letters of credit under some of the agreements.
As of June 30, 2011, the counterparties or their guarantors for 99.8% of the planned energy output under contract for Entergy Wholesale Commodities through 2015 have public investment grade credit ratings and 0.2% is with load-serving entities without public credit ratings.
In addition to selling the power produced by its plants, Entergy Wholesale Commodities sells unforced capacity to load-serving distribution companies in order for those companies to meet requirements placed on them by the ISO in their area. Following is a summary of the amount of the Entergy Wholesale Commodities nuclear plants’ installed capacity that is currently sold forward, and the blended amount of Entergy Wholesale Commodities nuclear plants’ planned generation output and installed capacity that is sold forward as of August 2, 2011 (2011 represents the remainder of the year):
After the nuclear incident in Japan resulting from the March 2011 earthquake and tsunami, the NRC established a task force to conduct a review of processes and regulations relating to nuclear facilities in the United States. The task force issued a near term (90-day) report in July 2011 that has made recommendations, which are currently being evaluated. The lessons learned from the events in Japan and the NRC recommendations may affect future operations of U.S. nuclear facilities, including Entergy's, and could, among other things, result in increased costs and capital requirements associated with operating Entergy's nuclear plants.
See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy’s accounting for nuclear decommissioning costs, unbilled revenue, impairment of long-lived assets and trust fund investments, qualified pension and other postretirement benefits, and other contingencies. Following is an update to that discussion. For updates of the impairment of long-lived assets discussion regarding Vermont Yankee see Note 11 to the financial statements herein.
Nuclear Decommissioning Costs
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.
The accounting standard-setting process, including projects between the FASB and the International Accounting Standards Board (IASB) to converge U.S. GAAP and International Financial Reporting Standards, is ongoing and the FASB and the IASB are each currently working on several projects that have not yet resulted in final pronouncements. Final pronouncements that result from these projects could have a material effect on Entergy’s future net income or financial position.
In May 2011 the FASB issued ASU No. 2011-4, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which states that the ASU explains how to measure fair value. The ASU states that: 1) the amendments in the ASU result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards; 2) consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements; 3) for many of the requirements, the
FASB does not intend for the ASU to result in a change in the application of the requirements of current U.S. GAAP; 4) some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements; and 5) other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. ASU No. 2011-4 is effective for Entergy for the first quarter 2012. Entergy does not expect ASU No. 2011-4 to affect materially its results of operations, financial position, or cash flows.
In June 2011 the FASB issued ASU No. 2011-5, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-5 is effective for Entergy for the first quarter 2012. ASU No. 2011-5 will have no effect on Entergy’s results of operations, financial position, or cash flows.
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