The theme of this year's annual report is "having it all." Obviously, that phrase means different things to different people. To many of our customers it's the dream of home ownership, stable employment, adequate healthcare and seeing their children head off to college for the first time in their family's history. Unfortunately, to a great many, it seems little more than a dream.
For some "having it all" means the freedom to use the air and water or other natural resources as if they're free for the taking or the sole property of this generation. To others, it may mean simply accumulating more of anything than you can possibly use.
When I joined Entergy over eight years ago we were on the brink. Having strained our financial resources in order to seek "growth," we were rapidly losing touch with what really mattered, moving away from what we really did well. Every decision seemed to come down to either/or, and in hindsight many of the choices seemed all wrong.
We vowed to dig out of that hole and never make the same mistakes again – in particular, as my mother would say, "having eyes bigger than your stomach." Through a lot of good fortune and the incredible efforts of 14,000 players, those dark times are a distant memory. But the temptation to get away from what got us here always exists. Particularly when the market is always looking for the next big thing.
Compared to many others, our stated strategy sounds just too complicated or too fluid. It doesn't fit on a bumper sticker. How do you describe a point-of-view driven strategy when that point of view constantly changes as the "herd" moves in unison from one idea to the next? How do you articulate your point of view when doing so only attracts more of the herd back to your side of the pasture?
How do you articulate the value of sustainable growth or being a business with a conscience without sounding like you've forgotten investors bought the stock for one reason – to make money? How do you articulate what 34 years in the business have taught you about the importance of having dedicated employees who know that the values of the company align with their own? Or the boost it gives employee spirit in knowing we have no hesitation in telling investors or customers that the safety of our employees always comes before anything else; something we prove in our actions every day?
You can count diversity in the organization in any number of ways. But how do you compute the real value of cultural, socio-economic or ethnic diversity when it comes to making the everyday decisions that affect one of the most diverse customer bases in the country? What is the increased value of serving communities that know the company is making a difference in the lives of the people who can least afford our product; not because we have to but because it's simply the right thing to do? What is the value to the bottom line of adhering to the principles of sustainable growth whether the times are good or not? Whether it's expedient or not? Whether it affects this generation or the next?
How do you explain to investors the seeming paradox that "having it all" means giving back and taking no more than absolutely essential from other stakeholders as you go?
The fact is, I've never felt overly compelled to woo those looking to get rich overnight. Maybe because I've never figured how to do that. The principles of sustainable growth have worked for Entergy even though I couldn't predict how or how much eight years ago when I was given the opportunity to become CEO, nor can I even explain today how it contributed to the achievement of the highest total shareholder return in the industry over these eight years. Entergy's average annual TSR was almost three times the industry average. And we started with no financial headroom or margin for error and have had our share of adversity along the way, like the unprecedented 120,000 square miles of damage from hurricanes Katrina and Rita in 2005.
Today, we continue to assert that the principles of sustainable growth are the only way to run the business. We continue to set aspirations to not only be a leader in financial, operational and societal performance, but to separate Entergy from the rest. We have demonstrated it is possible to deliver consistently superior shareholder returns (multiples of the industry average), create a safe and inclusive workplace, preserve our environment and contribute to a productive society. Using our dynamic point-of-view driven business model, our aspirations will be tomorrow's benchmark for what "having it all" means in business.
Sustainability in Good Times and Bad
The 2005 hurricanes put everything we believe and have practiced to the test. 2006 could easily have been consumed with the near-term recovery of storm-related costs but we maintained our long-term commitment to the principles of sustainability. For example, even as we pushed diligently for storm restoration cost recovery at local, state and federal levels in 2006:
In 2006, for the fifth consecutive year, Entergy was named to the Dow Jones Sustainability Index – World, an index that tracks the performance of companies that lead their field in terms of corporate sustainability on a global basis. This year we were the only company in the U.S. electricity sector to be so honored. In the electricity sector, Entergy ranked best in class for social responsibility, corporate governance, climate strategy, corporate citizenship/philanthropy, stakeholder engagement and occupational health and safety. All of which is evidence that the principles of sustainable growth work – in good times and bad.
Entergy is a stronger company today than it was before the hurricanes hit in 2005. That does not happen when you build on sand, only when you have a solid foundation of support from employees and the communities you serve. One that is built on trust and mutual respect.
Recovering Storm Costs, Managing Risks
We began 2006 with a comprehensive total storm cost recovery plan that sought to minimize the impact on our customers. We successfully pursued recovery from insurance carriers, federal funds allocated for community development and state securitization of remaining costs. All of which substantially lowered the remaining costs to customers.
Here are the basic elements of our storm recovery results in each jurisdiction.
Last June, the Mississippi Public Service Commission approved recovery of $89 million in storm restoration costs for Hurricane Katrina with no finding of imprudence. Ninety cents on the dollar was funded by the $81 million Community Development Block Grant funding received in October. The balance, plus $40 million to increase the storm reserve and lower future risks for Entergy Mississippi and its customers, is being funded by securitized bonds to be issued by the state of Mississippi.
In October, the City Council of New Orleans unanimously approved a settlement agreement that calls for a phased-in rate increase, and the creation of a $75 million storm reserve and an emergency rate relief provision in the event of another Katrina-type disaster. The settlement also called for an independent process for certification of storm costs. In early 2007, the City Council advisors issued their reports on storm costs incurred through December 2006 with no finding of imprudence. This rate relief outcome, combined with the award by the Louisiana Recovery Authority of a $200 million Community Development Block Grant, will assist Entergy New Orleans with its efforts to emerge from bankruptcy.
In December, the Public Utility Commission of Texas unanimously approved a constructive settlement that included $353 million of hurricane recovery costs, an amount net of anticipated insurance proceeds, with no finding of imprudence. In February 2007, the Public Utility Commission of Texas voted to approve securitization of the $353 million with an offset of $31.6 million which the commission determined was the net present value of accumulated deferred income tax benefits related to storm costs. A financing order is expected from the commission authorizing issuance of securitized debt in March 2007.
Testimony was filed in early 2007 by the Louisiana Public Service Commission staff and intervenors in the Entergy Gulf States-Louisiana and Entergy Louisiana storm restoration cost recovery cases. Both the staff and intervenors expressed support for securitization of costs and the creation of a storm reserve. While the cases are still pending, we are encouraged that the resolution will be as constructive as the results achieved in Mississippi, New Orleans and Texas.
In 2007, we expect closure for all remaining storm-related regulatory matters, receipt of additional insurance proceeds, receipt of funds from the securitization process and the removal of the remaining negative credit agency outlook triggered as a result of the hurricanes.
2006 Results: Generating Clean, Affordable, Reliable Power for Our Customers
The physical aspects of the storm restoration effort may well have been the greatest challenge this company has ever faced. The cost and financial recovery process consumed considerable time and resources as well. Nonetheless, we refused to let the storms slow down momentum in other initiatives in our utility and nuclear businesses.
Utilities: Executing the Resource Supply Plan
In 2006, we continued to execute our Resource Supply Plan to meet our customers' demand for power, diversify and modernize our generation fleet and create opportunities to lower our customers' rates. Our portfolio transformation framework assures consistency with our market-based point of view in order to produce the long-term least cost to customers after considering and pricing all risks. We are actively pursuing a number of attractive opportunities to meet our customers' demand requirements conditioned on the receipt of regulatory approval for rate recovery.
We also continued to pursue constructive resolution of other outstanding regulatory issues in 2006. Proving the value of creativity and persistence, our Independent Coordinator of Transmission was approved, installed and began performing all of its functions, including tariff administration, available flowgate capacity calculation, transmission planning and operation of the Entergy OASIS. Crossing these milestones were significant events for Entergy, as we have worked for nearly a decade to align our transmission operations with changing federal policy, while meeting local regulators' and policymakers' needs. In a testament to the hard work of all parties involved, on November 17, 2006, the transition was completed seamlessly.
We still have work ahead to resolve outstanding issues associated with the System Agreement litigation and Entergy Arkansas' decision to provide its eight-year notice to exit from this agreement. We also expect Entergy Gulf States to separate into Louisiana and Texas operating companies by the end of 2007, allowing the separate companies to develop plans that are consistent with local public policy, including potentially the pursuit of retail customer choice in Texas.
Nuclear: Strong Earnings and Opportunity
We continue to focus on safety and security first in all our nuclear operations. While our operational excellence is second to none and our aspiration is to continue our growth in this business, we have remained disciplined investors.
In 2006, we seized an opportunity that aligned with how we create value for sellers of plants and for our owners. We announced our intent to purchase the 798-megawatt Palisades Nuclear Plant near South Haven, Michigan, for a net amount of $350 million, or $303 per KW. The Palisades plant is of a design and vintage that is problematic for most operators. Entergy's experience with this technology and its technical challenges was a clear advantage in constructing the successful bid. We are confident in our operating plan to maintain the reliability and safety of the plant as it meets technical challenges in the years ahead. When this transaction closes – expected in the second quarter of 2007 – we will own and operate 11 nuclear plants in the South, Northeast and Midwest. We also continue to operate the Cooper Nuclear Station under a service contract with the Nebraska Public Power District. With our positive point of view relative to clean, affordable nuclear power generation, we continue to seek opportunities to further expand our nuclear business portfolio through acquisitions, management service contracts and other types of agreements. We have also continued to preserve our option to pursue new nuclear development through the construction and operating license initiatives at Grand Gulf Nuclear Station and River Bend Station.
The Time to Aspire for More
By any measure, 2006 was a defining year for Entergy. Thanks to a lot of hard work by our employees, the support of our customers, communities and owners and the collaborative efforts of too many to mention at the federal, state and local jurisdiction levels, we recovered from two unprecedented storms that devastated our service territories and much of our infrastructure. Then we moved beyond survival and recovery. We took steps to manage our regulatory and operating risks, reduce our impact on the environment and ensure our customers have access to reliable, affordable power for years to come. Our shareholder return was top-quartile at 38 percent for the year. While we are pleased to report progress, we are far from done. We recognize that after overcoming such adversity there is a great temptation to become satisfied and complacent. Instead, now is the time to aspire for more.
Imagine. Aspire. Achieve.
The legacy of 2005 and 2006 was not that we proved we had achieved our aspirations of operational excellence or financial resilience. What we proved was as an organization we are capable of more than we might have ever imagined. The adversity in the last two years was beyond anything the industry has experienced. The organization's response was equally unprecedented. As 2006 drew to a close, we took a hard look at our aspirations. We assessed our current position, evaluated multiple scenarios using our dynamic points of view on market conditions, our stated strategies, our change in risk profile and our experiences over the last few years, and refined our aspirations.
Underlying our refined aspirations is our timeless belief in the principles of sustainable growth, the unlimited human potential and basic human goodness. The long-term success of our company depends on our ability to ensure our employees' safety, meet our customers' expectations, deliver superior returns to our owners, conserve and protect our environment and contribute to a healthy, educated and productive society. It takes steady progress along every dimension to generate lasting growth and value. With that in mind, our five-year aspirations for 2006 through 2010 are outlined below:
J. Wayne Leonard
Chairman and Chief Executive Officer