Callaway 2005 Annual Report Download - page 99

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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At the time the Company entered into the Enron Contract, nine megawatts per hour was in excess of the
amount the Company expected to be able to use in its operations. The Company agreed to purchase this amount,
however, in order to obtain a more favorable price than the Company could have obtained if the Company had
purchased a lesser quantity. The Company expected to be able to sell any excess supply through Pilot Power.
Because the Enron Contract provided for the Company to purchase an amount of energy in excess of what it
expected to be able to use in its operations, the Company accounted for the Enron Contract as a derivative
instrument in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.”
The Enron Contract did not qualify for hedge accounting under SFAS No. 133. Therefore, the Company
recognized changes in the estimated fair value of the Enron Contract currently in earnings. The estimated fair
value of the Enron Contract was based upon present value determination of the net differential between the
contract price for electricity and the estimated future market prices for electricity as applied to the remaining
amount of unpurchased electricity under the Enron Contract. Through September 30, 2001, the Company had
recorded unrealized pre-tax losses of $19,922,000.
On November 29, 2001, the Company notified EESI that, among other things, EESI was in default of the
Enron Contract and that based upon such default, and for other reasons, the Company was terminating the Enron
Contract effective immediately. At the time of termination, the contract price for the remaining energy to be
purchased under the Enron Contract through May 2006 was approximately $39,126,000.
On November 30, 2001, EESI notified the Company that it disagreed that it was in default of the Enron
Contract and that it was prepared to deliver energy pursuant to the Enron Contract. On December 2, 2001, EESI,
along with Enron Corporation and numerous other related entities, filed for bankruptcy. Since November 30,
2001, the parties have not been operating under the Enron Contract and Pilot Power has been providing energy to
the Company from alternate suppliers.
As a result of the Company’s notice of termination to EESI, and certain other automatic termination
provisions under the Enron Contract, the Company believes that the Enron Contract has been terminated. As a
result, the Company adjusted the estimated value of the Enron Contract through the date of termination, at which
time the terminated Enron Contract ceased to represent a derivative instrument in accordance with SFAS
No. 133. Because the Enron Contract is terminated and neither party to the contract is performing pursuant to the
terms of the contract, the Company no longer records valuation adjustments for changes in electricity rates. The
Company continues to reflect on its balance sheet the derivative valuation account of $19,922,000, subject to
periodic review, in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities.”
The Company believes the Enron Contract has been terminated, and as of December 31, 2005, EESI has not
asserted any claim against the Company. There can be no assurance, however, that EESI or another party will not
assert a future claim against the Company or that a bankruptcy court or arbitrator will not ultimately nullify the
Company’s termination of the Enron Contract. No provision has been made for contingencies or obligations, if
any, under the Enron Contract beyond November 30, 2001.
F-31