Entergy 2003 Annual Report Download - page 88

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ENTERGY CORPORATION AND SUBSIDIARIES 2003
Asset Dispositions
In the first quarter of 2002, Entergy sold its interests in
projects in Argentina, Chile, and Peru for net proceeds of
$135.5 million. After impairment provisions recorded for
these Latin American interests in 2001, the net loss realized
on the sale in 2002 is insignificant.
In August 2002, Entergy sold its interest in projects
under development in Spain for a realized gain on the sale
of $25.7 million. In December 2002, Entergy sold its 800
MW Damhead Creek power plant in the UK resulting in an
increase in net income of $31.4 million. The Damhead Creek
buyer assumed all market and regulatory risks associated
with the facility.
In August 2001, Entergy sold its Saltend power plant in
the UK for a cash payment of approximately $800 million.
Entergy’s gain on the sale was approximately $88.1 million
($57.2 million after tax). In the sales transaction, Entergy
or its subsidiaries made certain warranties to the purchasers
relating primarily to the performance of certain remedial
work on the facility and the assumption of responsibility
for certain contingent liabilities. Entergy believes that it
has provided adequate reserves for the warranties as of
December 31, 2003.
NOTE 15. RISK MANAGEMENT AND FAIR VALUES
MARKET AND COMMODITY RISKS
In the normal course of business, Entergy is exposed to a
number of market and commodity risks. Market risk is the
potential loss that Entergy may incur as a result of changes
in the market or fair value of a particular instrument or
commodity. All financial and commodity-related instru-
ments, including derivatives, are subject to market risk.
Entergy is subject to a number of commodity and market
risks, including:
Type of Risk Primary Affected Segments
Power price risk All reportable segments
Fuel price risk All reportable segments
Foreign currency exchange rate risk All reportable segments
Equity price and interest
rate risk - investments U.S. Utility, Non-Utility Nuclear
Entergy manages these risks through both contractual
arrangements and derivatives. Contractual risk manage-
ment tools include long-term power and fuel purchase
agreements, capacity contracts, and tolling agreements.
Entergy also uses a variety of commodity and financial
derivatives, including natural gas and electricity futures,
forwards, swaps, and options; foreign currency forwards;
and interest rate swaps as a part of its overall risk
management strategy. Except for the energy trading activi-
ties conducted by the Energy Commodity Services segment,
Entergy enters into derivatives only to manage natural risks
inherent in its physical or financial assets or liabilities.
Entergy’s exposure to market risk is determined by a
number of factors, including the size, term, composition,
and diversification of positions held, as well as market
volatility and liquidity. For instruments such as options,
the time period during which the option may be exercised
and the relationship between the current market price of
the underlying instrument and the option’s contractual
strike or exercise price also affects the level of market risk.
A significant factor influencing the overall level of market
risk to which Entergy is exposed is its use of hedging
techniques to mitigate such risk. Entergy manages market
risk by actively monitoring compliance with stated risk
management policies as well as monitoring the effectiveness
of its hedging policies and strategies. Entergy’s risk
management policies limit the amount of total net exposure
and rolling net exposure during the stated periods. These
policies, including related risk limits, are regularly assessed
to ensure their appropriateness given Entergy’s objectives.
Hedging Derivatives
Entergy classifies substantially all of the following types of
derivative instruments held by its consolidated businesses
as cash flow hedges:
Instrument Business Segment
Natural gas and electricity Non-Utility Nuclear,
futures and forwards Energy Commodity Services
Foreign currency forwards U.S. Utility, Non-Utility Nuclear
Cash flow hedges with net unrealized gains of approximately
$11 million at December 31, 2003 are scheduled to mature
during 2004. Gains totaling approximately $27 million were
realized during 2003 on the maturity of cash flow hedges.
Unrealized gains or losses result from hedging power
output at the Non-Utility Nuclear power stations and
foreign currency hedges related to Euro-denominated
nuclear fuel acquisitions. The related gains or losses from
hedging power are included in revenues when realized. The
realized gains or losses from foreign currency transactions
are included in the cost of capitalized fuel. The maximum
length of time over which Entergy is currently hedging the
variability in future cash flows for forecasted transactions
at December 31, 2003 is approximately five years. The
ineffective portion of the change in the value of Entergy’s
cash flow hedges during 2003 was insignificant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
concluded