Entergy 2004 Annual Report Download - page 42

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Entergy Corporation and Subsidiaries 2004
which the prices specified in the PPA will be adjusted downward
monthly, beginning in November 2005, if power market prices drop
below PPA prices. Accordingly, because the price is not fixed, the
table above does not report power from that plant as sold forward
after November 2005.
Asale of power on a unit contingent basis coupled with an
availability guarantee provides for the payment to the power
purchaser of contract damages, if incurred, in the event the
seller fails to deliver power as a result of the failure of the
specified generation unit to generate power at or above a specified
availability threshold. To date, Entergy has not incurred any
payment obligation to any power purchaser pursuant to an
availability guarantee. All of Entergy’s outstanding availability
guarantees provide for dollar limits on Entergy’s maximum liability
under such guarantees.
Some of the agreements to sell the power produced by Entergy’s
Non-Utility Nuclear power plants contain provisions that require an
Entergy subsidiary to provide collateral to secure its obligations
under the agreements. The Entergysubsidiary may be required to
provide collateral based upon the difference between the current
market and contracted power prices in the regions where the Non-
Utility Nuclear business sells its power. The primary form of the
collateral to satisfy these requirements would be an Entergy
Corporation guaranty. Cash and letters of credit are also acceptable
forms of collateral. At December 31, 2004, based on power prices at
that time,Entergyhad in place as collateral $545.5 million
of Entergy Corporation guarantees and $47.5 million of letters of
credit. In the event of a decrease in Entergy Corporation’s credit
rating to specified levels below investment grade, Entergy may be
required to replace Entergy Corporation guarantees with cash or
letters of credit under some of the agreements.
In additionto selling the power produced by its plants, the
Non-Utility Nuclear business sells installed capacity to load-serving
distribution companies in order for those companies to meet
requirements placed on them by the Independent System Operators
in their area. Following is a summary of the amount of the
Non-Utility Nuclear business’ installed capacity that is currently
sold forward, and the blended amount of the Non-Utility Nuclear
business’ planned generation output and installed capacity that is
currently sold forward:
2005 2006 2007 2008 2009
Percent of capacity sold forward:
Bundled capacity and
energy contracts 13% 13% 13% 13% 13%
Capacity contracts 58% 67% 36% 22% 10%
Total 71% 80% 49% 35% 23%
Planned net MW in operation 4,155 4,200 4,200 4,200 4,200
Average capacity contract
price per kW per month $1.2 $1.1 $1.1 $1.0 $0.9
Blended Capacity and Energy
(based on revenues):
%of planned generation and
capacity sold forward 93% 87% 65% 36% 12%
Average contract
revenue per MWh $40 $42 $43 $44 $43
As of December 31, 2004, approximately 99% of Entergy’s
counterparties to Non-Utility Nuclear’s energy and capacity
contracts have investment grade credit ratings.
Following is a summary of the amount of Energy Commodity
Services’ output and installed capacity that is currently sold forward
under physical or financial contracts at fixed prices:
2005 2006 2007 2008 2009
Capacity:
Planned MW in operation 1,578 1,578 1,578 1,578 1,578
%of capacity sold forward 44% 33% 29% 29% 19%
Energy:
Planned generation (TWh) 3 3 3 3 4
%of planned generation
sold forward 69% 54% 45% 45% 35%
Blended Capacity and Energy
(based on revenues):
%of planned energy and
capacity sold forward 63% 44% 38% 39% 22%
Average contract
revenue per MWh $24 $24 $28 $28 $21
Entergycontinually monitors industry trends in order to
determine whether asset impairments or other losses could result
from a decline in value, or cancellation, of merchant power projects,
and records provisions for impairments and losses accordingly. As
discussed in “Results of Operations” above, in 2004 Entergy
determined that the value of the Warren power plant owned by the
non-nuclear wholesale assets business was impaired, and recorded
the appropriate provisionfor the loss.
Foreign Currency Exchange Rate Risk
Entergy Gulf States, System Fuels, and Entergy’s Non-Utility
Nuclear business enter into foreign currency forward contracts to
hedge the Euro-denominated payments due under certain purchase
contracts. The notional amounts of the foreign currency forward
contracts are 95.5 million Euro and the forward currency rates
range from .8641 to 1.33020. The maturities of these forward
contracts depend on the purchase contract payment dates and range
in time from January 2005 to January 2007. The mark-to-market
valuation of the forward contracts at December 31, 2004 was a net
asset of $28.1 million. The counterparty banks obligated on these
agreements are rated by Standard & Poor’s Rating Services at AA
ontheir senior debt obligations as of December 31, 2004.
Interest Rate and Equity Price Risk -
Decommissioning Trust Funds
Entergy’snuclear decommissioning trust funds are exposed to
fluctuations in equity prices and interest rates. The Nuclear
Regulatory Agency (NRC) requires Entergy to maintain trusts to
fund the costs of decommissioning ANO 1, ANO 2, River Bend,
Waterford 3, Grand Gulf, Pilgrim, Indian Point 1 and 2, and
Vermont Yankee (NYPA currently retains the decommissioning
trusts and liabilities for Indian Point 3 and FitzPatrick). The funds
areinvested primarily in equity securities; fixed-rate, fixed-income
securities; and cash and cash equivalents. Management believes that
MANAGEMENT’S FINANCIAL DISCUSSION and ANALYSIS continued