Entergy 2004 Annual Report Download - page 86

-84 -
Entergy Corporation and Subsidiaries 2004
NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued
Related-party Transactions and Guarantees
During 2004, 2003, and 2002, Entergy procured various services
from Entergy-Koch consisting primarily of pipeline transportation
services for natural gas and risk management services for electricity
and natural gas. The total cost of such services in 2004, 2003, and
2002 was approximately $9.5 million, $15.9 million, and $11.2 mil-
lion, respectively. In 2003, Entergy Louisiana and Entergy New
Orleans entered purchase power agreements with RS Cogen, and
purchased a total of $26.0 million of capacity and energy from RS
Cogen in 2003. In 2004, Entergy Louisiana and Entergy New
Orleans purchased a total of $43.6 million of capacity and energy
from RS Cogen. Entergy’s operating transactions with its other
equity method investees were not material in 2004, 2003, or 2002.
In the purchase agreements for the energy trading and the
pipeline business sales, Entergy-Koch has agreed to indemnify the
respective purchasers for certain potential losses relating to any
breaches of the sellers’ representations, warranties, and obligations
under eachof the purchase agreements. Entergy Corporation has
guaranteed up to 50% of Entergy-Koch’s indemnification
obligations to the purchasers. Entergydoes not expect any material
claims under these indemnification obligations, but to the extent
that any are asserted and paid, the gain that Entergy expects to
recordin 2006 maybe reduced.
During the fourth quarter of 2004, an Entergy subsidiary
purchased from a commercial bank holder $16.3 million of RS
Cogen subordinated indebtedness, due October 2017, bearing
interest at Libor + 4.50%. The debt was purchased at a discount
of approximately$2.4 millionthat willbe amortized over the
remaining lifeof the debt.
NOTE 13. ACQUISITIONS AND DISPOSITIONS
Asset Acquisitions
Vermont Yankee
In July 2002, Entergy’s Non-Utility Nuclear business purchased the
510 MW Vermont Yankee nuclear power plant located in Vernon,
Vermont, from Vermont Yankee Nuclear Power Corporation for
$180 million. Entergy received the plant, nuclear fuel, inventories,
and related real estate. The liability to decommission the plant, as
well as related decommissioning trust funds of approximately
$310 million, was also transferred to Entergy. The acquisition
included a 10-year power purchase agreement (PPA) under which
the former owners will buy the power produced by the plant,
whichis through the expirationof the current operating license for
the plant. The PPAincludes an adjustment clause whichprovides
that the prices specified in the PPA will be adjusted downward
annually, beginning in December 2005, if power market prices drop
belowthe PPAprices.
The acquisition was accounted for using the purchase method.
The results of operations of Vermont Yankee subsequent to the
purchase date havebeen included in Entergy’sconsolidated results
of operations. The purchase price has been allocated to the assets
acquired and liabilities assumed based ontheir estimated fair values
onthe purchase date.
Asset Dispositions
Entergy-Koch Businesses
In the fourth quarter of 2004, Entergy-Koch sold its energy trading
and pipeline businesses to third parties. The sales came after a
review of strategic alternatives for enhancing the value of Entergy-
Koch, LP. Entergy received $862 million of cash distributions in
2004 from Entergy-Koch after the business sales, and Entergy
ultimately expects to receive total net cash distributions exceeding
$1 billion, comprised of the after-tax cash from the distributions of
the sales proceeds and the eventual liquidation of Entergy-Koch.
Entergy currently expects the net cash distributions that it will
receive will exceed its equity investment in Entergy-Koch, and
expects to record a $60 million net-of-tax gain when it receives the
remaining cash distributions, which it expects will occur in 2006.
Other
In January 2004, Entergy sold its 50% interest in the Crete project,
which is a 320 MW power plant located in Illinois, and realized an
insignificant gain on the sale.
In the fourth quarter of 2004, Entergy sold undivided interests in
the Warren Power and the Harrison County plants at a price that
approximated bookvalue.
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 was
insignificant.
In August 2002, Entergysold 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.
NOTE 14. RISK MANAGEMENT AND FAIR VALUES
Marketand 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 instruments, 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
Equityprice and interest
rate risk - investments U.S. Utility, Non-Utility Nuclear
Entergy manages these risks through both contractual
arrangements and derivatives. Contractual risk management tools
include long-term power and fuel purchase agreements, capacity
contracts, and tolling agreements. Entergy also uses a variety of