Entergy 2004 Annual Report Download - page 87

Entergy Corporation and Subsidiaries 2004
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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 activities
conducted through December 2004 by Entergy-Koch, 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, areregularly
assessed to ensure their appropriateness given Entergy’s objectives.
Hedging Derivatives
Entergy classifies substantially all of the following types of
derivativeinstruments 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,
Competitive Retail Services
Foreign currency forwards U.S. Utility, Non-Utility Nuclear
Cash flow hedges with net unrealized losses of approximately
$99 million at December 31, 2004 are scheduled to mature during
2005. Net losses totaling approximately $13 million were realized
during 2004 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 fromforeign 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, 2004
is approximately four years. The ineffective portion of the
change in the value of Entergy’s cash flow hedges during 2004
was insignificant.
Fair Values
Financial Instruments
The estimated fair value of Entergy’s financial instruments is
determined using bid prices reported by dealer markets and by
nationally recognized investment banking firms. The estimated fair
value of derivative financial instruments is based on market quotes.
Considerable judgment is required in developing some of the
estimates of fair value. Therefore, estimates are not necessarily
indicative of the amounts that Entergy could realize in a current
market exchange. In addition, gains or losses realized on financial
instruments held by regulated businesses may be reflected in future
rates and therefore do not necessarily accrue to the benefit or
detriment of stockholders.
Entergy considers the carrying amounts of most of its financial
instruments classified as current assets and liabilities to be a
reasonable estimate of their fair value because of the short maturity
of these instruments. Additional information regarding financial
instruments and their fair values is included in Notes 5 and 6 to the
consolidated financial statements.
NOTE 15. DECOMMISSIONING TRUST FUNDS
Entergyholds debt and equitysecurities, classified as available-for-
sale, in nuclear decommissioning trust accounts. The securities held
at December 31, 2004 and 2003 aresummarized as follows
(in millions):
Total Total
Unrealized Unrealized
2004 Fair Value Gains Losses
Equity $ 995 $166 $17
Debt Securities 1,457 33 6
Total $2,452 $199 $23
2003
Equity $ 896 $ 81 $11
Debt Securities 1,383 27 3
Total $2,279 $108 $14
The fair value and gross unrealized losses of available-for-sale
equityand debt securities, summarized by investment type and
length of time that the securities have been in a continuous loss
position, are as follows at December 31, 2004 (in millions):
Equity Securities Debt Securities
Gross Gross
Unrealized Unrealized
Fair Value Losses Fair Value Losses
Less than 12 months $ 29 $ 2 $334 $5
More than 12 months 115 15 37 1
Total $144 $17 $371 $6
NOTES to CONSOLIDATED FINANCIAL STATEMENTS continued