Entergy 2005 Annual Report Download - page 98

ENTERGY CORPORATION AND SUBSIDIARIES 2005
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NOTES to CONSOLIDATED FINANCIAL STATEMENTS continuedNOTES to CONSOLIDATED FINANCIAL STATEMENTS continued
Entergy manages these risks through both contractual arrange-
ments 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 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 strat-
egy. 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, 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,
Competitive Retail Services
Foreign currency forwards U.S. Utility, Non-Utility Nuclear
Cash flow hedges with net unrealized losses of approximately
$391 million at December 31, 2005 are scheduled to mature during
2006. Net losses totaling approximately $218 million were realized
during 2005 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, 2005 is
approximately three years. The ineffective portion of the change in
the value of Entergy’s cash flow hedges during 2005, 2004, and 2003
was insignificant.
Fair Values
Financial Instruments
The estimated fair value of Entergy’s financial instruments is deter-
mined 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 reason-
able 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
Entergy holds debt and equity securities, classified as available-for-
sale, in nuclear decommissioning trust accounts. The securities held
at December 31, 2005 and 2004 are summarized as follows
(in millions):
Total Total
Unrealized Unrealized
2005 Fair Value Gains Losses
Equity $1,502 $280 $12
Debt Securities 1,105 20 10
Total $2,607 $300 $22
2004
Equity $ 995 $166 $17
Debt Securities 1,457 33 6
Total $2,452 $199 $23
The fair value and gross unrealized losses of available-for-sale
equity and 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, 2005 (in millions):
Equity Securities Debt Securities
Gross Gross
Unrealized Unrealized
Fair Value Losses Fair Value Losses
Less than 12 months $ 27 $ 1 $425 $ 6
More than 12 months 104 11 116 4
Total $131 $12 $541 $10
Entergy evaluates these unrealized gains and losses at the end of
each period to determine whether an other than temporary impair-
ment has occurred. This analysis considers the length of time that a
security has been in a loss position, the current performance of that
security, and whether decommissioning costs are recovered in rates.
Due to the regulatory treatment of decommissioning collections
and trust fund earnings, Entergy Arkansas, Entergy Gulf States,
Entergy Louisiana, and System Energy record regulatory assets or
liabilities for unrealized gains and losses on trust investments. For
the unregulated portion of River Bend, Entergy Gulf States has
recorded an offsetting amount of unrealized gains or losses in other
deferred credits. No significant impairments were recorded in 2005
and 2004 as a result of these evaluations.