Entergy 2007 Annual Report Download - page 49

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Entergy Corporation and Subsidiaries 2007
n฀ Codies the concept of participant funding or cost causation, a
form of cost allocation for transmission interconnections and
upgrades, and allows the FERC to apply participant funding in
all regions of the country. Participant funding helps ensure that a
utility’s native load customers only bear the costs that are necessary
to provide reliable transmission service to them and not bear
costs imposed by generators (the participants) who seek to deliver
power to other regions.
n฀ Provides nancing benets, including loan guarantees and
production tax credits, for new nuclear plant construction, and
reauthorizes the Price-Anderson Act, the law that provides an
umbrella of insurance protection for the payment of public liability
claims in the event of a major nuclear power plant incident.
n฀ Revises current tax law treatment of nuclear decommissioning
trust funds by allowing regulated and non-regulated taxpayers
to make deductible contributions to fund the entire amount of
estimated future decommissioning costs.
n฀ Provides a more rapid tax depreciation schedule for transmission
assets to encourage investment.
n฀ Creates mandatory electricity reliability guidelines with
enforceable penalties to help ensure that the nation’s power
transmission grid is kept in good repair and that disruptions
in the electricity system are minimized. Entergy already
voluntarily complies with National Electricity Reliability Council
standards, which are similar to the guidelines mandated by the
Energy Policy Act of 2005.
n฀ Establishes conditions for the elimination of the Public Utility
Regulatory Policy Act’s (PURPA) mandatory purchase obligation
from qualifying facilities.
n฀ Signicantly increased the FERC’s authorization to impose
criminal and civil penalties for violations of the provisions of the
Federal Power Act.
MA R K E T A N D CR E D I T RI S K SE N S I T I V E IN S T R U M E N T S
Market risk is the risk of changes in the value of commodity and
nancial instruments, or in future operating results or cash ows, in
response to changing market conditions. Entergy holds commodity
and nancial instruments that are exposed to the following signicant
market risks:
n฀ e commodity price risk associated with the sale of electricity by
Entergy’s Non-Utility Nuclear business.
n฀ e interest rate and equity price risk associated with Entergy’s
investments in decommissioning trust funds, particularly in
the Non-Utility Nuclear business. See Note 17 to the nancial
statements for details regarding Entergy’s decommissioning
trust funds.
n฀ e interest rate risk associated with changes in interest rates as a
result of Entergy’s issuances of debt. Entergy manages its interest
rate exposure by monitoring current interest rates and its debt
outstanding in relation to total capitalization. See Notes 4 and 5 to
the nancial statements for the details of Entergy’s
debt outstanding.
Entergy’s commodity and nancial instruments are also exposed
to credit risk. Credit risk is the risk of loss from nonperformance
by suppliers, customers, or nancial counterparties to a contract or
agreement. Credit risk also includes potential demand on liquidity due
to collateral requirements within supply or sales agreements.
Commodity Price Risk
Power Generation
e sale of electricity from the power generation plants owned by
Entergy’s Non-Utility Nuclear business, unless otherwise contracted,
is subject to the uctuation of market power prices. Entergy’s Non-
Utility Nuclear business has entered into PPAs and other contracts to
sell the power produced by its power plants at prices established in the
PPAs. Entergy continues to pursue opportunities to extend the existing
PPAs and to enter into new PPAs with other parties. Following is a
summary of the amount of the Non-Utility Nuclear business’ output
that is currently sold forward under physical or nancial contracts:
2008 2009 2010 2011 2012
Non-Utility Nuclear:
Percent of planned generation
sold forward:
Unit-contingent 51% 48% 31% 29% 16%
Unit-contingent with
guarantee of availability(1) 36% 35% 28% 14% 7%
Firm liquidated damages 5% –% –% –% –%
Total 92% 83% 59% 43% 23%
Planned generation (TWh) 41 41 40 41 41
Average contracted price per MWh(2) $54 $61 $58 45 $51
(1) A sale of power on a unit contingent basis coupled with a guarantee of
availability 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. All of
Entergy’s outstanding guarantees of availability provide for dollar
limits on Entergy’s maximum liability under such guarantees.
(2) The Vermont Yankee acquisition included a 10-year PPA under which
the former owners will buy most of the power produced by the plant,
which is through the expiration in 2012 of the current operating
license for the plant. The PPA includes an adjustment clause under
which the prices specified in the PPA will be adjusted downward
monthly, beginning in November 2005, if power market prices drop
below PPA prices, which has not happened thus far and is not expected
in the foreseeable future.
Non-Utility Nuclear’s purchase of the FitzPatrick and Indian Point 3
plants from NYPA included value sharing agreements with NYPA. In
October 2007, Non-Utility Nuclear and NYPA amended and restated
the value sharing agreements to clarify and amend certain provisions
of the original terms. Under the amended value sharing agreements,
Non-Utility Nuclear will make annual payments to NYPA based on
the generation output of the Indian Point 3 and FitzPatrick plants from
January 2007 through December 2014. Non-Utility Nuclear will pay
NYPA $6.59 per MWh for power sold from Indian Point 3, up to an
annual cap of $48 million, and $3.91 per MWh for power sold from
FitzPatrick, up to an annual cap of $24 million. e annual payment
for each year is due by January 15 of the following year, with the
payment for year 2007 output due on January 15, 2008. If Entergy or
an Entergy aliate ceases to own the plants, then, aer January 2009,
the annual payment obligation terminates for generation aer the date
that Entergy ownership ceases.
Non-Utility Nuclear will record its liability for payments to NYPA
as power is generated and sold by Indian Point 3 and FitzPatrick. Non-
Utility Nuclear recorded a $72 million liability for generation through
December 31, 2007. An amount equal to the liability will be recorded
to the plant asset account as contingent purchase price consideration
for the plants. is amount will be depreciated over the expected
remaining useful life of the plants.
Management’s Financial Discussion and Analysis conti nued