Entergy 2008 Annual Report Download - page 51

ENTERGY CORPORATION AND SUBSIDIARIES 2008
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Management’s Financial Discussion and Analysis continued
issued an order accepting a tariff amendment establishing that the
WPP shall take effect at a date to be determined, after completion
of successful simulation trials and the ICT’s endorsement of the
WPP’s implementation. On January 16, 2009, the Utility operating
companies filed a compliance filing with the FERC that included
the ICT’s endorsement of the WPP implementation, subject to the
FERC’s acceptance of certain additional tariff amendments and
the completion of simulation testing and certain other items. The
Utility operating companies filed the tariff amendments supported
by the ICT on the same day. The amendments propose to further
amend the WPP to (a) limit supplier offers in the WPP to on-peak
periods and (b) eliminate the granting of certain transmission
service through the WPP. The Utility operating companies noted
that Entergy and the ICT believe that, if the FERC approves the
compliance and tariff filings by March 17, 2009, the WPP can be
implemented by the week of March 23, 2009.
In March 2004, the APSC initiated a proceeding to review
Entergy’s proposal and compare the benefits of such a proposal to
the alternative of Entergy joining the SPP RTO. The APSC sought
comments from all interested parties on this issue. Various parties,
including the APSC General Staff, filed comments opposing the
ICT proposal. A public hearing has not been scheduled by the
APSC at this time, although Entergy Arkansas has responded to
various APSC data requests. In May 2004, Entergy Mississippi filed
a petition for review with the MPSC requesting MPSC support
for the ICT proposal. A hearing in that proceeding was held in
August 2004, and the MPSC has taken no further action. Entergy
New Orleans appeared before the Utility Committee of the City
Council in June 2005 to provide information on the ICT proposal,
and the Council has taken no further action. Entergy Louisiana
and Entergy Gulf States Louisiana filed an application with the
LPSC requesting that the LPSC find that the ICT proposal is a
prudent and appropriate course of action. A hearing in the LPSC
proceeding on the ICT proposal was held in October 2005, and
the LPSC voted to approve the ICT proposal in July 2006.
Interconnection Orders
The Utility operating companies (except Entergy New Orleans)
have been parties to several proceedings before the FERC in which
independent generation entities (GenCos) seek refunds of monies
that the GenCos had previously paid to the Entergy companies for
facilities necessary to connect the GenCos’ generation facilities to
Entergy’s transmission system. To the extent the Utility operating
companies have been ordered to provide refunds, or may in the
future be ordered to provide additional refunds, the majority
of these costs will qualify for inclusion in the Utility operating
companies’ rates. The recovery of these costs is not automatic,
however, especially at the retail level, where the majority of the
cost recovery would occur. With respect to the facilities that
the GenCos have funded, the ICT recently completed a report
evaluating the classification of a portion of facilities that either are
receiving refunds or eligible for refunds. Following the issuance
of the report, the Utility operating companies filed proposed
modifications to the respective interconnection agreements
seeking to implement the ICT’s classifications and thereby reduce
the amount of refunds not yet credited against transmission
charges. The FERC has accepted the amended interconnection
agreements that have been filed. The ICT is continuing to review
additional facilities and will issue subsequent reports evaluating
the classification of such transmission upgrades.
MARKET AND CREDIT RISK SENSITIVE INSTRUMENTS
Market risk is the risk of changes in the value of commodity
and financial instruments, or in future operating results or cash
flows, in response to changing market conditions. Entergy holds
commodity and financial instruments that are exposed to the
following significant market risks:
nThe commodity price risk associated with the sale of electricity
by Entergy’s Non-Utility Nuclear business.
n The interest rate and equity price risk associated with Entergy’s
investments in pension and other postretirement benefit
trust funds. See Note 11 to the financial statements for details
regarding Entergy’s pension and other postretirement benefit
trust funds.
nThe 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 financial
statements for details regarding Entergy’s decommissioning
trust funds.
nThe 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 financial statements for the details of Entergy’s
debt outstanding.
Entergy’s commodity and financial instruments are also exposed
to credit risk. Credit risk is the risk of loss from nonperformance
by suppliers, customers, or financial counterparties to a contract or
agreement. Credit risk also includes potential demand on liquidity due
to credit support requirements within supply or sales agreements.
CO M M O D I T Y PR I C E RI S K
Power Generation
As a wholesale generator, Entergy’s Non-Utility Nuclear business’
core business is selling energy, measured in MWh, to its customers.
Non-Utility Nuclear enters into forward contracts with its customers
and sells energy in the day ahead or spot markets. In addition to
selling the energy produced by its plants, Non-Utility Nuclear
sells unforced capacity to load-serving entities, which allows those
companies to meet specified reserve and related requirements
placed on them by the ISOs in their respective areas. Non-Utility
Nuclear’s forward fixed price power contracts consist of contracts
to sell energy only, contracts to sell capacity only, and bundled
contracts in which it sells both capacity and energy. While the
terminology and payment mechanics vary in these contracts, each
of these types of contracts requires Non-Utility Nuclear to deliver
MWh of energy to its counterparties, make capacity available to
them, or both. The following is a summary as of December 31,
2008 of the amount of Non-Utility Nuclear’s nuclear power plants’
planned energy output that is sold forward under physical or
financial contracts:
Non-Utility Nuclear 2009 2010 2011 2012 2013
Percent of planned generation
sold forward:
Unit-contingent 48% 31% 29% 18% 12%
Unit-contingent with
guarantee of availability(1) 38% 35% 17% 7% 6%
Total 86% 66% 46% 25% 18%
Planned generation (TWh) 41 40 41 41 40
Average contracted
price per MWh(2) $61 $60 $56 $54 $50
(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.