Entergy 2010 Annual Report Download - page 105

ENTERGY CORPORATION AND SUBSIDIARIES 2010
Notes to Consolidated Financial Statements continued
price consideration for the plants. In 2010, 2009, and 2008,
Entergy Wholesale Commodities recorded $72 million as plant
for generation during each of those years. This amount will be
depreciated over the expected remaining useful life of the plants.
Asset Dispositions
HARRISON COUNTY
In the fourth quarter 2010, Entergy sold its ownership interest in
the Harrison County Power Project 550-MW combined-cycle plant
to two Texas electric cooperatives that owned a minority share of
the Marshall, Texas unit. Entergy sold its 61 percent share of the
plant for $219 million and realized a gain of $44.2 million ($27.2
million net-of-tax) on the sale.
ENTERGY-KOCH BUSINESSES
In the fourth quarter 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. Entergy received $862 million of cash distributions in 2004
from Entergy-Koch after the business sales. Due to the November
2006 expiration of contingencies on the sale of Entergy-Koch’s
trading business, and the corresponding release to Entergy-Koch
of sales proceeds held in escrow, Entergy recorded a gain related
to its Entergy-Koch investment of approximately $55 million, net-
of-tax, in the fourth quarter 2006 and received additional cash
distributions of approximately $163 million. In December 2009,
Entergy reorganized its investment in Entergy-Koch, received a
$25.6 million cash distribution, and received a distribution of
certain software owned by the joint venture.
Note 16. Risk Management and Fair Values
Market and 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 Affected Businesses
Power price risk Utility, Entergy Wholesale Commodities
Fuel price risk Utility, Entergy Wholesale Commodities
Foreign currency
exchange rate risk Utility, Entergy Wholesale Commodities
Equity price and
interest rate
risk-investments Utility, Entergy Wholesale Commodities
Entergy manages a portion of these risks using derivative
instruments, some of which are classified as cash flow hedges due
to their financial settlement provisions while others are classified
as normal purchase/normal sales transactions due to their
physical settlement provisions. Normal purchase/normal sale risk
management tools include power purchase and sales agreements,
fuel purchase agreements, capacity contracts, and tolling
agreements. Financially-settled cash flow hedges can include
natural gas and electricity futures, forwards, swaps, and options;
foreign currency forwards; and interest rate swaps. Entergy will
occasionally enter into financially settled option contracts to
manage market risk under certain hedging transactions which
may or may not be designated as hedging instruments. Entergy
enters into derivatives only to manage natural risks inherent in
its physical or financial assets or liabilities.
Entergy manages fuel price volatility for its Louisiana
jurisdictions (Entergy Gulf States Louisiana, Entergy Louisiana,
and Entergy New Orleans) and Entergy Mississippi primarily
through the purchase of short-term natural gas swaps. These
swaps are marked-to-market with offsetting regulatory assets
or liabilities. The notional volumes of these swaps are based
on a portion of projected annual exposure to gas for electric
generation and projected winter purchases for gas distribution at
Entergy Gulf States Louisiana and Entergy New Orleans.
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.
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