Entergy 2010 Annual Report Download - page 67

ENTERGY CORPORATION AND SUBSIDIARIES 2010
Notes to Consolidated Financial Statements continued
guidance regarding recognition and presentation of other-than-
temporary impairments related to investments in debt securities.
The assessment of whether an investment in a debt security
has suffered an other-than-temporary impairment is based on
whether Entergy has the intent to sell or more likely than not
will be required to sell the debt security before recovery of its
amortized costs. Further, if Entergy does not expect to recover
the entire amortized cost basis of the debt security, an other-
than-temporary impairment is considered to have occurred
and it is measured by the present value of cash flows expected
to be collected less the amortized cost basis (credit loss). The
assessment of whether an investment in an equity security has
suffered an other-than-temporary impairment continues to be
based on a number of factors including, first, whether Entergy
has the ability and intent to hold the investment to recover its
value, the duration and severity of any losses, and, then, whether
it is expected that the investment will recover its value within a
reasonable period of time. Entergy’s trusts are managed by third
parties who operate in accordance with agreements that define
investment guidelines and place restrictions on the purchases
and sales of investments. See Note 17 to the financial statements
for details on the decommissioning trust funds and the other
than temporary impairments recorded in 2010, 2009, and 2008.
Equity Method Investments
Entergy owns investments that are accounted for under the
equity method of accounting because Entergy’s ownership level
results in significant influence, but not control, over the investee
and its operations. Entergy records its share of earnings or
losses of the investee based on the change during the period
in the estimated liquidation value of the investment, assuming
that the investee’s assets were to be liquidated at book value. In
accordance with this method, earnings are allocated to owners
or members based on what each partner would receive from its
capital account if, hypothetically, liquidation were to occur at
the balance sheet date and amounts distributed were based on
recorded book values. Entergy discontinues the recognition of
losses on equity investments when its share of losses equals or
exceeds its carrying amount for an investee plus any advances
made or commitments to provide additional financial support.
See Note 14 to the financial statements for additional information
regarding Entergy’s equity method investments.
Derivative Financial Instruments and
Commodity Derivatives
The accounting standards for derivative instruments and hedging
activities require that all derivatives be recognized at fair value on
the balance sheet, either as assets or liabilities, unless they meet
the normal purchase, normal sales criteria. The changes in the
fair value of recognized derivatives are recorded each period in
current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction
and the type of hedge transaction.
Contracts for commodities that will be delivered in quantities
expected to be used or sold in the ordinary course of business,
including certain purchases and sales of power and fuel,
meet the normal purchase, normal sales criteria and are not
recognized on the balance sheet. Revenues and expenses from
these contracts are reported on a gross basis in the appropriate
revenue and expense categories as the commodities are received
or delivered.
For other contracts for commodities in which Entergy is
hedging the variability of cash flows related to a variable-rate
asset, liability, or forecasted transactions that qualify as cash
flow hedges, the changes in the fair value of such derivative
instruments are reported in other comprehensive income. To
qualify for hedge accounting, the relationship between the
hedging instrument and the hedged item must be documented
to include the risk management objective and strategy and, at
inception and on an ongoing basis, the effectiveness of the hedge
in offsetting the changes in the cash flows of the item being
hedged. Gains or losses accumulated in other comprehensive
income are reclassified as earnings in the periods in which
earnings are affected by the variability of the cash flows of the
hedged item. The ineffective portions of all hedges are recognized
in current-period earnings.
Entergy has determined that contracts to purchase uranium
do not meet the definition of a derivative under the accounting
standards for derivative instruments because they do not provide
for net settlement and the uranium markets are not sufficiently
liquid to conclude that forward contracts are readily convertible
to cash. If the uranium markets do become sufficiently liquid in
the future and Entergy begins to account for uranium purchase
contracts as derivative instruments, the fair value of these
contracts would be accounted for consistent with Entergy’s other
derivative instruments.
Fair Values
The estimated fair values of Entergy’s financial instruments and
derivatives are determined using bid prices and market quotes.
Considerable judgment is required in developing the estimates
of fair value. Therefore, estimates are not necessarily indicative
of the amounts that Entergy could realize in a current market
exchange. Gains or losses realized on financial instruments
held by regulated businesses may be reflected in future rates
and therefore do not accrue to the benefit or detriment of
stockholders. Entergy considers the carrying amounts of most
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. See Note 16 to the financial
statements for further discussion of fair value.
Impairment of Long-Lived Assets
Entergy periodically reviews long-lived assets held in all of its
business segments whenever events or changes in circumstances
indicate that recoverability of these assets is uncertain. Generally,
the determination of recoverability is based on the undiscounted
net cash flows expected to result from such operations and
assets. Projected net cash flows depend on the future operating
costs associated with the assets, the efficiency and availability of
the assets and generating units, and the future market and price
for energy over the remaining life of the assets.
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