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Entergy Corporation and Subsidiaries 2011
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Electricity over-the-counter instruments that financially settle
against day-ahead power pool prices are used to manage price
exposure for Entergy Wholesale Commodities generation. Based
on market prices as of December 31, 2011, cash flow hedges
relating to power sales totaled $310 million of net unrealized gains.
Approximately $197 million is expected to be reclassified from
accumulated other comprehensive income (OCI) to operating
revenues in the next twelve months. The actual amount reclassified
from accumulated OCI, however, could vary due to future changes
in market prices. Gains totaling approximately $168 million, $220
million, and $322 million were realized on the maturity of cash flow
hedges, before taxes of $59 million, $77 million, and $113 million for
the years ended December 31, 2011, 2010, and 2009, respectively.
Unrealized gains or losses recorded in OCI result from hedging
power output at the Entergy Wholesale Commodities power plants.
The related gains or losses from hedging power are included in
operating revenues when realized. The maximum length of time over
which Entergy is currently hedging the variability in future cash flows
with derivatives for forecasted power transactions at December 31,
2011 is approximately three years. Planned generation currently
sold forward from Entergy Wholesale Commodities nuclear power
plants is 88% for 2012 of which approximately 47% is sold under
financial derivatives and the remainder under normal purchase/sale
contracts. The change in the value of Entergy’s cash flow hedges
due to ineffectiveness was $6.1 million for the year ended December
31, 2011 and was insignificant for the year ended December 31,
2010. The ineffective portion of cash flow hedges is recorded in
competitive business operating revenues. Certain agreements to
sell the power produced by Entergy Wholesale Commodities power
plants contain provisions that require an Entergy subsidiary to
provide collateral to secure its obligations when the current market
prices exceed the contracted power prices. The primary form of
collateral to satisfy these requirements is an Entergy Corporation
guaranty. As of December 31, 2011, there were no hedge contracts
with counterparties in a liability position. Entergy may effectively
liquidate a cash flow hedge instrument by entering into a contract
offsetting the original hedge, and then de-designating the original
hedge. In this situation, gains or losses accumulated in OCI prior to
de-designation continue to be deferred in OCI until they are included
in income as the original hedged transaction occurs. From the point
of de-designation, the gains or losses on the original hedge and the
offsetting contract are recorded as assets or liabilities on the balance
sheet and offset as they flow through to earnings.
Natural gas over-the-counter swaps that financially settle against
NYMEX futures are used to manage fuel price volatility for the
Utility’s Louisiana and Mississippi customers. All benefits or costs of
the program are recorded in fuel costs. The total volume of natural
gas swaps outstanding as of December 31, 2011 is 37,980,000 MMBtu
for Entergy. Credit support for these natural gas swaps is covered
by master agreements that do not require collateralization based on
mark-to-market value, but do carry adequate assurance language
that may lead to collateralization requests.
The effect of Entergy’s derivative instruments not designated as
hedging instruments on the consolidated income statements for
the years ended December 31, 2011, 2010, and 2009 is as follows
(in millions):
Amount of Gain (loss)
Amount of Gain Income Statement Recorded in
Instrument Recognized in AOCI Location Income
2011
Natural gas swaps $ – Fuel, fuel-related $ (62)
expenses, and gas
purchased for resale
Electricity forwards, Competitive
swaps, and options de- business operating
designated as hedged items $ 1 revenues $ 11
2010
Natural gas swaps $ – Fuel, fuel-related $ (95)
expenses, and gas
purchased for resale
Electricity forwards, Competitive
swaps, and options de- business operating
designated as hedged items $15 revenues $ –
2009
Natural gas swaps $ – Fuel, fuel-related $(160)
expenses, and gas
purchased for resale
Due to regulatory treatment, the natural gas swaps are marked to
market through fuel, fuel-related expenses, and gas purchased for
resale and then such amounts are simultaneously reversed and
recorded as an offsetting regulatory asset or liability. The gains or
losses recorded as fuel expenses when the swaps are settled are
recovered or refunded through fuel cost recovery mechanisms.
105