Entergy 2011 Annual Report Download - page 51

Entergy Corporation and Subsidiaries 2011
MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS continued
Energy 2012 2013 2014 2015 2016
Percent of planned generation
sold forward:
Unit-contingent 61% 38% 14% 12% 12%
Unit-contingent with
guarantee of availability(1) 16% 19% 15% 13% 13%
Firm LD 24% 24% 10% –% –%
Offsetting positions (13%) –% –% –% –%
Total energy sold forward 88% 81% 39% 25% 25%
Planned generation (TWh)(2)(3) 41 40 41 41 40
Average revenue under
contract per MWh(4) $49 $45-50 $49-54 $49-57 $50-59
Capacity 2012 2013 2014 2015 2016
Percent of capacity sold forward:
Bundled capacity and
energy contracts 18% 16% 16% 16% 16%
Capacity contracts 39% 26% 25% 11% –%
Total capacity sold forward 57% 42% 41% 27% 16%
Planned net MW in operation(3) 4,998 4,998 4,998 4,998 4,998
Average revenue under
contract per kW per month $2.4 $3.2 $3.1 $2.9 $–
(applies to capacity contracts only)
Blended Capacity and Energy Recap (based on revenues)
% of planned generation and capacity
sold forward 90% 80% 43% 27% 26%
Average revenue under contract
per MWh(4) $51 $47 $51 $52 $52
(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) Amount of output expected to be generated by Entergy Wholesale
Commodities nuclear units considering plant operating characteristics,
outage schedules, and expected market conditions which impact dispatch.
(3) Assumes NRC license renewal for plants whose current licenses expire
within five years and the continued operation of all six plants. NRC license
renewal applications are in process for three units, as follows (with current
license expirations in parentheses): Pilgrim (June 2012), Indian Point 2
(September 2013), and Indian Point 3 (December 2015). For a discussion
regarding the continued operation of the Vermont Yankee plant, see
“Impairment of Long-Lived Assets” in Note 1 to the financial statements.
(4) Revenue on a per unit basis at which generation output, capacity, or
a combination of both is expected to be sold to third parties (including
offsetting positions), given existing contract or option exercise prices based
on expected dispatch or capacity, excluding the revenue associated with the
amortization of the below-market PPA for Palisades. Revenue may fluctuate
due to factors including positive or negative basis differentials, option
premiums and market prices at time of option expiration, costs to convert
firm LD to unit-contingent, and other risk management costs. Also, average
revenue under contract excludes payments owed under the value sharing
agreement with NYPA.
Entergy estimates that a $10 per MWh change in the annual
average energy price in the markets in which the Entergy Wholesale
Commodities nuclear business sells power, based on the respective
year-end market conditions, planned generation volumes, and hedged
positions, would have a corresponding effect on pre-tax net income of
$48 million in 2012 and would have had a corresponding effect on pre-
tax net income of $17 million in 2011.
Entergy’s purchase of the FitzPatrick and Indian Point 3 plants
from NYPA included value sharing agreements with NYPA. In October
2007, NYPA and the subsidiaries that own the FitzPatrick and Indian
Point 3 plants amended and restated the value sharing agreements to
clarify and amend certain provisions of the original terms. Under the
amended value sharing agreements, the Entergy subsidiaries agreed
to make annual payments to NYPA based on the generation output of
the Indian Point 3 and FitzPatrick plants from January 2007 through
December 2014. Entergy subsidiaries 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. The annual payment for each year’s output is due
by January 15 of the following year. Entergy will record the liability
for payments to NYPA as power is generated and sold by Indian
Point 3 and FitzPatrick. In 2011, 2010, and 2009, Entergy Wholesale
Commodities recorded a $72 million liability for generation during
each of those years. An amount equal to the liability was recorded
each year to the plant asset account as contingent purchase price
consideration for the plants. This amount will be depreciated over the
expected remaining useful life of the plants.
Some of the 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 under the agreements. The Entergy subsidiary is required
to provide collateral based upon the difference between the current
market and contracted power prices in the regions where Entergy
Wholesale Commodities sells power. The primary form of collateral
to satisfy these requirements is an Entergy Corporation guaranty.
Cash and letters of credit are also acceptable forms of collateral.
At December 31, 2011, based on power prices at that time, Entergy
had liquidity exposure of $133 million under the guarantees in
place supporting Entergy Wholesale Commodities transactions, $20
million of guarantees that support letters of credit, and $6 million
of posted cash collateral to the ISOs. As of December 31, 2011, the
liquidity exposure associated with Entergy Wholesale Commodities
assurance requirements would increase by $132 million for a $1
per MMBtu increase in gas prices in both the short-and long-term
markets. In the event of a decrease in Entergy Corporation’s credit
rating to below investment grade, based on power prices as of
December 31, 2011, Entergy would have been required to provide
approximately $44 million of additional cash or letters of credit
under some of the agreements.
As of December 31, 2011, substantially all of the counterparties
or their guarantors for 100% of the planned energy output under
contract for Entergy Wholesale Commodities nuclear plants through
2016 have public investment grade credit ratings.
NUCLEAR MATTERS
After the nuclear incident in Japan resulting from the March 2011
earthquake and tsunami, the NRC established a task force to
conduct a review of processes and regulations relating to nuclear
facilities in the United States. The task force issued a near term
(90-day) report in July 2011 that has made recommendations, which
are currently being evaluated by the NRC. It is anticipated that the
NRC will issue certain orders and requests for information to nuclear
plant licensees by the end of the first quarter 2012 that will begin
to implement the task force’s recommendations. These orders may
require U.S. nuclear operators, including Entergy, to undertake plant
modifications or perform additional analyses that could, among
other things, result in increased costs and capital requirements
associated with operating Entergy’s nuclear plants.
CRITICAL ACCOUNTING ESTIMATES
The preparation of Entergy’s financial statements in conformity with
generally accepted accounting principles requires management to
apply appropriate accounting policies and to make estimates and
judgments that can have a significant effect on reported financial
position, results of operations, and cash flows. Management has
identified the following accounting policies and estimates as critical
because they are based on assumptions and measurements that
involve a high degree of uncertainty, and the potential for future
changes in these assumptions and measurements could produce
estimates that would have a material effect on the presentation of
Entergy’s financial position, results of operations, or cash flows.
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