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Entergy Corporation and Subsidiaries 2012
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NYPA VALUE SHARING AGREEMENTS
Entergy’s purchase of the FitzPatrick and Indian Point 3 plants from
NYPA included value sharing agreements with NYPA. In October
2007, Entergy subsidiaries and NYPA amended and restated the
value sharing agreements to clarify and amend certain provisions
of the original terms. Under the amended value sharing agreements,
Entergy subsidiaries will 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. An amount
equal to the liability will be recorded to the plant asset account as
contingent purchase price consideration for the plants. In 2012, 2011,
and 2010, Entergy Wholesale Commodities recorded approximately
$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.
Dispositions
HARRISON COUNTY
In the fourth quarter 2010, an Entergy Wholesale Commodities
subsidiary sold its ownership interest in the Harrison County Power
Project 550 MW combined-cycle plant to two Texas electric coop-
eratives 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.
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
Equity price and interest
rate risk - investments Utility, Entergy Wholesale Commodities
Entergy manages a portion of these risks using derivative instru-
ments, some of which are classified as cash flow hedges due to their
financial settlement provisions while others are classified as normal
purchase/normal sale transactions due to their physical settlement
provisions. Normal purchase/normal sale risk management tools
include power purchase and sales agreements, fuel purchase agree-
ments, capacity contracts, and tolling agreements. Financially-settled
cash flow hedges can include natural gas and electricity swaps and
options, and interest rate swaps. Entergy will occasionally enter into
financially settled swap and option contracts to manage market risk
under certain hedging transactions which may or may not be desig-
nated 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 and Entergy Louisiana) 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.
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 instru-
ments 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 effective-
ness of its hedging policies and strategies. Entergy’s risk management
policies limit the amount of total net exposure and rolling net expo-
sure 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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