Entergy 2012 Annual Report Download - page 103

Entergy Corporation and Subsidiaries 2012
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 expo-
sure for Entergy Wholesale Commodities generation. Based on market
prices as of December 31, 2012, cash flow hedges relating to power
sales totaled $151 million of net unrealized gains. Approximately
$123 million is expected to be reclassified from accumulated other
comprehensive income (AOCI) to operating revenues in the next
twelve months. The actual amount reclassified from AOCI, however,
could vary due to future changes in market prices. Gains totaling
approximately $268 million, $168 million, and $220 million were
realized on the maturity of cash flow hedges, before taxes of $94
million, $59 million, and $77 million, for the years ended December
31, 2012, 2011, and 2010, respectively. Unrealized gains or losses
recorded in other comprehensive income 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, 2012
is approximately two years. Planned generation currently under con-
tract from Entergy Wholesale Commodities nuclear power plants is
85% for 2013, of which approximately 51% is sold under financial
derivatives and the remainder under normal purchase/normal sale
contracts. The change in fair value of Entergy’s cash flow hedges due
to ineffectiveness was ($14) million, ($6) million, and $1 million for
the years ended December 31, 2012, 2011, and 2010, respectively.
The ineffective portion of cash flow hedges is recorded in competitive
businesses operating revenues.
Certain 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
when the current market prices exceed the contracted power prices.
The primary form of collateral to satisfy these requirements is an
Entergy Corporation guarantee. As of December 31, 2012, hedge
contracts with two counterparties were in a liability position (approx-
imately $2 million total), but were significantly below the amount of
the guarantee provided under the contract and no cash collateral was
required. As of December 31, 2011, there were no hedge contracts
with counterparties in a liability position. If the Entergy Corporation
credit rating falls below investment grade, the effect of the corpo-
rate guarantee is ignored and Entergy would have to post collateral
equal to the estimated outstanding liability under the contract at the
applicable date. 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 other comprehensive income prior to de-desig-
nation continue to be deferred in other comprehensive income 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, 2012 is 39,380,000 MMBtu
for Entergy, 12,670,000 MMBtu for Entergy Gulf States Louisiana,
16,300,000 MMBtu for Entergy Louisiana, and 10,410,000 MMBtu
for Entergy Mississippi. 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, 2012, 2011, and 2010 is as follows
(in millions):
Amount of Gain Amount of Gain
Recognized Income Statement (Loss) Recorded in
Instrument in AOCI Location Income
2012
Natural gas swaps – Fuel, fuel-related $(42)
expenses, and gas
purchased for resale
Electricity swaps $ 1 Competitive $ 1
and options businesses operating
de-designated revenues
as hedged items
2011
Natural gas swaps – Fuel, fuel-related $(62)
expenses, and gas
purchased for resale
Electricity swaps $ 1 Competitive $ 11
and options businesses operating
de-designated revenues
as hedged items
2010
Natural gas swaps – Fuel, fuel-related $(95)
expenses, and gas
purchased for resale
Electricity swaps $15 Competitive $ –
and options businesses operating
de-designated revenues
as hedged items
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 recov-
ered or refunded through fuel cost recovery mechanisms.
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