Entergy 2012 Annual Report Download - page 61

Entergy Corporation and Subsidiaries 2012
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
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 opera-
tions. 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, earn-
ings 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 various
exceptions including 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 physically delivered in
quantities expected to be used or sold in the ordinary course of busi-
ness, 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, liabil-
ity, 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 to earnings in the periods when the underlying
transactions actually occur. 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 mar-
kets 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 deriv-
atives are determined using bid prices and market quotes. Consider-
able 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 busi-
ness segments whenever events or changes in circumstances indicate
that recoverability of these assets is uncertain. Generally, the determi-
nation 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.
Two nuclear power plants in the Entergy Wholesale Commodities
business segment (Indian Point 2 and Indian Point 3) have applications
pending for renewed NRC licenses. Various parties have expressed
opposition to renewal of the licenses. Under federal law, nuclear power
plants may continue to operate beyond their license expiration dates
while their renewal applications are pending NRC approval. If the NRC
does not renew the operating license for any of these plants, the plant’s
operating life could be shortened, reducing its projected net cash flows
and impairing its value as an asset.
In March 2011 the NRC renewed Vermont Yankee’s operating
license for an additional 20 years. The renewed operating license expires
in March 2032. In May 2011 the Vermont Department of Public Service
and the New England Coalition petitioned the United States Court of
Appeals for the D.C. Circuit seeking judicial review of the NRC’s issu-
ance of the renewed operating license, alleging that the license had been
issued without a valid and effective water quality certification under
Section 401 of the Clean Water Act. Entergy Nuclear Vermont Yankee
and Entergy Nuclear Operations, Inc. intervened in the proceeding. In
June 2012 the Court of Appeals denied the appeal on the ground that
the petitioners had failed to exhaust their administrative remedies before
the NRC. The time for seeking further judicial review of the NRC’s issu-
ance of Vermont Yankee’s renewed operating license has expired.
Vermont Yankee also is operating under a Certificate of Pub-
lic Good from the State of Vermont that was scheduled to expire
in March 2012 but has an application pending before the Vermont
Public Service Board (VPSB) for a new Certificate of Public Good for
operation until March 2032. In April 2011, Entergy Nuclear Ver-
mont Yankee and Entergy Nuclear Operations, the owner and opera-
tor respectively of Vermont Yankee, filed suit in the United States
District Court for the District of Vermont. The suit challenged certain
conditions imposed by Vermont upon Vermont Yankee’s continued
operation and storage of spent nuclear fuel, including the require-
ment to obtain not only a new Certificate of Public Good, but also
approval by Vermont’s General Assembly. In January 2012 the court
entered judgment in Entergy’s favor and specifically:
n Declared that Vermont’s laws requiring Vermont Yankee to cease
operation in March 2012 and prohibiting the storage of spent
nuclear fuel from operation after that date, absent approval by
the General Assembly, were based on radiological safety concerns
and are preempted by the Atomic Energy Act;
n Permanently enjoined Vermont from enforcing these preempted
requirements of the state’s laws; and
n Permanently enjoined Vermont under the Commerce Clause of
the United States Constitution from conditioning the issuance of
a new Certificate of Public Good upon the existence of a below
wholesale market power sale agreement with Vermont utilities
or Vermont Yankee’s selling power to Vermont utilities at rates
below those available to wholesale customers in other states.
59