Progress Energy 2004 Annual Report Download - page 51

Marketable Securities Price Risk
The Company’s electric utility subsidiaries maintain trust
funds, pursuant to NRC requirements, to fund certain
costs of decommissioning their nuclear plants. These
funds are primarily invested in stocks, bonds and cash
equivalents, which are exposed to price fluctuations in
equity markets and to changes in interest rates. The fair
value of these funds was $1.044 billion and $938 million at
December 31, 2004 and 2003, respectively. The Company
actively monitors its portfolio by benchmarking the
performance of its investments against certain indices
and by maintaining, and periodically reviewing, target
allocation percentages for various asset classes. The
accounting for nuclear decommissioning recognizes
that the Company’s regulated electric rates provide
for recovery of these costs net of any trust fund
earnings, and, therefore, fluctuations in trust fund
marketable security returns do not affect the earnings of
the Company.
Contingent Value Obligations
Market Value Risk
In connection with the acquisition of FPC, the Company
issued 98.6 million CVOs. Each CVO represents the right to
receive contingent payments based on the performance
of four synthetic fuel facilities purchased by subsidiaries
of FPC in October 1999. The payments, if any, are based on
the net after-tax cash flows the facilities generate. These
CVOs are recorded at fair value, and unrealized gains and
losses from changes in fair value are recognized in
earnings. At December 31, 2004 and 2003, the fair value of
these CVOs was $13 million and $23 million, respectively.
A hypothetical 10% decrease in the December 31, 2004,
market price would result in a $1 million decrease in the
fair value of the CVOs.
Commodity Price Risk
The Company is exposed to the effects of market
fluctuations in the price of natural gas, coal, fuel oil,
electricity and other energy-related products marketed
and purchased as a result of its ownership of energy-
related assets. The Company’s exposure to these
fluctuations is significantly limited by the cost-based
regulation of PEC and PEF. Each state commission allows
electric utilities to recover certain of these costs through
various cost recovery clauses to the extent the
respective commission determines that such costs are
prudent. Therefore, while there may be a delay in the
timing between when these costs are incurred and when
these costs are recovered from the ratepayers, changes
from year to year have no material impact on operating
results. In addition, many of the Company’s long-term
power sales contracts shift substantially all fuel
responsibility to the purchaser. The Company also has oil
price risk exposure related to synfuel tax credits. See
discussion in Note 23E.
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Progress Energy Annual Report 2004
(dollars in millions)
December 31, 2003 2004 2005 2006 2007 2008 Thereafter Total Fair Value
Fixed rate long-term debt $868 $349 $909 $674 $827 $5,836 $9,463 $10,501
Average interest rate 6.67% 7.38% 6.78% 6.41% 6.27% 6.51% 6.55%
Variable rate long-term debt – – – $ 241 – $861 $1,102 $1,103
Average interest rate – – – 3.04% – 1.08% 1.51%
Debt to affiliated trust(a) – – – – – $309 $309 $313
Interest rate – – – – – 7.10% 7.10%
Interest rate derivatives:
Pay variable/receive fixed – – $(300) $(350) $(200) – $(850) $(4)
Average pay rate – – (b) (b) (b) –(b)
Average receive rate – – 2.75% 3.35% 2.93% – 3.04%
Payer swaptions – – – – $ 400 – $400 $ 5
Average pay rate – – – – 4.75% – –
Average receive rate – – – – (b) ––
Interest rate collars(c) $65 – – $130 – – $195 $ (11)
Cap rate 6.00% – – 6.50% – – –
Floor rate 4.13% – – 5.13% – – –
(a) FPC Capital I – Quarterly Income Preferred Securities.
(b) Rate is 3-month LIBOR, which was 1.15% at December 31, 2003.
(c) Notional amount is varying with a maximum of $195 million, decreasing to $130 million after December 2004.