Progress Energy 2004 Annual Report Download - page 93

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The following weighted-average actuarial assumptions
were used in the calculation of the net periodic cost:
The expected long-term rates of return on plan assets
were determined by considering long-term historical
returns for the plans and long-term projected returns
based on the plans’ target asset allocation. For all
pension plan assets and a substantial portion of OPEB
plans assets, those benchmarks support an expected
long-term rate of return between 9.0% and 9.5%. The
Company has chosen to use an expected long-term rate
of 9.25%.
The medical cost trend rates were assumed to decrease
gradually from the initial rates to the ultimate rates.
Assuming a 1% increase in the medical cost trend rates,
the aggregate of the service and interest cost
components of the net periodic OPEB cost for 2004 would
increase by $1 million, and the OPEB obligation at
December 31, 2004, would increase by $30 million.
Assuming a 1% decrease in the medical cost trend rates,
the aggregate of the service and interest cost
components of the net periodic OPEB cost for 2004 would
decrease by $1 million, and the OPEB obligation at
December 31, 2004, would decrease by $26 million.
B. FPC Acquisition
During 2000, the Company completed the acquisition of
FPC. FPC’s pension and OPEB liabilities, assets and net
periodic costs are reflected in the above information as
appropriate. Certain of FPC’s nonbargaining unit benefit
plans were merged with those of the Company effective
January 1, 2002.
PEF continues to recover qualified plan pension costs
and OPEB costs in rates as if the acquisition had not
occurred. Accordingly, a portion of the accrued OPEB
cost reflected in the table above has a corresponding
regulatory asset at December 31, 2004, and 2003 (See
Note 8A). In addition, a portion of the prepaid pension
cost reflected in the table above has a corresponding
regulatory liability (See Note 8A). Pursuant to its rate
treatment, PEF recognized additional periodic pension
credits and additional periodic OPEB costs, as indicated
in the net periodic cost information above.
18. RISK MANAGEMENT ACTIVITIES AND
DERIVATIVES TRANSACTIONS
Under its risk management policy, the Company may use
a variety of instruments, including swaps, options and
forward contracts, to manage exposure to fluctuations in
commodity prices and interest rates. Such instruments
contain credit risk if the counterparty fails to perform
under the contract. The Company minimizes such risk by
performing credit reviews using, among other things,
publicly available credit ratings of such counterparties.
Potential nonperformance by counterparties is not
expected to have a material effect on the consolidated
financial position or consolidated results of operations of
the Company.
A. Commodity Derivatives
GENERAL
Most of the Company’s commodity contracts are not
derivatives pursuant to SFAS No. 133 or do not qualify as
normal purchases or sales pursuant to SFAS No. 133.
Therefore, such contracts are not recorded at fair value.
During 2003 the FASB reconsidered an interpretation of
SFAS No. 133 related to the pricing of contracts that
include broad market indices (e.g., CPI). In particular, that
guidance discussed whether the pricing in a contract
that contains broad market indices could qualify as a
normal purchase or sale (the normal purchase or sale
term is a defined accounting term, and may not, in all
cases, indicate whether the contract would be “normal”
from an operating entity viewpoint). The FASB issued
final superseding guidance (DIG Issue C20) on this issue
effective October 1, 2003, for the Company. DIG Issue C20
specifies new pricing-related criteria for qualifying as a
normal purchase or sale, and it required a special
transition adjustment as of October 1, 2003.
PEC determined that it had one existing “normal”
contract that was affected by DIG Issue C20. Pursuant to
the provisions of DIG Issue C20, PEC recorded a pre-tax
fair value loss transition adjustment of $38 million
($23 million after-tax) in the fourth quarter of 2003, which
was reported as a cumulative effect of a change in
accounting principle. The subject contract meets the DIG
Issue C20 criteria for normal purchase or sale and,
91
Progress Energy Annual Report 2004
Pension Benefits
Other Postretirement
Benefits
(in millions)
2004 2003 2002 2004 2003 2002
Discount rate 6.30% 6.60% 7.50% 6.30% 6.60% 7.50%
Rate of increase in
future compensation
Bargaining 3.50% 3.50% 3.50% –––
Nonbargaining –4.00% 4.00% –––
Supplementary plans 5.00% 4.00% 4.00% –––
Expected long-term rate
of return on plan assets 9.25% 9.25% 9.25% 8.50% 8.45% 8.20%