Progress Energy 2004 Annual Report Download - page 95

As of December 31, 2004, PEC had $110 million notional
amount of pay-fixed forward swaps to hedge its
exposure to interest rates with regard to future
issuances of debt (pre-issue hedges) and $21 million
notional amount of pay-fixed forward starting swaps to
hedge its exposure to interest rates with regard to an
upcoming railcar lease. On February 4, 2005, PEC entered
another $50 million notional amount of its pre-issue
hedges. All the swaps have a computational period of
10 years. PEC held no interest rate cash flow hedges at
December 31, 2003. The ineffective portion of interest
rate cash flow hedges was not material to the Company’s
results of operations for 2004 and 2003.
In December 2004, Progress Ventures, Inc. (PVI), a wholly
owned subsidiary of Progress Energy, terminated
$195 million notional amount of interest rate collars in
place to hedge floating interest rate exposure associated
with variable-rate long-term debt. The related debt was
also extinguished in December 2004 (See Note 13). Pre-
tax deferred losses of $6 million ($4 million after-tax) were
reclassified into earnings in other, net due to
discontinuance of these cash flow hedges.
At December 31, 2004 and 2003, Progress Energy, Inc.,
held interest rate cash flow hedges, with a total notional
amount of $200 million and $400 million, respectively,
related to projected outstanding balances of commercial
paper. The fair value of the hedges at December 31, 2004,
was not material to the Company’s financial condition and
at December 31, 2003, was $5 million. The hedges held at
December 31, 2003, were terminated during the year.
Amounts in accumulated other comprehensive income
related to these terminated hedges will be reclassified to
earnings as the hedged interest payments occur.
FAIR VALUE HEDGES
As of December 31, 2004 and 2003, Progress Energy had
$150 million notional amount and $850 million notional
amount, respectively, of fixed rate debt swapped to floating
rate debt by executing interest rate derivative agreements.
These agreements expire on various dates through March
2011. During 2004, Progress Energy entered into
$350 million notional amount and terminated $1.05 billion
notional amount of interest rate swap agreements.
At December 31, 2004 and 2003, the Company had
$9 million and $23 million, respectively, of basis adjustments
in long-term debt related to terminated interest rate fair
value hedges, which are being amortized over periods
ending in 2006 through 2011 coinciding with the maturities
of the related debt instruments.
The notional amounts of interest rate derivatives are not
exchanged and do not represent exposure to credit loss.
In the event of default by a counterparty, the risk in these
transactions is the cost of replacing the agreements at
current market rates.
19. RELATED PARTY TRANSACTIONS
As a part of normal business, Progress Energy and
certain subsidiaries enter into various agreements
providing financial or performance assurances to third
parties. These agreements are entered into primarily to
support or enhance the creditworthiness otherwise
attributed to a subsidiary on a stand-alone basis, thereby
facilitating the extension of sufficient credit to
accomplish the subsidiaries’ intended commercial
purposes. As of December 31, 2004, Progress Energy and
its subsidiaries’ guarantees include: $270 million
supporting commodity transactions, $181 million to
support nuclear decommissioning, $536 million related to
power supply agreements and $182 million for
guarantees supporting other agreements of subsidiaries.
Progress Energy also purchased $92 million of surety
bonds and authorized the issuance of standby letters of
credit by financial institutions of $50 million. Florida
Progress also fully guarantees the medium-term notes
outstanding for Progress Capital, a wholly owned
subsidiary of Florida Progress (See Note 13). At
December 31, 2004, management does not believe
conditions are likely for significant performance under
these agreements. To the extent liabilities are incurred
as a result of the activities covered by the guarantees,
such liabilities are included in the Balance Sheets.
Progress Fuels sells coal to PEF for an insignificant
profit. These intercompany revenues and expenses are
eliminated in consolidation; however, in accordance
with SFAS No. 71, profits on intercompany sales to
regulated affiliates are not eliminated if the sales price is
reasonable and the future recovery of sales price
through the ratemaking process is probable. Sales, net
of insignificant profits, of $331 million, $346 million and
$329 million for the years ended December 31, 2004,
2003 and 2002, respectively, are included in fuel used
in electric generation on the Consolidated Statements
of Income.
Florida Progress Funding Corporation’s (Funding Corp.)
$309 million 7.10% Junior Subordinated Deferrable
Interest Notes (Subordinated Notes) are due to FPC
Capital I (the Trust). The Trust was established for the
sole purpose of issuing $300 million Preferred Securities
and using the proceeds thereof to purchase from
Funding Corp. its Subordinated Notes due 2039. The
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Progress Energy Annual Report 2004