Progress Energy 2007 Annual Report Download - page 112

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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payment amounts reflect our net cost after any participant
contributions and do not reflect reductions for expected
prescription drug-related federal subsidies. The expected
federal subsidies for 2008 through 2012 and in total for 2013
through 2017, in millions, are approximately $3, $3, $4, $4,
$5 and $39, respectively.
B. Florida Progress Acquisition
During 2000, we completed our acquisition of Florida
Progress. Florida Progress’ pension and OPEB liabilities,
assets and net periodic costs are reflected in the above
information as appropriate. Certain of Florida Progress’
nonbargaining unit benefit plans were merged with our
benefit plans effective January 1, 2002.
PEF continues to recover qualified plan pension costs and
OPEB costs in rates as if the acquisition had not occurred.
The information presented in Note 16A is adjusted as
appropriate to reflect PEF’s rate treatment.
17. RISK MANAGEMENT ACTIVITIES AND
DERIVATIVES TRANSACTIONS
We are exposed to various risks related to changes in
market conditions. We have a risk management committee
that includes senior executives from various business
groups. The risk management committee is responsible
for administering risk management policies and monitoring
compliance with those policies by all subsidiaries. Under our
risk policy, we 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. We minimize 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 our financial position or results
of operations.
As discussed in Note 15, in connection with the acquisition
of Florida Progress during 2000, the Parent issued
98.6 million CVOs. The CVOs are derivatives and are
recorded at fair value. The unrealized loss/gain recognized
due to changes in fair value is recorded in other, net on
the Consolidated Statements of Income (See Note 20). At
December 31, 2007 and 2006, the CVO liability included in other
liabilities and deferred credits on our Consolidated Balance
Sheets was $34 million and $32 million, respectively.
A. Commodity Derivatives
GENERAL
Most of our physical commodity contracts are not
derivatives pursuant to SFAS No. 133 or qualify as normal
purchases or sales pursuant to SFAS No. 133. Therefore,
such contracts are not recorded at fair value.
In 2003, we recorded a $38 million pre-tax ($23 million
after-tax) fair value loss transition adjustment pursuant to
the provisions of FASB Derivatives Implementation Group
Issue C20, “Interpretation of the Meaning of Not Clearly
and Closely Related in Paragraph 10(b) regarding Contracts
with a Price Adjustment Feature” (DIG Issue C20).
The related liability is being amortized to earnings over the
term of the related contract (See Note 20). At December 31,
2007 and 2006, the remaining liability was $10 million and
$14 million, respectively.
DISCONTINUED OPERATIONS
As discussed in Note 3A, our subsidiary, PVI, entered into
a series of transactions to sell or assign substantially all of
its CCO physical and commercial assets and liabilities. On
June 1, 2007, PVI closed the transaction involving the
assignment of a contract portfolio consisting of the
Georgia Contracts, forward gas and power contracts,
gas transportation, structured power and other contracts
to a third party. This represented substantially all of our
nonregulated energy marketing and trading operations.
The sale of the generation assets closed on June 11, 2007.
Additionally, we sold Gas on October 2, 2006 (See Note
3C). At December 31, 2007, with the exception of the oil
price hedge instruments discussed below, our discontinued
operations did not have outstanding positions in derivative
instruments. For the year ended December 31, 2007,
$88 million of after-tax gains from derivative instruments
related to our nonregulated energy marketing and trading
operations were included in discontinued operations on the
Consolidated Statements of Income.
On January 8, 2007, we entered into derivative contracts to
hedge economically a portion of our 2007 synthetic fuels cash
flow exposure to the risk of rising oil prices over an average
annual oil price range of $63 to $77 per barrel on a New York
Mercantile Exchange (NYMEX) basis. The notional quantity
of these oil price hedge instruments was 25 million barrels
and provided protection for the equivalent of approximately
8 million tons of 2007 synthetic fuels production. The cost of
the hedges was approximately $65 million. The contracts
were marked-to-market with changes in fair value recorded
through earnings. These contracts ended on December 31,
2007, and were settled for cash on January 8, 2008, with no