Progress Energy 2007 Annual Report Download - page 113

Progress Energy Annual Report 2007
111
material impact to 2008 earnings. Approximately 34 percent
of the notional quantity of these contracts was entered
into by Ceredo. As discussed in Notes 1C and 3J, we
disposed of our 100 percent ownership interest in Ceredo on
March 30, 2007. Progress Energy is the primary beneficiary
of, and continues to consolidate Ceredo in accordance with
FIN 46R, but we have recorded a 100 percent minority
interest. Consequently, subsequent to the disposal there is no
net earnings impact for the portion of the contracts entered
into by Ceredo. At December 31, 2007, the fair value of all of
these contracts was recorded as a $234 million short-term
derivative asset position, including $79 million at Ceredo. The
fair value of these contracts was included in receivables,
net on the Consolidated Balance Sheet (See Note 6A). As
discussed in Note 3B, on October 12, 2007, we permanently
ceased production of synthetic fuels at our majority-owned
facilities. Because we have abandoned our majority-owned
facilities and our other synthetic fuels operations ceased as
of December 31, 2007, gains and losses on these contracts
were included in discontinued operations, net of tax on the
Consolidated Statement of Income in 2007. During the year
ended December 31, 2007, we recorded net pre-tax gains
of $168 million related to these contracts. Of this amount,
$57 million was attributable to Ceredo of which $42 million
was attributed to minority interest for the portion of the gain
subsequent to the disposal of Ceredo.
At December 31, 2006, derivative assets of $107 million and
derivative liabilities of $31 million were included in assets
to be divested and liabilities to be divested, respectively,
on the Consolidated Balance Sheet. Due to the divestitures
discussed above, management determined that it was no
longer probable that the forecasted transactions underlying
certain derivative contracts would be fulfilled, and cash
flow hedge accounting for the contracts was discontinued
beginning in the second quarter of 2006 for Gas and in
the fourth quarter of 2006 for CCO. Our discontinued
operations did not have material outstanding positions in
commodity cash flow hedges at December 31, 2006. For
the years ended December 31, 2006 and 2005, excluding
amounts reclassified to earnings due to discontinuance
of the related cash flow hedges, net gains and losses
from derivative instruments related to Gas and CCO on a
consolidated basis were not material and are included in
discontinued operations, net of tax on the Consolidated
Statements of Income. For the year ended December 31,
2006, discontinued operations, net of tax includes
$74 million in after-tax deferred income, which was
reclassified to earnings due to discontinuance of the
related cash flow hedges. For the year ended December 31,
2005, there were no reclassifications to earnings due to
discontinuance of the related cash flow hedges.
ECONOMIC DERIVATIVES
Derivative products, primarily natural gas and oil contracts,
may be entered into from time to time for economic hedging
purposes. While management believes the economic
hedges mitigate exposures to fluctuations in commodity
prices, these instruments are not designated as hedges
for accounting purposes and are monitored consistent
with trading positions. We manage open positions with
strict policies that limit our exposure to market risk and
require daily reporting to management of potential financial
exposures.
The Utilities have derivative instruments related to their
exposure to price fluctuations on fuel oil and natural
gas purchases. These instruments receive regulatory
accounting treatment. Unrealized gains and losses are
recorded in regulatory liabilities and regulatory assets on
the Consolidated Balance Sheets, respectively, until the
contracts are settled (See Note 7A). Once settled, any
realized gains or losses are passed through the fuel clause.
During the year ended December 31, 2007, PEC recorded a
net realized loss of $9 million. PEC’s net realized gains and
losses were not material during the years ended December
31, 2006 and 2005. During the years ended December 31,
2007, 2006 and 2005, PEF recorded a net realized loss of
$46 million, a net realized gain of $39 million and a net
realized gain of $70 million, respectively.
Excluding amounts receiving regulatory accounting
treatment and amounts related to our discontinued
operations discussed above, gains and losses from
contracts entered into for economic hedging purposes
were not material to our results of operations during
the years ended December 31, 2007, 2006 and
2005. Excluding derivative assets and derivative
liabilities to be divested discussed above, we did not
have material outstanding positions in such contracts at
December 31, 2007 and 2006, other than those receiving
regulatory accounting treatment at PEC and PEF, as
discussed below.
At December 31, 2007, the fair value of PEC’s commodity
derivative instruments was recorded as a $19 million long-
term derivative asset position included in other assets
and deferred debits and a $3 million short-term derivative
liability position included in other current liabilities
on the Consolidated Balance Sheet. At December 31,
2006, PEC did not have material outstanding positions in
such contracts.
At December 31, 2007, the fair value of PEF’s commodity
derivative instruments was recorded as a $60 million short-
term derivative asset position included in prepayments