Progress Energy 2007 Annual Report Download - page 62

MARKET RISK DISCLOSURES
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QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are exposed to various risks related to changes in
market conditions. Market risk represents the potential
loss arising from adverse changes in market rates and
prices. 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
to the extent that the counterparty fails to perform under
the contract. We mitigate such risk by performing credit
reviews using, among other things, publicly available
credit ratings of such counterparties (See Note 17).
The following disclosures about market risk contain
forward-looking statements that involve estimates,
projections, goals, forecasts, assumptions, risks
and uncertainties that could cause actual results or
outcomes to differ materially from those expressed in
the forward-looking statements. Please review “Safe
Harbor for Forward-Looking Statements” for a discussion
of the factors that may impact any such forward-looking
statements made herein.
Certain market risks are inherent in our financial instruments,
which arise from transactions entered into in the normal
course of business. Our primary exposures are changes
in interest rates with respect to our long-term debt and
commercial paper, fluctuations in the return on marketable
securities with respect to our nuclear decommissioning trust
funds, changes in the market value of CVOs and changes
in energy-related commodity prices.
These financial instruments are held for purposes
other than trading. The risks discussed below do not
include the price risks associated with nonfinancial
instrument transactions and positions associated with
our operations, such as purchase and sales commitments
and inventory.
Interest Rate Risk
From time to time, we use interest rate derivative
instruments to adjust the mix between fixed and floating
rate debt in our debt portfolio, to mitigate our exposure
to interest rate fluctuations associated with certain debt
instruments and to hedge interest rates with regard to
future fixed-rate debt issuances.
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 the
transaction is the cost of replacing the agreements at
current market rates. We enter into interest rate derivative
agreements only with banks with credit ratings of single
A or better.
We use a number of models and methods to determine
interest rate risk exposure and fair value of derivative
positions. For reporting purposes, fair values and
exposures of derivative positions are determined at the
end of the reporting period using the Bloomberg Financial
Markets system.
In accordance with SFAS No. 133, “Accounting for
Derivatives and Hedging Activities” (SFAS No. 133), interest
rate derivatives that qualify as hedges are separated into
one of two categories: cash flow hedges or fair value
hedges. Cash flow hedges are used to reduce exposure to
changes in cash flow due to fluctuating interest rates. Fair
value hedges are used to reduce exposure to changes in
fair value due to interest rate changes.
The following tables provide information at December 31,
2007 and 2006, about our interest rate risk-sensitive
instruments. The tables present principal cash flows and
weighted-average interest rates by expected maturity
dates for the fixed and variable rate long-term debt and
Florida Progress-obligated mandatorily redeemable
securities of trust. The tables also include estimates
of the fair value of our interest rate risk-sensitive
instruments based on quoted market prices for these or
similar issues. For interest rate swaps and interest rate
forward contracts, the tables present notional amounts
and weighted-average interest rates by contractual
maturity dates for 2008 to 2012 and thereafter and the
related fair value. Notional amounts are used to calculate
the contractual cash flows to be exchanged under the
interest rate swaps and the settlement amounts under
the interest rate forward contracts. See Note 17 for more
information on interest rate derivatives.
During 2007, PEF had entered into a combined $225 million
notional of forward starting swaps to mitigate exposure to
interest rate risk in anticipation of future debt issuances,
which were terminated on September 13, 2007, in
conjunction with PEF’s issuance of $500 million of First
Mortgage Bonds, 6.35% Series due 2037 and $250 million
of First Mortgage Bonds, 5.80% Series due 2017.
On July 30, 2007, PEC entered into a $50 million notional
forward starting swap and on October 24, 2007, PEC