Progress Energy 2007 Annual Report Download - page 64

MARKET RISK DISCLOSURES
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terminated on December 1, 2006. On December 6, 2006,
Progress Energy repurchased, pursuant to the tender
offer, $550 million, or 44.0 percent, of the outstanding
aggregate principal amount of its 7.10% Senior Notes due
March 1, 2011, at 108.361 percent of par, or $596 million,
plus accrued interest.
Marketable Securities Price Risk
The Utilities maintain trust funds, pursuant to NRC
requirements, to fund certain costs of decommissioning
their nuclear plants. These funds are primarily invested
in stocks, bonds and cash equivalents, which are
exposed to price fluctuations in equity markets and to
changes in interest rates. At December 31, 2007 and
2006, the fair value of these funds was $1.384 billion and
$1.287 billion, respectively, including $804 million and
$735 million, respectively, for PEC and $580 million and
$552 million, respectively, for PEF. We actively monitor
our portfolio by benchmarking the performance of our
investments against certain indices and by maintaining,
and periodically reviewing, target allocation percentages
for various asset classes. The accounting for nuclear
decommissioning recognizes that the Utilities’ regulated
electric rates provide for recovery of these costs net
of any trust fund earnings, and, therefore, fluctuations
in trust fund marketable security returns do not affect
earnings. See Note 13 for further information on the trust
fund securities.
Contingent Value Obligations Market
Value Risk
In connection with the acquisition of Florida Progress,
the Parent issued 98.6 million CVOs. Each CVO represents
the right of the holder to receive contingent payments
based on the performance of four synthetic fuels facilities
purchased by subsidiaries of Florida Progress in October
1999. The payments are based on the net after-tax cash
flows the facilities generate. The CVOs are derivatives and
are recorded at fair value. Unrealized gains and losses
from changes in fair value are recognized in earnings.
We perform sensitivity analyses to estimate our exposure
to the market risk of the CVOs. The sensitivity analysis
performed on the CVOs uses quoted prices obtained
from brokers or quote services to measure the potential
loss in earnings from a hypothetical 10 percent adverse
change in market prices over the next 12 months. 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 hypothetical 10 percent decrease in
the December 31, 2007, market price would result in a
$3 million decrease in the fair value of the CVOs.
Commodity Price Risk
We are exposed to the effects of market fluctuations
in the price of natural gas, coal, fuel oil, electricity and
other energy-related products marketed and purchased
as a result of our ownership of energy-related assets.
Our exposure to these fluctuations is significantly limited
by the cost-based regulation of the Utilities. Each state
commission allows electric utilities to recover certain of
these costs through various cost-recovery clauses to the
extent the respective commission determines that such
costs are prudent. Therefore, while there may be a delay
in the timing between when these costs are incurred and
when these costs are recovered from the ratepayers,
changes from year to year have no material impact on
operating results. In addition, most of our long-term power
sales contracts shift substantially all fuel price risk to the
purchaser. We also have oil price risk exposure related to
synthetic fuels tax credits as discussed in MD&A – “Other
Matters – Synthetic Fuels Tax Credits.”
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.
We perform sensitivity analyses to estimate our exposure
to the market risk of our derivative commodity instruments
that are not eligible for recovery from ratepayers.
The following discussion addresses the stand-alone
commodity risk created by these derivative commodity
instruments, without regard to the offsetting effect of
the underlying exposure these instruments are intended
to hedge. The sensitivity analysis performed on these
derivative commodity instruments uses quoted prices
obtained from brokers to measure the potential loss
in earnings from a hypothetical 10 percent adverse
change in market prices over the next 12 months. At
December 31, 2007, the only derivative commodity
instruments not eligible for recovery from ratepayers
related to derivative contracts entered into on January 8,
2007, to hedge economically a portion of our 2007 synthetic
fuels cash flow exposure to the risk of rising oil prices as
discussed below. These contracts ended on December 31,
2007, and were settled for cash on January 8, 2008, with no
material impact to 2008 earnings. At December 31, 2006,
derivative commodity instruments not eligible for recovery
from ratepayers were included in discontinued operations
as discussed below.
See Note 17 for additional information with regard
to our commodity contracts and use of derivative
financial instruments.