Progress Energy 2007 Annual Report Download - page 66

MARKET RISK DISCLOSURES
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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 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
and other current assets, a $90 million long-term
derivative asset position included in derivative assets,
and a $15 million short-term derivative liability position
included in other current liabilities on the Consolidated
Balance Sheet. At December 31, 2006, the fair value of
such instruments was recorded as a $2 million long-term
derivative asset position included in derivative assets, an
$87 million short-term derivative liability position included
in other current liabilities, and a $36 million long-term
derivative liability position included in other liabilities and
deferred credits on the Consolidated Balance Sheet.
CASH FLOW HEDGES
Our subsidiaries designate a portion of commodity
derivative instruments as cash flow hedges under SFAS
No. 133. The objective for holding these instruments
is to hedge exposure to market risk associated with
fluctuations in the price of power for our forecasted sales.
Realized gains and losses are recorded net in operating
revenues. At December 31, 2007 and 2006, we did not
have material outstanding positions in such contracts.
The ineffective portion of commodity cash flow hedges
was not material to our results of operations for 2007,
2006 and 2005.
At December 31, 2007 and 2006, the amount recorded in
our accumulated other comprehensive income related to
commodity cash flow hedges was not material.