Progress Energy 2004 Annual Report Download - page 94

Download and view the complete annual report

Please find page 94 of the 2004 Progress Energy annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 116

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116

therefore, was designated as a normal purchase as of
October 1, 2003. The original liability of $38 million
associated with the fair value loss is being amortized to
earnings over the term of the related contract. At
December 31, 2004 and 2003, the remaining liability was
$26 million and $35 million, respectively.
ECONOMIC DERIVATIVES
Derivative products, primarily electricity and natural gas
contracts, are entered into 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. The Company manages open
positions with strict policies that limit its exposure to
market risk and require daily reporting to management of
potential financial exposures. Gains and losses from
such contracts were not material to results of operations
during 2004, 2003 or 2002, and the Company did not have
material outstanding positions in such contracts at
December 31, 2004 and 2003.
In 2004, PEF entered into derivative instruments related to
its exposure to price fluctuations on fuel oil purchases. At
December 31, 2004, the fair values of these instruments
were a $2 million long-term derivative asset position
included in other assets and deferred debits and a
$5 million short-term derivative liability position included
in other current liabilities. These instruments receive
regulatory accounting treatment. Gains are recorded in
regulatory liabilities and losses are recorded in
regulatory assets.
CASH FLOW HEDGES
Progress Energy’s 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 natural gas for
the Company’s forecasted purchases and sales. At
December 31, 2004, the maximum period over which the
Company is hedging exposures to the price variability of
natural gas is 10 years.
The total fair value of commodity cash flow hedges at
December 31, 2004 and 2003 was as follows:
The ineffective portion of commodity cash flow hedges
was not material to the Company’s results of operations
for 2004, 2003 or 2002. At December 31, 2004, there were
$9 million of after-tax deferred losses in accumulated
other comprehensive income (OCI), of which $5 million is
expected to be reclassified to earnings during the next
12 months as the hedged transactions occur. Gains and
losses are recorded net in operating revenues. As part of
the divestiture of Winchester Production Company, Ltd.,
assets in 2004, $7 million of after-tax deferred losses were
reclassified into earnings due to discontinuance of the
related cash flow hedges and recorded against the gain
on sale. Due to the volatility of the commodities markets,
the value in OCI is subject to change prior to its
reclassification into earnings.
B. Interest Rate Derivatives –
Fair Value or Cash Flow Hedges
The Company uses cash flow hedging strategies to
hedge variable interest rates on long-term and short-
term debt and to hedge interest rates with regard to
future fixed-rate debt issuances. Gains and losses are
recorded in OCI and amounts reclassified to earnings are
included in net interest charges as the hedged
transactions occur. The Company uses fair value hedging
strategies to manage its exposure to fixed interest rates
on long-term debt. For interest rate fair value hedges, the
change in the fair value of the hedging derivative is
recorded in net interest charges and is offset by the
change in the fair value of the hedged item.
The fair values of open position interest rate hedges at
December 31, 2004 and 2003 were as follows:
CASH FLOW HEDGES
The following table presents selected information related
to the Company’s interest rate cash flow hedges included
in accumulated OCI at December 31, 2004:
92
Notes to Consolidated Financial Statements
(millions of dollars)
2004 2003
Fair value of assets $– $–
Fair value of liabilities (15) (12)
Fair value, net $(15) $(12)
(in millions)
2004 2003
Interest rate cash flow hedges $(2) $(6)
Interest rate fair value hedges $3 $(4)
Accumulated Other
Comprehensive Income/(Loss),
net of tax(a)
(millions of dollars)
Portion Expected to be
Reclassified to Earnings
during the Next 12 Months(b)
$(19) $(4)
(a) Includes amounts related to terminated hedges.
(b) Actual amounts that will be reclassified to earnings may vary from the
expected amounts presented above as a result of changes in interest rates.