Progress Energy 2007 Annual Report Download - page 114

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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.
B. Interest Rate Derivatives – Fair Value or
Cash Flow Hedges
We use cash flow hedging strategies to reduce exposure
to changes in cash flow due to fluctuating interest rates.
We use fair value hedging strategies to reduce exposure
to changes in fair value due to interest rate changes.
The notional amounts of interest rate derivatives are not
exchanged and do not represent exposure to credit loss.
In the event of default by the counterparty, the exposure in
these transactions is the cost of replacing the agreements
at current market rates.
CASH FLOW HEDGES
The fair values of open interest rate cash flow hedges at
December 31 were as follows:
Gains and losses from cash flow hedges are recorded in
accumulated other comprehensive income and amounts
reclassified to earnings are included in net interest charges
as the hedged transactions occur. Amounts in accumulated
other comprehensive income related to terminated hedges
are reclassified to earnings as the interest expense is
recorded. The ineffective portion of interest rate cash flow
hedges was not material to our results of operations for
2007, 2006 and 2005.
The following table presents selected information related
to interest rate cash flow hedges included in accumulated
other comprehensive income at December 31, 2007:
At December 31, 2006, including amounts related to
terminated hedges, we had $14 million of after-tax deferred
losses, including $5 million of after-tax deferred losses at
PEC and $1 million of after-tax deferred losses at PEF,
recorded in accumulated other comprehensive income
related to interest rate cash flow hedges.
At December 31, 2007 and 2006, PEC had $200 million notional
and $50 million notional, respectively, of interest rate cash
flow hedges. During 2007, PEC entered into a combined
$150 million notional of forward starting swaps and
amended its $50 million notional 10-year forward starting
swap in order to move the maturity date from October 1,
2017 to April 1, 2018, which now requires mandatory cash
settlement on April 1, 2008.
In 2007, PEF entered into a combined $225 million notional of
forward starting swaps to mitigate exposure to interest rate
risk in anticipation of future debt issuances. At December 31,
2006, PEF had $50 million notional of interest rate cash flow
hedges. All of PEF’s forward starting swaps 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 January 8, 2008, PEF entered into a combined
$200 million notional of forward starting swaps to mitigate
exposure to interest rate risk in anticipation of future
debt issuances.
FAIR VALUE HEDGES
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. At December 31, 2007, we had no open interest
rate fair value hedges. At December 31, 2006, we had
$50 million notional of interest rate fair value hedges.
(in millions) 2007 2006
Fair value of liabilities $(12) $(2)
(term in years/millions of dollars)
Maximum term Less than 1
Accumulated other comprehensive loss, net of tax(a) $(24)
Portion expected to be reclassified to earnings during the
next 12 months(b) $(2)
(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.