Progress Energy 2008 Annual Report Download - page 54

MARKET RISK DISCLOSURES
52
Income included $74 million in after-tax deferred income,
which was reclassified to earnings due to discontinuance
of the related cash flow hedges, and immaterial net gains
and losses from other derivative instruments related to
Gas and CCO.
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. Certain of our hedge
agreements may result in the receipt of, or posting of,
derivative collateral with our counterparties, depending
on the daily derivative position. Fluctuations in commodity
prices that lead to our return of collateral received and/
or our posting of collateral with our counterparties
negatively impact our liquidity. 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. Substantially all of these instruments receive
regulatory accounting treatment. Related unrealized
gains and losses are recorded in regulatory liabilities
and regulatory assets, respectively, on the Consolidated
Balance Sheets until the contracts are settled (See Note
7A). After settlement of the derivatives and the fuel is
consumed, realized gains or losses are passed through
the fuel cost-recovery clause. During the years ended
December 31, 2008 and 2007, PEC recorded a net realized
gain of $2 million and a net realized loss of $9 million,
respectively. PEC’s net realized loss was not material
during the year ended December 31, 2006. During the
years ended December 31, 2008, 2007 and 2006, PEF
recorded a net realized gain of $172 million, a net realized
loss of $46 million and a net realized gain of $39 million,
respectively.
At December 31, 2008, the fair value of PEC’s commodity
derivative instruments was recorded as a $45 million
short-term derivative liability position included in
derivative liabilities and a $54 million long-term derivative
liability position included in derivative liabilities on the
Consolidated Balance Sheet. At December 31, 2007,
the fair value of such instruments was recorded as a
$19 million long-term derivative asset position included
in derivative assets and a $4 million short-term derivative
liability position included in derivative liabilities on the
Consolidated Balance Sheet. Certain counterparties
have held cash collateral with PEC in support of these
instruments. PEC had an $18 million cash collateral
asset included in derivative collateral posted on the
Consolidated Balance Sheet at December 31, 2008, and
no cash collateral position at December 31, 2007.
At December 31, 2008, the fair value of PEF’s commodity
derivative instruments was recorded as a $9 million short-
term derivative asset position included in prepayments
and other current assets, a $1 million long-term
derivative asset position included in derivative assets, a
$380 million short-term derivative liability position included
in current derivative liabilities, and a $209 million long-term
derivative liability position included in derivative liabilities
on the Consolidated Balance Sheet. At December 31, 2007,
the fair value of such instruments was recorded as an
$83 million short-term derivative asset position included
in prepayments and other current assets, a $100 million
long-term derivative asset position included in derivative
assets, a $38 million short-term derivative liability position
included in current derivative liabilities, and a $9 million
long-term derivative liability position included in derivative
liabilities on the Consolidated Balance Sheet. Certain
counterparties have posted or held cash collateral in
support of these instruments. PEF had a $335 million cash
collateral asset included in derivative collateral posted
and a $12 million cash collateral liability included in other
current liabilities on the Consolidated Balance Sheet at
December 31, 2008, and no cash collateral position at
December 31, 2007.
CASH FLOW HEDGES
The Utilities designate a portion of commodity derivative
instruments as cash flow hedges under SFAS No. 133. The
objective for holding some of 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.
We also hedge exposure to market risk associated with
fluctuations in the price of fuel for fleet vehicles. Realized
gains and losses are recorded net as part of fleet vehicle
costs. At December 31, 2008 and 2007, we had no material
outstanding positions in such contracts. The ineffective
portion of commodity cash flow hedges was not material
to our results of operations for 2008, 2007 and 2006.
At December 31, 2008 and 2007, the amount recorded in
our accumulated other comprehensive income related to
commodity cash flow hedges was not material.