Progress Energy 2010 Annual Report Download - page 54

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MARKET RISK DISCLOSURES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are exposed to various risks related to changes in
market conditions. Market risk represents the potential
loss arising from adverse changes in market rates and
prices. We have a risk management committee that
includes senior executives from various business groups.
The risk management committee is responsible for
administering risk management policies and monitoring
compliance with those policies by all subsidiaries. Under
our risk policy, we may use a variety of instruments,
including swaps, options and forward contracts, to
manage exposure to fluctuations in commodity prices
and interest rates. Such instruments contain credit
risk to the extent that the counterparty fails to perform
under฀the฀contract.฀We฀minimize฀such฀risk฀by฀performing฀
credit and financial reviews using a combination of
financial analysis and publicly available credit ratings
of such counterparties (See Note 17). Both PEC and PEF
also have limited counterparty exposure for commodity
hedges (primarily gas and oil hedges) by spreading
concentration risk over a number of counterparties.
The following disclosures about market risk contain forward-
looking statements that involve estimates, projections, goals,
forecasts, assumptions, risks and uncertainties that could
cause actual results or outcomes to differ materially from
those expressed in the forward-looking statements. Please
review “Safe Harbor for Forward-Looking Statements” for a
discussion of the factors that may impact any such forward-
looking statements made herein.
Certain market risks are inherent in our financial
instruments, which arise from transactions entered into
in the normal course of business. Our primary exposures
are changes in interest rates with respect to our long-
term debt and commercial paper, fluctuations in the
return on marketable securities with respect to our NDT
funds, changes in the market value of CVOs and changes
in energy-related commodity prices.
These financial instruments are held for purposes other
than trading. The risks discussed below do not include
the price risks associated with nonfinancial instrument
transactions and positions associated with our
operations, such as purchase and sales commitments
and inventory.
Interest Rate Risk
As part of our debt portfolio management and daily cash
management, we have variable rate long-term debt and
may have commercial paper and/or loans outstanding
under our RCA facilities, which are also exposed to
floating interest rates. Approximately 7 percent and
9 percent of consolidated debt had variable rates at
December 31, 2010 and 2009, respectively.
Based on our variable rate long-term debt balances
at December 31, 2010, a 100 basis point change in
interest rates would result in an annual pre-tax interest
expense change of approximately $9 million. We had no
outstanding short-term debt at December 31, 2010.
From time to time, we use interest rate derivative
instruments to adjust the mix between fixed and floating
rate debt in our debt portfolio, to mitigate our exposure
to interest rate fluctuations associated with certain debt
instruments and to hedge interest rates with regard to
future fixed-rate debt issuances.
The notional amounts of interest rate derivatives are not
exchanged and do not represent exposure to credit loss.
In the event of default by a counterparty, the exposure in
the transaction is the cost of replacing the agreements at
current market rates.
We use a number of models and methods to determine
interest rate risk exposure and fair value of derivative
positions. For reporting purposes, fair values and
exposures of derivative positions are determined as
of the end of the reporting period using the Bloomberg
Financial Markets system.
In accordance with GAAP, interest rate derivatives
that qualify as hedges are separated into one of two
categories: cash flow hedges or fair value hedges. Cash
flow hedges are used to reduce exposure to changes
in cash flow due to fluctuating interest rates. Fair value
hedges are used to reduce exposure to changes in fair
value due to interest rate changes.
The following tables provide information, at December 31,
2010 and 2009, about our interest rate risk-sensitive
instruments. The tables present principal cash flows and
weighted-average interest rates by expected maturity
dates for the fixed and variable rate long-term debt and
Parent-obligated mandatorily redeemable preferred
securities of trust. The tables also include estimates of the
fair value of our interest rate risk-sensitive instruments
based on quoted market prices for these or similar issues.
For interest rate forward contracts, the tables present
notional amounts and weighted-average interest rates by
contractual mandatory termination dates for 2011 to 2015
and thereafter and the related fair value. Notional amounts
are used to calculate the settlement amounts under the
interest rate forward contracts. See Note 17 for more
information on interest rate derivatives.