Risk Management Activities and Derivative Transactions

9 Months Ended

Sep. 30, 2012

Risk Management Activities And Derivative Transactions Disclosure [Line Items]

Risk Management Activities And Derivative Transactions

8.RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

The Progress Energy Registrants utilize various derivative instruments to manage risks primarily associated with commodity prices and interest rates. The primary use of energy commodity derivatives is to hedge the generation portfolio against the changes in the prices of power and fuel. Interest rate derivatives are entered into to manage interest rate risk associated with variable-rate and fixed-rate borrowings.

Certain derivative instruments qualify for hedge accounting and are designated as cash flow hedges, while others either do not qualify as accounting hedges (such as economic hedges) or have not been designated as hedges (herein after referred to as undesignated contracts). All derivative instruments not meeting the criteria for the normal purchasesor sales exception are recognized aseither assets or liabilities at fair value in the Balance Sheets. As PEC and PEF meet the criteria for regulatory accounting treatment, the majority of the derivative contracts entered into by PEC and PEF are not designated as hedges since gains and losses on such contracts are deferred as regulatory liabilities and assets, respectively. Thus, there is no immediate earnings impact associated with changes in fair values of such derivative contracts. Cash flows relative to derivative instruments are considered operating activities based on the nature of the underlying transactions.

For derivative instruments that qualify and are designated as cash flow hedges, the effective portion of the gain or loss is reported as a component of Accumulated Other Comprehensive Income (AOCI) and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. Any gains or losses on the derivative that represent either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

• COMMODITY PRICE RISK

The Progress Energy Registrants are exposed to the impact of market changes in the future prices of natural gas, coal, fuel oil, electricity and other energy-related products marketed and purchased as a result of our ownership of energy-related assets. With respect to commodity price risks associated with electricity generation, PEC and PEF are exposed to changes including, but not limited to, the cost of the coal, natural gas and fuel oil used to generate electricity, the prices of electricity in wholesale markets, the cost of capacity and electricity purchased for resale in wholesale markets and the cost of emissions allowances primarily at the coal fired power plants. Risks associated with commodity price changes on future operations are closely monitored and, where appropriate, various commodity contracts are used to mitigate the effect of such fluctuations on operations. Exposure to commodity price risk is influenced by a number of factors, including, but not limited to, the term of the contracts, the liquidity of the market and delivery location.

COMMODITY CASH FLOW HEDGES

The Progress Energy Registrants use commodity instruments, such as swaps, futures, forwards and options, to protect margins for a portion of future revenues and fuel and purchased power expenses.

UNDESIGNATED CONTRACTS

The Progress Energy Registrants use derivative contracts as economic hedges to manage the market risk exposures that arise from providing electricity generation and capacity to large energy customers, energy aggregators, retail customers and other wholesale companies. Undesignated contracts may include contracts not designated as a hedge, contracts that do not qualify for hedge accounting, derivatives that do not or no longer qualify for the normal purchases or sales scope exemption, and de-designated hedge contracts. These undesignated contracts expire as late as 2015.

PEC uses derivative contracts as economic hedges to manage the market risk exposures that arise from electricity generation. PEC has also entered into firm power sale agreements, some of which are accounted for as derivative instruments, as part of the Interim FERC Mitigation in connection with Progress Energy's merger with Duke Energy (See Note 2). Undesignated contracts at September 30, 2012 are primarily associated with forward purchases and sales of electricity and forward purchases of fuel used in electricity generation.

PEF uses derivative contracts as economic hedges to manage the market risk exposures that arise from electricity generation. Undesignated contracts at September 30, 2012 are primarily associated with forward purchases of fuel used in electricity generation.

B. INTEREST RATE RISK

The Progress Energy Registrants are exposed to risk resulting from changes in interest rates as a result of their issuances or anticipated issuance of variable and fixed-rate debt and commercial paper. Interest rate exposure is managed by limiting variable-rate exposures to a percentage of total debt and by monitoring the effects of market changes in interest rates. To manage risk associated with changes in interest rates, the Progress Energy Registrantsmay enter into financial contracts; primarily interest rate swaps and U.S. Treasury lock agreements. Additionally, in anticipationof certain fixed-rate debt issuances, a series of forward starting interest rate swaps may be executed to lock in components of the market interest rates at the time and terminated prior to or upon the issuance of the corresponding debt. When these transactions occur within a business that meets the criteria for regulatory accounting treatment, these contracts may be treated as undesignated and any pre-tax gain or loss recognized from inception to termination of the hedges would be recorded as a regulatory liability or asset and amortized as a component of interest expense over the life of the debt. Alternatively, these derivatives may be designated as hedges whereby, any pre-tax gain or loss from inception to termination of the hedges would be recorded in AOCI and amortized as a component of interest expense over the life of the debt.

During the third quarter of 2012, $117 million and $42 million in pre-tax deferred net losses on derivative instruments related to interest rate cash flow hedgesfor regulated operations were reclassified from AOCI to regulatory assets at PEC and PEF, respectively.

The following tables show the notional amounts for derivatives related to interest rate risk:

Notional Amounts of Derivative Instruments Related to Interest Rate
		Progress Energy		PEC		PEF
(in millions)		September 30, 2012
Undesignated contracts	$	100	$	50	$	50
(in millions)		December 31, 2011
Cash flow hedges	$	500	$	250	$	50

C. VOLUMES

The following tables show information relating to the volume of the Progress Energy Registrants' outstanding commodity derivative activity. Amounts disclosed represent the notional volumes of commodities contracts accounted for at fair value. For option contracts, notional amounts include only delta-equivalent volumes which represent the notional volumes times the probability of exercising the option based on current price volatility. Volumes associated with contracts qualifying for the normal purchase or sales exceptions have been excluded from the tables below. Amounts disclosed represent the absolute value of notional amounts. Contractual amounts have been netted where offsetting purchase and sale contracts exist with identical delivery locations and times of delivery. Where all commodity positions are perfectly offset, no quantities are shown below. For additional information on notional dollar amounts of debt subject to derivative contracts accounted for at fair value, see “Interest Rate Risk” section above.

Underlying Notional Amounts for Commodity Derivative Instruments Accounted for At Fair Value
		Progress Energy	PEC	PEF
		September 30, 2012
Commodity contracts
	Electricity-energy (Gigawatt-hours)(a)	1,850	1,850	0
	Electricity-capacity (Gigawatt-months)(a)	5	5	0
	Natural gas (millions of decatherms)	297	89	208
	Fuel oil (millions of gallons)	6	0	6
		December 31, 2011
Commodity contracts
	Natural gas (millions of decatherms)	347	103	244
	Fuel oil (millions of gallons)	10	0	10
(a)	Interim FERC Mitigation power sales agreements entered into in connection with the merger with Duke Energy.

D. DERIVATIVE INSTRUMENT AND HEDGING ACTIVITY INFORMATION

The following tables show fair value amounts of derivative contracts and the line item(s) in the Balance Sheets in which such amounts are included. The fair values of derivative contracts are presented on a gross basis, even when the derivative instruments are subject to master netting arrangements where the Progress Energy Registrants net the fair value of derivative contracts subject to master arrangements with the same counterparty in the Balance Sheets. Cash collateral payables and receivables associated with the derivative contracts have not been netted against the fair value amounts.

Location and Fair Value of Derivatives Reflected in the Balance Sheets
				Progress Energy				PEC				PEF
Instrument / Balance Sheet location				September 30, 2012
(in millions)			Asset		Liability		Asset		Liability		Asset		Liability
Derivatives designated as hedging instruments
Commodity contracts
	Derivative liabilities, current				$	1			$	-			$	1
		Total derivatives designated as hedging instruments				1				0				1
Derivatives not designated as hedging instruments
Commodity contracts(a)
	Investments and other assets: other		$	1		0	$	0		0	$	1		0
	Derivative liabilities, current			8		220		3		74		5		146
	Deferred credits and other liabilities: other			14		209		2		74		12		135
Interest rate contracts(a)
	Derivative liabilities, current					23				11				12
CVOs(b)
	Deferred credits and other liabilities: other					4				0				0
		Total derivatives not designated as hedging instruments		23		456		5		159		18		293
		Total derivatives	$	23	$	457	$	5	$	159	$	18	$	294
(a)	Substantially all of these contracts receive regulatory treatment.
(b)	As discussed in Note 16 in the 2011 Form 10-K, the Parent issued 98.6 million Contingent Value Obligations (CVOs) in connection with the acquisition of Florida Progress Corporation (Florida Progress) during 2000. Through a negotiated settlement agreement and subsequent tender offer between October 2011 and February 2012, we repurchased and continue to hold 83.4 million CVOs.
				Progress Energy				PEC				PEF
Instrument / Balance Sheet location			December 31, 2011
(in millions)			Asset		Liability		Asset		Liability		Asset		Liability
Derivatives designated as hedging instruments
Commodity contracts
	Derivative liabilities, current				$	2			$	-			$	2
	Deferred credits and other liabilities: other					1				-				1
Interest rate contracts
	Derivative liabilities, current					76				38				0
	Deferred credits and other liabilities: other					17				9				8
		Total derivatives designated as hedging instruments				96				47				11
Derivatives not designated as hedging instruments
Commodity contracts(a)
	Derivative liabilities, current		$	5		357	$	0		91	$	5		266
	Deferred credits and other liabilities: other			0		332		0		110		0		222
CVOs(b)
	Current liabilities: other					14				-				-
		Total derivatives not designated as hedging instruments		5		703		0		201		5		488
		Total derivatives	$	5	$	799	$	0	$	248	$	5	$	499
(a)	Substantially all of these contracts receive regulatory treatment.
(b)	As discussed in Note 16 in the 2011 Form 10-K, the Parent issued 98.6 million CVOs in connection with the acquisition of Florida Progress during 2000. In 2011, we repurchased and continue to hold 80.1 million CVOs in a negotiated settlement agreement and subsequent tender offer.

The following tables show the amount of gains and losses recognized on derivative instruments designated and qualifying as cash flow hedges by type of derivative contract and the Statements line items in which such gains and losses are included.

Cash Flow Hedges - Location and Amount of Pre-Tax Gains and (Losses) Recognized in Comprehensive Income
				Progress Energy				PEC				PEF
			Three months ended September 30
(in millions)			2012		2011		2012		2011		2012		2011
Pre-tax gains (losses) recognized in OCI(a)
	Commodity contracts		$	1	$	(1)	$	0	$	0	$	1	$	(1)
	Interest rate contracts(b)			0		(111)		0		(58)		0		(27)
Total pre-tax gains (losses) recognized in OCI			$	1	$	(112)	$	0	$	(58)	$	1	$	(28)
Location of pre-tax gains (losses) reclassified from OCI into income(a)
	Interest rate contracts(b)
		Interest expense	$	(2)	$	(3)	$	0	$	(2)	$	0	$	0
Total pre-tax gains (losses) reclassified from OCI into income			$	(2)	$	(3)	$	0	$	(2)	$	0	$	0
Location of pre-tax gains (losses) recognized in income on derivatives(c)
	Interest rate contracts(b)
		Interest expense	$	0	$	(1)	$	0	$	(1)	$	0	$	0
Total pre-tax gains (losses) recognized in income on derivatives			$	0	$	(1)	$	0	$	(1)	$	0	$	0
(a)	Effective portion.
(b)	Amounts in AOCI related to terminated hedges are reclassified to earnings as the interest expense is recorded. The effective portion of the hedges will be amortized to interest expense over the term of the related debt.
(c)	Related to ineffective portion and amount excluded from effectiveness testing.
				Progress Energy				PEC				PEF
			Nine months ended September 30
(in millions)			2012		2011		2012		2011		2012		2011
Pre-tax gains (losses) recognized in OCI(a)
	Commodity contracts		$	1	$	(1)	$	0	$	0	$	1	$	(1)
	Interest rate contracts(b)			(11)		(134)		(7)		(67)		(2)		(35)
Total pre-tax gains (losses) recognized in OCI			$	(10)	$	(135)	$	(7)	$	(67)	$	(1)	$	(36)
Location of pre-tax gains (losses) reclassified from OCI into income(a)
	Interest rate contracts(b)
		Interest expense	$	(12)	$	(9)	$	(5)	$	(5)	$	(2)	$	0
Total pre-tax gains (losses) reclassified from OCI into income			$	(12)	$	(9)	$	(5)	$	(5)	$	(2)	$	0
Location of pre-tax gains (losses) recognized in income on derivatives(c)
	Interest rate contracts(b)
		Interest expense	$	0	$	(3)	$	0	$	(1)	$	0	$	0
Total pre-tax gains (losses) recognized in income on derivatives			$	0	$	(3)	$	0	$	(1)	$	0	$	0
(a)	Effective portion.
(b)	Amounts in AOCI related to terminated hedges are reclassified to earnings as the interest expense is recorded. The effective portion of the hedges will be amortized to interest expense over the term of the related debt.
(c)	Related to ineffective portion and amount excluded from effectiveness testing.

PROGRESS ENERGY

At September 30, 2012 and December 31, 2011, $71 million and $232 million, respectively, of pre-tax deferred net losses on derivative instruments related to interest rate cash flow hedges remained in AOCI and $5 million pre-tax loss is expected to be recognized in earnings during the next 12 months as the hedged transactions occur.

PEC

At December 31, 2011,$116 million of pre-tax deferred net losses on derivative instruments related to interest rate cash flow hedges remained in AOCI.At September 30, 2012,such losses were reclassified to regulatory assets.

PEF

At December 31, 2011, $41 million of pre-tax deferred net losses on derivative instruments related to interest rate cash flow hedges remained in AOCI.At September 30, 2012,such losses were reclassified to regulatory assets.

The following tables show the amount of the pre-tax gains and losses recognized on undesignated contracts by type of derivative instrument and the line item(s) in the Statements of Operations and Comprehensive Income in which such gains and losses are included or deferred in the Balance Sheets as regulatory assets and liabilities.

Undesignated Contracts - Location and Amount of Pre-Tax Gains and (Losses) Recognized in Income or as Regulatory Assets or Liabilities
				Progress Energy				PEC				PEF
				Three months ended September 30
(in millions)				2012	2011			2012	2011			2012	2011
Location of pre-tax gains and (losses) recognized in earnings
	Commodity contracts
		Regulated electric revenue	$	(9)	$	0	$	(9)	$	0	$	0	$	0
		Fuel used in electric generation and purchased power(a)		(135)		(91)		(35)		(20)		(100)		(71)
	Interest rate contracts
		Interest expense(b)		(4)		0		(3)		0		(1)		0
Total pre-tax gains (losses) recognized in earnings			$	(148)	$	(91)	$	(47)	$	(20)	$	(101)	$	(71)
Location of pre-tax gains and (losses) recognized as regulatory assets or liabilities
	Commodity contracts(c)
		Regulatory asset	$	60	$	(157)	$	15	$	(42)	$	45	$	(115)
	Interest rate contracts(b)
		Regulatory asset		2		0		2		0		0		0
Total pre-tax gains (losses) recognized as regulatory assets or liabilities			$	62	$	(157)	$	17	$	(42)	$	45	$	(115)
Location of pre-tax gains and (losses) recognized in income on derivatives
	Fair value loss transition adjustment
		Regulated electric revenue	$	0	$	1	$	0	$	1	$	0	$	0
	CVOs
		Other income and expenses, net		(1)		(63)		0		0		0		0
Total pre-tax gains (losses) recognized in income on derivatives			$	(1)	$	(62)	$	0	$	1	$	0	$	0
(a)	After settlement of the derivatives and the fuel is consumed, gains or losses are passed through the fuel cost-recovery clause.
(b)	Amounts in regulatory assets and liabilities related to terminated hedges are reclassified to earnings as the interest expense is recorded. The hedges will be amortized to interest expense over the term of the related debt.
(c)	Amounts are recorded in regulatory assets and liabilities in the Balance Sheets until derivatives are settled.
				Progress Energy				PEC				PEF
				Nine months ended September 30
(in millions)				2012	2011			2012	2011			2012	2011
Location of pre-tax gains and (losses) recognized in earnings
	Commodity contracts
		Regulated electric revenue	$	(9)	$	0	$	(9)	$	0	$	0	$	0
		Fuel used in electric generation and purchased power(a)		(395)		(219)		(100)		(42)		(295)		(177)
	Interest rate contracts
		Interest expense(b)		(4)		0		(3)		0		(1)		0
Total pre-tax gains (losses) recognized in earnings			$	(408)	$	(219)	$	(112)	$	(42)	$	(296)	$	(177)
Location of pre-tax gains and (losses) recognized as regulatory assets or liabilities
	Commodity contracts(c)
		Regulatory asset	$	(108)	$	(201)	$	(34)	$	(55)	$	(74)	$	(146)
	Interest rate contracts(b)
		Regulatory asset		2		0		2		0		0		0
Total pre-tax gains (losses) recognized as regulatory assets or liabilities			$	(106)	$	(201)	$	(32)	$	(55)	$	(74)	$	(146)
Location of pre-tax gains and (losses) recognized in income on derivatives
	Commodity contracts
		Regulated electric revenue	$	2	$	1	$	2	$	1	$	0	$	0
	Fair value loss transition adjustment
		Regulated electric revenue		1		1		1		1		0		0
	CVOs
		Other income and expenses, net		7		(59)		0		0		0		0
Total pre-tax gains (losses) recognized in income on derivatives			$	10	$	(57)	$	3	$	2	$	0	$	0
(a)	After settlement of the derivatives and the fuel is consumed, gains or losses are passed through the fuel cost-recovery clause.
(b)	Amounts in regulatory assets and liabilities related to terminated hedges are reclassified to earnings as the interest expense is recorded. The hedges will be amortized to interest expense over the term of the related debt.
(c)	Amounts are recorded in regulatory assets and liabilities in the Balance Sheets until derivatives are settled.

E. CREDIT RISK

Certain of PEC and PEF's derivative contracts contain contingent features, such as material adverse change clauses or payment acceleration clauses that could result in immediate payments, the posting of letters of credit or the termination of the derivative contract before maturity if specific events occur, such as a downgrade in the individual company's credit rating below investment grade.

The following tables show information with respect to derivative contracts that are in a net liability position and contain objective credit-risk-related payment provisions. The amounts disclosed in the table below represent the aggregate fair value amounts of such derivative instruments at the end of the reporting period, the aggregate fair value of assets that are already posted as collateral under such derivative instruments at the end of the reporting period and the aggregate fair value of the additional assets that would need to be transferred in the event that credit-risk-related contingent features were triggered.

Information Regarding Derivative Instruments that Contain Credit-Risk-Related Contingent Features
	Progress Energy		PEC		PEF
(in millions)		September 30, 2012
Aggregate fair value amounts of derivative instruments in a net liability position	$	325	$	118	$	207
Collateral already posted		74		13		61
Additional cash collateral or letters of credit in the event credit-risk-related contingent features were triggered at the end of the reporting period		251		105		146
(in millions)		December 31, 2011
Aggregate fair value amounts of derivative instruments in a net liability position	$	489	$	152	$	337
Collateral already posted		147		24		123
Additional cash collateral or letters of credit in the event credit-risk-related contingent features were triggered at the end of the reporting period		342		128		214

NETTINGOF CASH COLLATERALAND DERIVATIVE ASSETSAND LIABILITIES UNDERMASTER NETTING ARRANGEMENTS

In accordance with applicable accounting rules, the Progress Energy Registrants have elected to offset fair value amounts (or amounts that approximate fair value) recognized in their Balance Sheets related to cash collateral amounts receivable or payable against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting agreement. The amounts disclosed in the table below represent the receivables related to the right to reclaim cash collateral and payables related to the obligation to return cash collateral under master netting arrangements. See Note 9 for additional information on fair value disclosures related to derivatives.

Information Regarding Cash Collateral under Master Netting Arrangements
		Progress Energy				PEC				PEF
	September 30, 2012
(in millions)	Receivables		Payables		Receivables		Payables		Receivables		Payables
Amounts offset against net derivative positions	$	73	$	0	$	13	$	0	$	60	$	0
Amounts not offset against net derivative positions		1		0		0		0		1		0
	December 31, 2011
(in millions)	Receivables		Payables		Receivables		Payables		Receivables		Payables
Amounts offset against net derivative positions	$	140	$	0	$	23	$	0	$	117	$	0
Amounts not offset against net derivative positions		3		0		0		0		3		0