Fair Value Disclosures

9 Months Ended

Sep. 30, 2012

9. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Under existing accounting guidance, fair value is considered to be the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. The fair value definition focuses on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability versus an entry price, which would be the price paid to acquire an asset or received to assume a liability.

The Progress Energy Registrants classify recurring and non-recurring fair value measurements based on the following fair value hierarchy, as prescribed by the accounting guidance for fair value, which prioritizes the inputs to valuation techniques used to measure fair value into three levels:

Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities that the Progress Energy Registrants have the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide ongoing pricing information. The Progress Energy Registrants do not adjust quoted market prices on Level 1 for any blockage factor.

Level 2 – a fair value measurement utilizing inputs other than a quoted market price that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates. A Level 2 measurement cannot have more than an insignificant portion of the valuation based on unobservable inputs.

Level 3 – any fair value measurements which include unobservable inputs for the asset or liability for more than an insignificant portion of the valuation. A level 3 measurement may be based primarily on Level 2 inputs.

The fair value accounting guidance for financial instruments permits entities to elect to measure many financial instruments and certain other items at fair value that are not required to be accounted for at fair value under other GAAP. There are no financial assets or financial liabilities that are not required to be accounted for at fair value under GAAP for which the option to record at fair value has been elected by the Progress Energy Registrants. However, in the future, the Progress Energy Registrants may elect to measure certain financial instruments at fair value in accordance with this accounting guidance.

Nuclear Decommissioning Trust (NDTs) funds reflect the assets of the Utilities' nuclear decommissioning trusts. The assets of the trusts are invested primarily in exchange-traded equity securities (classified within Level 1) and marketable debt securities, most of which are valued using Level 1 inputs for similar instruments and are classified within Level 2.

We issued CVOs, which are derivatives, in connection with the acquisition of Florida Progress. CVOs are further discussed in Note 8. At September 30, 2011, we determined the fair value of the CVOs based on the purchase price in a negotiated settlement agreement (a Level 3 input) and we classified CVOs as Level 3. The CVOs were previously recorded at fair value based on quoted prices from a less-than-active market and classified as Level 2. In November 2011, we commenced a public tender offer that expired on February 15, 2012. At September 30, 2012 and December 31, 2011, all CVOs not tendered, have been classified as Level 2 based on observable prices in the less-than-active market.

Transfers into (out of) Levels 1, 2 or 3 represent existing assets or liabilities previously categorized as a higher level for which the inputs to the estimate became less observable or assets and liabilities that were previously classified as Level 2 or 3 for which the lowest significant input became more observable during the period. The Progress Energy Registrants' policy for the recognition of transfers between levels of the fair value hierarchy is to recognize the transfer at the end of the period. There were no transfers into (out of) Levels 1, 2 and 3 during the periods other than the CVO transfer previously discussed.

Valuation methods of the primary fair value measurements disclosed below are as follows:

Investments in equity securities – Investments in equity securities, other than those accounted for as equity and cost method investments, are typically valued at the closing price in the principal active market as of the last business day of the quarter. Principal active markets for equity prices include published exchanges such as NASDAQ and NYSE. Foreign equity prices are translated from their trading currency using the currency exchange rate in effect at the close of the principal active market. Prices have not been adjusted to reflect for after-hours market activity. The majority of investments in equity securities are valued using Level 1 measurements.

Investments in debt securities – Most debt investments (including those held in the NDT) are valued based on a calculation using interest rate curves and credit spreads applied to the terms of the debt instrument (maturity and coupon interest rate) and consider the counterparty credit rating. Most debt valuations are Level 2 measurements. If the market for a particular fixed income security is relatively inactive or illiquid, the measurement is a Level 3 measurement. U.S. Treasury debt is typically a Level 1 measurement.

Commodity derivatives – The pricing for commodity derivatives is primarily a calculated value which incorporates the forward price and is adjusted for liquidity (bid-ask spread), credit or non-performance risk (after reflecting credit enhancements such as collateral) and discounted to present value. The primary difference between a Level 2 and a Level 3 measurement relates to the level of activity in forward markets for the commodity. If the market is relatively inactive, the measurement is deemed to be a Level 3 measurement. Commodity derivatives with clearinghouses are classified as Level 1 measurements.

The following tables provide the fair value measurement amounts for financial assets and liabilities recorded at fair value on our and the Utilities' Balance Sheets. Derivative amounts in the tables below exclude cash collateral amounts, which are disclosed in Note 8. See Note 10 for additional information related to investments by major security type.

PROGRESS ENERGY
(in millions)			Total		Level 1		Level 2		Level 3
September 30, 2012
Nuclear decommissioning trust fund equity securities		$	1,226	$	1,220	$	6	$	-
Nuclear decommissioning trust fund debt securities and other			618		131		487		-
Other long-term available-for-sale debt securities and other^(a)			60		21		39		-
Derivative assets^(b)			1		-		1		-
	Total assets		1,905		1,372		533		-
Derivative liabilities^(c)			(435)		-		(399)		(36)
	Net assets	$	1,470	$	1,372	$	134	$	(36)

(in millions)			Total		Level 1		Level 2		Level 3
December 31, 2011
Nuclear decommissioning trust fund equity securities		$	1,062	$	1,061	$	1	$	-
Nuclear decommissioning trust fund debt securities and other			585		87		498		-
Other long-term available-for-sale debt securities and other^(a)			20		20		-		-
Derivative assets^(b)			5		-		5		-
	Total assets		1,672		1,168		504		-
Derivative liabilities^(c)			(799)		-		(775)		(24)
	Net assets	$	873	$	1,168	$	(271)	$	(24)

^(a)	Included in Other within Investments and Other Assets in the Consolidated Balance Sheets.
^(b)	Included in Prepayments and Other Current Assets within Current Assets and Other within Investments and Other Assets in the Consolidated Balance Sheets.
^(c)	Included in Derivative Liabilities within Current Liabilities and Other within Deferred Credits and Other Liabilities in the Consolidated Balance Sheets.

PEC
(in millions)			Total		Level 1		Level 2		Level 3
September 30, 2012
Nuclear decommissioning trust fund equity securities		$	797	$	797	$	-	$	-
Nuclear decommissioning trust fund debt securities and other			426		105		321		-
Other long-term available-for-sale debt securities and other^(a)			6		6		-		-
	Total assets		1,229		908		321		-
Derivative liabilities^(c)			(155)		-		(119)		(36)
	Net assets	$	1,074	$	908	$	202	$	(36)

(in millions)			Total		Level 1		Level 2		Level 3
December 31, 2011
Nuclear decommissioning trust fund equity securities		$	690	$	690	$	-	$	-
Nuclear decommissioning trust fund debt securities and other			398		81		317		-
Other long-term available-for-sale debt securities and other^(a)			6		6		-		-
	Total assets		1,094		777		317		-
Derivative liabilities^(c)			(248)		-		(224)		(24)
	Net assets	$	846	$	777	$	93	$	(24)

^(a)	Included in Other within Investments and Other Assets in the Consolidated Balance Sheets.
^(b)	Included in Prepayments and Other Current Assets within Current Assets and Other within Investments and Other Assets in the Consolidated Balance Sheets.
^(c)	Included in Derivative Liabilities within Current Liabilities and Other within Deferred Credits and Other Liabilities in the Consolidated Balance Sheets.

PEF
(in millions)			Total		Level 1		Level 2		Level 3
September 30, 2012
Nuclear decommissioning trust fund equity securities		$	429	$	423	$	6	$	-
Nuclear decommissioning trust fund debt securities and other			192		26		166		-
Other long-term available-for-sale debt securities and other^(a)			41		2		39		-
Derivative assets^(b)			1		-		1		-
	Total assets		663		451		212		-
Derivative liabilities^(c)			(276)		-		(276)		-
	Net assets	$	387	$	451	$	(64)	$	-

(in millions)			Total		Level 1		Level 2		Level 3
December 31, 2011
Nuclear decommissioning trust fund equity securities		$	372	$	371	$	1	$	-
Nuclear decommissioning trust fund debt securities and other			187		6		181		-
Other long-term available-for-sale debt securities and other^(a)			1		1		-		-
Derivative assets^(b)			5		-		5		-
	Total assets		565		378		187		-
Derivative liabilities^(c)			(499)		-		(499)		-
	Net assets	$	66	$	378	$	(312)	$	-

^(a)	Included in Other within Investments and Other Assets in the Balance Sheets.
^(b)	Included in Prepayments and Other Current Assets within Current Assets and Other within Investments and Other Assets in the Balance Sheets.
^(c)	Included in Derivative Liabilities within Current Liabilities and Other within Deferred Credits and Other Liabilities in the Balance Sheets.

The determination of the fair values in the preceding tables incorporates various factors, including risks of nonperformance by us or our counterparties. Such risks consider not only the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits or letters of credit), but also the impact of our and the Utilities' credit risk on our liabilities.

QUALITATIVE AND QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS

A reconciliation of changes in the fair value of our and PEC's commodity derivative liabilities classified as Level 3 in the fair value hierarchy for the periods ended September 30 follows:

PROGRESS ENERGY
	Three months ended September 30				Nine months ended September 30
(in millions)		2012		2011		2012		2011
Derivatives, net at beginning of period	$	30	$	37	$	24	$	36
Total pre-tax realized or unrealized gains included in earnings − regulated electric		(2)		-		(2)		-
Total (gains) losses, included in the consolidated Balance Sheet as regulatory asset or liability		(4)		6		2		7
Issuances		16		-		16		-
Settlements		(4)		-		(4)		-
Transfers into Level 3 − CVOs		-		74		-		74
Derivatives, net at end of period	$	36	$	117	$	36	$	117

PEC
	Three months ended September 30				Nine months ended September 30
(in millions)		2012		2011		2012		2011
Derivatives, net at beginning of period	$	28	$	37	$	24	$	36
Total pre-tax realized or unrealized gains included in earnings − regulated electric		(2)		-		(2)		-
Total (gains) losses, included in the consolidated Balance Sheet as regulatory asset or liability		(2)		5		2		6
Issuances		16		-		16		-
Settlements		(4)		-		(4)		-
Derivatives, net at end of period	$	36	$	42	$	36	$	42

During the three and nine months ended September 30, 2012 and 2011, PEF's assets and liabilities classified as Level 3 were not material.

Substantially all unrealized gains and losses on derivatives are deferred as regulatory liabilities or assets consistent with ratemaking treatment. Unrealized losses on the change in fair value of our CVOs are discussed in Note 8. There were no Level 3 realized gains or losses, purchases, sales, issuances or settlements during the period.

For commodity derivative contracts classified as Level 3, we utilize internally-developed financial models based upon the income approach (discounted cash flow method) to measure the fair values. The primary inputs to these models are the forward commodity prices used to develop the forward price curves for the respective instrument. The pricing inputs are derived from published exchange transaction prices and other observable or public data sources. In the absence of observable market information that supports the pricing inputs, there is a presumption that the transaction price is equal to the last observable price for a similar period. For the commodity derivative contracts classified as Level 3, the pricing inputs for natural gas and electricity forward price curves are not observable for the full term of the related contracts. In isolation, increases (decreases) in unobservable natural gas forward prices would result in favorable (unfavorable) fair value adjustments for gas purchase contracts. In isolation, increases (decreases) in unobservable electricity forward prices would result in unfavorable (favorable) fair value adjustments for electricity sales contracts. We regularly evaluate and validate the pricing inputs we use to estimate fair value of gas purchase contracts by a market participant price verification procedure, which provides a comparison of our forward commodity curves to market participant generated curves.

Quantitative information about our and PEC's derivative liabilities classified as Level 3 follows:

PROGRESS ENERGY
(in millions)	Fair Value		Valuation Technique	Unobservable Input		Range
September 30, 2012
Commodity natural gas hedges	$	27	Discounted cash flow	Forward natural gas curves - price per MMBtu	$	4.178	-	4.588
FERC mitigation power sale agreements		9	Discounted cash flow	Forward electricity curves - price per MWh		24.88	-	49.78


PEC
(in millions)	Fair Value		Valuation Technique	Unobservable Input		Range
September 30, 2012
Commodity natural gas hedges	$	27	Discounted cash flow	Forward natural gas curves - price per MMBtu	$	4.178	-	4.588
FERC mitigation power sale agreements		9	Discounted cash flow	Forward electricity curves - price per MWh		24.88	-	49.78

ADDITIONAL FAIR VALUE DISCLOSURES

At September 30, 2012 and December 31, 2011, the fair value of cash and cash equivalents, accounts and notes receivable, accounts payable, notes payable and commercial paper and non-recourse notes payable of variable interest entities are not materially different from their carrying amounts because of the short-term nature of these instruments and/or because the stated rates approximate market rates.

The fair value of our long-term debt, including current maturities, is summarized in the following table. Judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates determined are not necessarily indicative of the amounts the Progress Energy Registrants could have settled in current markets. The fair value of the long-term debt is determined using Level 2 measurements.

		September 30, 2012				December 31, 2011
(in millions)		Book Value		Fair Value		Book Value		Fair Value
Progress Energy	$	13,776	$	16,160	$	13,152	$	15,518
PEC		4,838		5,352		4,206		4,735
PEF		4,672		5,646		4,681		5,633

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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