Progress Energy 2004 Annual Report Download - page 107

less than the rates ultimately found to be reasonable, the
STB ordered the Company to pay to Norfolk Southern the
difference between the rate levels plus interest.
The Company subsequently filed a petition with the STB to
phase in the new rates over a period of time, and filed a
notice of appeal with the U.S. Court of Appeals for the D.C.
Circuit. Pursuant to an order issued by the STB on
January 6, 2005, the phasing proceeding will proceed on a
schedule that appears likely to produce an STB decision
before the end of 2005. On January 12, 2005, the STB filed
a Motion to Dismiss the Company’s appeal on the grounds
that its October 20, 2004, order is not “final” until the
Company’s phasing application has been decided.
As of December 31, 2004, the Company has accrued a
liability of $42 million, of which $23 million represents
reparations previously remitted to PEC by Norfolk
Southern that are now subject to refund. Of the remaining
$19 million, $17 million has been recorded as deferred
fuel cost on the Consolidated Balance Sheet, while the
remaining $2 million attributable to wholesale customers
has been charged to fuel used in electric generation on
the Consolidated Statements of Income.
The Company cannot predict the outcome of this matter.
4. The Company, through its subsidiaries, is a majority
owner in five entities and a minority owner in one entity
that owns facilities that produce synthetic fuel as defined
under the Internal Revenue Code (Code). The production
and sale of the synthetic fuel from these facilities qualify
for tax credits under Section 29 if certain requirements
are satisfied, including a requirement that the synthetic
fuel differs significantly in chemical composition from the
coal used to produce such synthetic fuel and that the fuel
was produced from a facility that was placed in service
before July 1, 1998. The amount of Section 29 credits that
the Company is allowed to claim in any calendar year is
limited by the amount of the Company’s regular federal
income tax liability. Synthetic fuel tax credit amounts
allowed but not utilized are carried forward indefinitely
as deferred alternative minimum tax credits. All entities
have received PLRs from the IRS with respect to their
synthetic fuel operations. However, these PLRs do not
address the placed-in-service date determination. The
PLRs do not limit the production on which synthetic fuel
credits may be claimed. Total Section 29 credits
generated to date (including those generated by FPC
prior to its acquisition by the Company) are approximately
$1.5 billion, of which $713 million has been used to offset
regular federal income tax liability and $745 million is
being carried forward as deferred alternative minimum
tax credits. Also, $7 million has not been recognized due
to the decrease in tax liability resulting from expenses
incurred for the 2004 hurricane damage. The current
Section 29 tax credit program expires at the end of 2007.
IMPACT OF HURRICANES
For the year ended December 31, 2004, the Company’s
synthetic fuel facilities sold 8.3 million tons of synthetic
fuel and the Company recorded $215 million of Section 29
tax credits. The amount of synthetic fuel sold and tax
credits recorded in 2004 was impacted by hurricane
costs that reduced the Company’s projected 2004 regular
tax liability.
For the nine months ended September 30, 2004, the
Company’s synthetic fuel facilities sold 7.7 million tons of
synthetic fuel, which generated an estimated $204 million
of Section 29 tax credits. Due to the anticipated decrease
in the Company’s tax liability as a result of expenses
incurred for the 2004 hurricane damage, the Company
estimated that it would be able to use in 2004, or carry
forward to future years, only $125 million of these Section
29 tax credits at September 30, 2004. As a result, the
Company recorded a charge of $79 million related to
Section 29 tax credits at September 30, 2004.
On November 2, 2004, PEF filed a petition with the FPSC to
recover $252 million of storm costs plus interest from
customers over a two-year period. Based on a
reasonable expectation at December 31, 2004, that the
FPSC will grant the requested recovery of the storm
costs, the Company’s loss from the casualty is less than
originally anticipated. As of December 31, 2004, the
Company estimates that it will be able to use in 2004, or
carry forward to future years, $215 million of these
Section 29 tax credits. Therefore, the Company recorded
tax credits of $90 million for the quarter ended December
31, 2004, which the Company now anticipates can be
used. For the year ended December 31, 2004, the
Company’s synthetic fuel facilities sold 8.3 million tons of
synthetic fuel, which generated an estimated $222 million
of Section 29 tax credits. As of December 31, 2004, the
Company anticipates that approximately $7 million of tax
credits related to synthetic fuel sold during the year could
not be used and have not been recognized.
The Company believes its right to recover storm costs is
well established; however, the Company cannot predict
the timing or outcome of this matter. If the FPSC should
deny PEF’s petition for the recovery of storm costs in
2005, there could be a material impact on the amount of
2005 synthetic fuels production and results of operations.
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Progress Energy Annual Report 2004