Progress Energy 2004 Annual Report Download - page 109

PERMANENT SUBCOMMITTEE
In October 2003, the United States Senate Permanent
Subcommittee on Investigations began a general
investigation concerning synthetic fuel tax credits
claimed under Section 29. The investigation is examining
the utilization of the credits, the nature of the technologies
and fuels created, the use of the synthetic fuel and other
aspects of Section 29 and is not specific to the Company’s
synthetic fuel operations. Progress Energy is providing
information in connection with this investigation. The
Company cannot predict the outcome of this matter.
SALE OF PARTNERSHIP INTEREST
In June 2004, the Company, through its subsidiary,
Progress Fuels, sold, in two transactions, a combined
49.8% partnership interest in Colona Synfuel Limited
Partnership, LLLP, one of its synthetic fuel facilities.
Substantially all proceeds from the sales will be
received over time, which is typical of such sales in the
industry. Gain from the sales will be recognized on a cost
recovery basis. The Company’s book value of the
interests sold totaled approximately $5 million. The
company received total gross proceeds of $10 million in
2004. Based on projected production and tax credit
levels, the Company anticipates receiving approximately
$24 million in 2005, approximately $31 million in 2006,
approximately $32 million in 2007 and approximately
$8 million through the second quarter of 2008. In the
event that the synthetic fuel tax credits from the Colona
facility are reduced, including an increase in the price of
oil that could limit or eliminate synthetic fuel tax credits,
the amount of proceeds realized from the sale could be
significantly impacted.
IMPACT OF CRUDE OIL PRICES
Although the Internal Revenue Code Section 29 tax credit
program is expected to continue through 2007, recent
unprecedented and unanticipated increases in the price
of oil could limit the amount of those credits or eliminate
them altogether for one or more of the years following
2004. This possibility is due to a provision of Section 29
that provides that if the average wellhead price per barrel
for unregulated domestic crude oil for the year (the
“Annual Average Price”) exceeds a certain threshold
value (the “Threshold Price”), the amount of Section 29
tax credits are reduced for that year. Also, if the Annual
Average Price increases high enough (the “Phase Out
Price”), the Section 29 tax credits are eliminated for that
year. For 2003, the Threshold Price was $50.14 per barrel
and the Phase Out Price was $62.94 per barrel. The
Threshold Price and the Phase Out Price are adjusted
annually for inflation.
If the Annual Average Price falls between the Threshold
Price and the Phase Out Price for a year, the amount by
which Section 29 tax credits are reduced will depend on
where the Average Annual Price falls in that continuum. For
example, for 2003, if the Annual Average Price had been
$56.54 per barrel, there would have been a 50% reduction
in the amount of Section 29 tax credits for that year.
The Secretary of the Treasury calculates the Annual
Average Price based on the Domestic Crude Oil First
Purchases Prices published by the Energy Information
Agency (EIA). Because the EIA publishes its information
on a three-month lag, the Secretary of the Treasury
finalizes its calculations three months after the year in
question ends. Thus, the Annual Average Price for
calendar year 2003 was published in April 2004.
Although the official notice for 2004 is not expected to be
published until April 2005, the Company does not believe
that the Annual Average Price for 2004 will reach the
Threshold Price for 2004. Consequently, the Company
does not expect the amount of its 2004 Section 29 tax
credits to be adversely affected by oil prices.
The Company cannot predict with any certainty the
Annual Average Price for 2005 or beyond. Therefore, it
cannot predict whether the price of oil will have a
material effect on its synthetic fuel business after 2004.
However, if during 2005 through 2007, oil prices remain at
historically high levels or increase, the Company’s
synthetic fuel business may be adversely affected for
those years, and, depending on the magnitude of such
increases in oil prices, the adverse affect for those years
could be material and could have an impact on the
Company’s synthetic fuel results of operations and
production plans.
5. The Company and its subsidiaries are involved in various
litigation matters in the ordinary course of business, some
of which involve substantial amounts. Where appropriate,
accruals and disclosures have been made in accordance
with SFAS No. 5, “Accounting for Contingencies,” to
provide for such matters. In the opinion of management,
the final disposition of pending litigation would not have a
material adverse effect on the Company’s consolidated
results of operations or financial position.
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Progress Energy Annual Report 2004