Progress Energy 2004 Annual Report Download - page 36

had average unit prices of $0.14, $0.23 and $0.14 at
December 31, 2004, 2003 and 2002, respectively.
Progress Energy and its affiliates file a consolidated
federal income tax return. The consolidated income tax of
Progress Energy is allocated to subsidiaries in
accordance with the Intercompany Income Tax Allocation
Agreement (Tax Agreement). The Tax Agreement
provided an allocation that recognizes positive and
negative corporate taxable income. The Tax Agreement
provides for an equitable method of apportioning the carry
over of uncompensated tax benefits. Progress Energy tax
benefits not related to acquisition interest expense are
allocated to profitable subsidiaries, beginning in 2002, in
accordance with a Public Utility Holding Company Act of
1935, as amended (PUHCA) order.
Other income taxes benefit decreased for 2004 compared
to 2003 due primarily to increased taxes booked at the
Holding Company of $21 million. Income taxes increased
an additional $9 million at the Holding Company as a
result of a reserve booked related to identified state tax
deficiencies. Other income taxes benefit decreased for
2003 compared to 2002 primarily for the tax allocation to
the profitable subsidiaries. Other fluctuations in income
taxes are primarily due to changes in pre-tax income.
Discontinued Operations
In 2002, the Company approved the sale of NCNG to
Piedmont Natural Gas Company, Inc. As a result, the
operating results of NCNG were reclassified to
discontinued operations for all reportable periods. In
September 2003, Progress Energy completed the sale of
NCNG and ENCNG for net proceeds of approximately
$450 million in September 2003. Progress Energy incurred
a loss from discontinued operations of $8 million for 2003
compared with a loss of $24 million for 2002. During the
year ended December 31, 2004, the Company recorded a
reduction to the loss on the sale of NCNG of approximately
$6 million related to deferred taxes (See Note 4E).
Cumulative Effect of Accounting Changes
In 2003, Progress Energy recorded adjustments for the
cumulative effects of changes in accounting principles
due to the adoption of several new accounting
pronouncements. These adjustments totaled to a
$21 million loss after-tax, which was due primarily to new
Financial Accounting Standards Board (FASB) guidance
related to the accounting for certain contracts. This
guidance discusses whether the pricing in a contract
that contains broad market indices qualifies for certain
exceptions that would not require the contract to be
recorded at its fair value. PEC Electric had a purchase
power contract with Broad River LLC that did not meet
the criteria for an exception, and a negative fair value
adjustment was recorded in 2003 for $23 million after-tax
(See Note 18A).
APPLICATION OF CRITICAL ACCOUNTING
POLICIES AND ESTIMATES
The Company prepared its Consolidated Financial
Statements in accordance with accounting principles
generally accepted in the United States. In doing so,
certain estimates were made that were critical in nature
to the results of operations. The following discusses
those significant estimates that may have a material
impact on the financial results of the Company and are
subject to the greatest amount of subjectivity. Senior
management has discussed the development and
selection of these critical accounting policies with the
Audit Committee of the Company’s Board of Directors.
Utility Regulation
As discussed in Note 8, the Company’s regulated utilities
segments are subject to regulation that sets the prices
(rates) the Company is permitted to charge customers
based on the costs that regulatory agencies determine
the Company is permitted to recover. At times, regulators
permit the future recovery through rates of costs that
would be currently charged to expense by a
nonregulated company. This rate-making process results
in deferral of expense recognition and the recording of
regulatory assets based on anticipated future cash
inflows. As a result of the changing regulatory framework
in each state in which the Company operates, a
significant amount of regulatory assets has been
recorded. The Company continually reviews these assets
to assess their ultimate recoverability within the
approved regulatory guidelines. Impairment risk
associated with these assets relates to potentially
adverse legislative, judicial or regulatory actions in the
future. Additionally, the state regulatory agencies often
provide flexibility in the manner and timing of the
depreciation of property, nuclear decommissioning costs
and amortization of the regulatory assets. Note 8
provides additional information related to the impact of
utility regulation on the Company.
Asset Impairments
As discussed in Note 10, the Company evaluates the
carrying value of long-lived assets for impairment
whenever indicators exist. Examples of these indicators
include current period losses combined with a history of
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Management’s Discussion and Analysis