Progress Energy 2004 Annual Report Download - page 37

losses, or a projection of continuing losses, or a
significant decrease in the market price of a long-lived
asset group. If an indicator exists, the asset group held
and used is tested for recoverability by comparing the
carrying value to the sum of undiscounted expected
future cash flows directly attributable to the asset group.
If the asset group is not recoverable through
undiscounted cash flows or if the asset group is to be
disposed of, an impairment loss is recognized for the
difference between the carrying value and the fair value
of the asset group. A high degree of judgment is required
in developing estimates related to these evaluations and
various factors are considered, including projected
revenues and cost and market conditions.
Due to the reduction in coal production at the Kentucky
May coal mine, the Company evaluated its long-lived
assets in 2003 and recorded an impairment of $17 million
before tax ($11 million after-tax). Fair value was
determined based on discounted cash flows. During
2002, the Company recorded pre-tax long-lived asset
impairments of $305 million related to its
telecommunications business. The fair value of these
assets was determined considering various factors,
including a valuation study heavily weighted on a
discounted cash flow methodology and using market
approaches as supporting information.
The Company continually reviews its investments to
determine whether a decline in fair value below the cost
basis is other than temporary. In 2003, PEC’s affordable
housing investment (AHI) portfolio was reviewed and
deemed to be impaired based on various factors,
including continued operating losses of the AHI portfolio
and management performance issues arising at certain
properties within the AHI portfolio. As a result, PEC
recorded an impairment of $18 million on a pre-tax basis
during 2003. PEC also recorded an impairment of
$3 million for a cost investment. During 2002, the Company
recorded pre-tax impairments to its cost method
investment in Interpath of $25 million. The fair value of this
investment was determined considering various factors,
including a valuation study heavily weighted on a
discounted cash flow methodology and using market
approaches as supporting information. These cash flows
included numerous assumptions, including the pace at
which the telecommunications market would rebound. In
the fourth quarter of 2002, the Company sold its remaining
interest in Interpath for a nominal amount.
Under the full-cost method of accounting for oil and gas
properties, total capitalized costs are limited to a ceiling
based on the present value of discounted (at 10%) future
net revenues using current prices, plus the lower of cost
or fair market value of unproved properties. The ceiling
test takes into consideration the prices of qualifying cash
flow hedges as of the balance sheet date. If the ceiling
(discounted revenues) is not equal to or greater than total
capitalized costs, the Company is required to write-down
capitalized costs to this level. The Company performs this
ceiling test calculation every quarter. No write-downs
were required in 2004, 2003 or 2002.
Goodwill
As discussed in Note 9, effective January 1, 2002, the
Company adopted FASB Statement No. 142, “Goodwill
and Other Intangible Assets,” which requires that
goodwill be tested for impairment at least annually and
more frequently when indicators of impairment exist. The
Company completed the initial transitional goodwill
impairment test, which indicated that the Company’s
goodwill was not impaired as of January 1, 2002. The
Company performed the annual goodwill impairment test
for the CCO segment in the first quarters of 2004 and 2003,
and the annual goodwill impairment test for the PEC
Electric and PEF segments in the second quarters of 2004
and 2003, each of which indicated no impairment. If the
fair values for the utility segments were lower by
approximately 10%, there still would be no impact on the
reported value of their goodwill. The carrying amounts of
goodwill at December 31, 2004, and 2003, for reportable
segments PEC Electric, PEF and CCO, are $1,922 million,
$1,733 million and $64 million, respectively. In December
2003, $7 million in goodwill was acquired as part of
Progress Telecommunications Corporation’s partial
acquisition of EPIK and was reported in the Corporate
and Other segment. The Company revised the preliminary
EPIK purchase price allocation as of September 2004,
and the $7 million of goodwill was reallocated to certain
tangible assets acquired based on the results of
valuations and appraisals.
Synthetic Fuels Tax Credits
As discussed in Note 23E, Progress Energy, through the
Fuels business unit, owns facilities that produce
synthetic fuels as defined under the Internal Revenue
Code. The production and sale of the synthetic fuels from
these facilities qualifies for tax credits under Section 29
if certain requirements are satisfied, including a
requirement that the synthetic fuels differs significantly in
chemical composition from the coal used to produce
such synthetic fuels and that the fuel was produced
from a facility 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
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Progress Energy Annual Report 2004