Progress Energy 2007 Annual Report Download - page 108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
106
At December 31, 2006 and 2005, we had recorded
$76 million and $115 million, respectively, related to
probable tax liabilities associated with prior filings,
excluding accrued interest and penalties, which were
included in noncurrent income tax liabilities on the
Consolidated Balance Sheets.
Prior to the adoption of FIN 48, we accounted for potential
losses of tax benefits in accordance with SFAS No. 5. At
December 31, 2006 and 2005, we had recorded $27 million
and $60 million, respectively, of tax contingency reserves
under SFAS No. 5, excluding accrued interest and penalties,
which were included in taxes accrued on the Consolidated
Balance Sheets.
We and our subsidiaries file income tax returns in the U.S.
federal jurisdiction, and various state jurisdictions. During
2007, we closed federal tax years 1998 to 2003. Our open
federal tax years are from 2004 forward and our open state
tax years in our major jurisdictions are generally from 1992
forward. The IRS is currently examining our federal tax
returns for years 2004 through 2005. We cannot predict
when those examinations will be completed. We are
not aware of any tax positions for which it is reasonably
possible that the total amounts of unrecognized tax benefits
will significantly increase or decrease during the 12-month
period ending December 31, 2008.
We include interest expense related to unrecognized tax
benefits in interest charges and we include penalties in
other, net on the Consolidated Statements of Income.
During 2007, the interest expense related to unrecognized
tax benefits was $1 million, net, of which a $15 million
expense component was deferred as a regulatory asset
by PEF and not recognized in our Consolidated Statement
of Operations. During 2007 there were no penalties related
to unrecognized tax benefits. As of January 1, 2007, we
had accrued $24 million for interest and penalties. As of
December 31, 2007, we have accrued $23 million for interest
and penalties, which are included in other liabilities and
deferred credits on the Consolidated Balance Sheets.
15. CONTINGENT VALUE OBLIGATIONS
In connection with the acquisition of Florida Progress
during 2000, the Parent issued 98.6 million contingent
value obligations (CVOs). Each CVO represents the right
of the holder to receive contingent payments based on
the performance of four Earthco synthetic fuels facilities
purchased by subsidiaries of Florida Progress in October
1999. The payments are based on the net after-tax cash
flows the facilities generate. We will make deposits into a
CVO trust for estimated contingent payments due to CVO
holders based on the results of operations and the utilization
of tax credits. Monies held in the trust are generally not
payable to the CVO holders until the completion of income
tax audits. The CVOs are derivatives and are recorded at fair
value. The unrealized loss/gain recognized due to changes
in fair value is recorded in other, net on the Consolidated
Statements of Income (See Note 20). At December 31, 2007
and 2006, the CVO liability included in other liabilities and
deferred credits on our Consolidated Balance Sheets was
$34 million and $32 million, respectively.
During 2007, a $5 million deposit was made into a CVO
trust for the net after-tax cash flows generated by the four
Earthco synthetic fuels facilities in 2004. Deposits into the
trust will be classified as a restricted cash asset until the
applicable tax years are closed, at which time a payment
will be disbursed to the CVO holders. Future payments will
include principal and interest earned during the investment
period net of expenses deducted. The interest earned on
the payment held in trust for 2007 was insignificant. The
asset is included in other assets and deferred debits on the
Consolidated Balance Sheet at December 31, 2007.
16. BENEFIT PLANS
A. Postretirement Benefits
We have noncontributory defined benefit retirement
plans for substantially all full-time employees that provide
pension benefits. We also have supplementary defined
benefit pension plans that provide benefits to higher-level
employees. In addition to pension benefits, we provide
contributory other postretirement benefits (OPEB),
including certain health care and life insurance benefits,
for retired employees who meet specified criteria. We
use a measurement date of December 31 for our pension
and OPEB plans.
COSTS OF BENEFIT PLANS
Prior service costs and benefits are amortized on a
straight-line basis over the average remaining service
period of active participants. Actuarial gains and losses
in excess of 10 percent of the greater of the projected
benefit obligation or the market-related value of assets
are amortized over the average remaining service period
of active participants.
To determine the market-related value of assets, we use
a five-year averaging method for a portion of the pension
assets and fair value for the remaining portion. We have
historically used the five-year averaging method. When we
acquired Florida Progress in 2000, we retained the Florida
Progress historical use of fair value to determine market-
related value for Florida Progress pension assets.