Progress Energy 2007 Annual Report Download - page 30

MANAGEMENT’S DISCUSSION AND ANALYSIS
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Other operating expenses were a gain of $2 million in 2006
compared to a gain of $26 million in 2005. The decrease in
the gain for 2006 compared to 2005 is primarily due to the
$24 million gain on the sale of the utility distribution assets
serving Winter Park recorded in 2005 (See Note 7C).
Total Other Income
Total other income was $48 million for 2007, which
represents a $20 million increase compared to 2006. This
increase is primarily due to $24 million favorable AFUDC
equity related to costs associated with large construction
projects, partially offset by $5 million lower interest income
on unrecovered storm restoration costs. We expect
AFUDC equity to continue to increase in 2008, primarily
due to increased spending on environmental initiatives
and other large construction projects. See “Future
Liquidity and Capital Resources – Capital Expenditures.”
Total other income was $28 million for 2006, which
represents a $20 million increase compared to 2005.
This increase is primarily due to $8 million of increased
investment interest income and $6 million of interest on
unrecovered storm restoration costs.
Total Interest Charges, Net
Total interest charges, net were $173 million in 2007, which
represents an increase of $23 million compared to 2006.
The increase in interest charges is primarily due to the
$10 million impact of an increase in average long-term
debt, the $7 million impact of interest on over-recovered
fuel costs, $6 million increase in interest on income
tax related items and $2 million increase related to the
disallowed fuel costs (See Note 7C). These increases are
partially offset by $7 million favorable AFUDC debt related
to costs associated with large construction projects.
Total interest charges, net were $150 million in 2006,
which represents an increase of $24 million compared to
2005. The increase in interest charges is primarily due to
the $20 million impact of a net increase in average long-
term debt.
Income Tax Expense
Income tax expense was $144 million, $193 million and
$121 million in 2007, 2006 and 2005, respectively. The
$49 million income tax expense decrease in 2007
compared to 2006 is primarily due to the $23 million impact
of lower pre-tax income compared to the prior year, the
$14 million impact of tax adjustments and the $9 million
impact of favorable AFUDC equity discussed above. The
tax adjustments are primarily related to the $11 million
impact of changes in income tax estimates and the
$3 million favorable impact related to the closure of
certain federal tax years and positions. AFUDC equity is
excluded from the calculation of income tax expense. The
$72 million income tax expense increase in 2006 compared
to 2005 is primarily due to changes in pre-tax income. In
addition, 2005 income tax expense included the allocation
of $13 million of the Parent’s tax benefit not related to
acquisition interest expense that was suspended in 2006.
See Corporate and Other below for additional information
on the change in the tax benefit allocation in 2006.
Corporate and Other
The Corporate and Other segment primarily includes the
operations of the Parent, PESC and other miscellaneous
nonregulated businesses that do not separately meet
the quantitative disclosure requirements as a separate
business segment. Corporate and Other expense is
summarized below:
(in millions) 2007 Change 2006 Change 2005
Other interest expense $(205) $54 $(259) $(2) $(257)
Contingent value
obligations (2) 23 (25) (31) 6
Tax reallocation −− – 38 (38)
Other income tax
benefit 105 (14) 119 19 100
Other expense (18) 46 (64) (28) (36)
Corporate and Other
after-tax expense $(120) $109 $(229) $(4) $(225)
Other interest expense, which includes elimination entries,
decreased $54 million for 2007 compared to 2006 primarily
due to the $86 million impact of the $1.7 billion reduction
in debt at the Parent during 2006, partially offset by
a $45 million decrease in the interest allocated to
discontinued operations. The decrease in interest expense
allocated to discontinued operations resulted from the
allocations of interest expense in 2006 for operations
that were sold in 2006. Interest expense allocated to
discontinued operations was $13 million and $58 million
for 2007 and 2006, respectively.
Other interest expense, which includes elimination
entries, increased $2 million for 2006 compared to 2005
primarily due to a $19 million decrease in the interest
allocated to discontinued operations and a decrease
in the elimination of intercompany interest expense
due to lower intercompany debt balances partially
offset by lower interest expense due to lower debt at
the Parent. The decrease in interest expense allocated
to discontinued operations resulted from the full year
allocations of interest expense in 2005 compared to partial
year allocations of interest in 2006 for operations that were