Progress Energy 2007 Annual Report Download - page 31

Progress Energy Annual Report 2007
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sold in 2006. Interest expense allocated to discontinued
operations was $58 million and $77 million for 2006 and
2005, respectively.
Progress Energy issued 98.6 million CVOs in connection
with the acquisition of Florida Progress Corporation
(Florida Progress) in 2000. Each CVO represents the right
of the holder to receive contingent payments based on the
performance of four 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. At December 31, 2007, 2006 and 2005,
the CVOs had a fair value of approximately $34 million,
$32 million and $7 million, respectively. Progress Energy
recorded unrealized losses of $2 million and $25 million
for 2007 and 2006, respectively, and unrealized gains of
$6 million for 2005, to record the changes in fair value of
the CVOs, which had average unit prices of $0.35, $0.33 and
$0.07 at December 31, 2007, 2006 and 2005, respectively.
For the years ended December 31, 2007 and 2006, income
tax expense was not increased by the allocation of the
Parent’s income tax benefits not related to acquisition
interest expense to profitable subsidiaries. Due to the
repeal of the Public Utility Holding Company Act of 1935,
as amended (PUHCA 1935), beginning in 2006 we no
longer allocate the Parent income tax benefits not related
to acquisition interest expense to profitable subsidiaries.
Since 2002, Parent income tax benefits not related to
acquisition interest expense were allocated to profitable
subsidiaries, in accordance with a PUHCA 1935 order. For
the year ended December 31, 2005, income tax expense
was increased by $38 million due to the allocation of the
Parent’s income tax benefit.
Other income tax benefit decreased for 2007 compared
to 2006 primarily due to decreased pre-tax expense at the
Parent primarily as a result of the loss on early retirement
of debt in 2006, partially offset by the $14 million impact
related to the closure of certain federal tax years and
positions (See Note 14), the $18 million impact of taxes
on interest allocated to discontinued operations and the
$5 million impact related to the deduction for domestic
production activities. Other income tax benefit increased
for 2006 compared to 2005 primarily due to increased pre-
tax expense at the Parent and the $8 million impact of
taxes on interest allocated to discontinued operations.
For 2007, other expense was $18 million compared to
$64 million in 2006. The $46 million decrease is primarily
due to the $59 million pre-tax loss on redemptions of debt
at the Parent in 2006 (See Note 12) and the $30 million
decrease in the allocation of corporate overhead as a
result of the divestitures completed during 2006. These
decreases are partially offset by the $17 million pre-
tax gain, net of minority interest, on the sale of Level 3
stock subsequent to the sale of PT LLC in 2006 (See Note
3E) and the $14 million increase in interest income on
temporary investments due to proceeds from the sale
of nonregulated businesses. The $28 million increase
in other expense from 2005 to 2006 was primarily due
to the $59 million pre-tax loss on redemptions of debt
at the Parent partially offset by the $17 million pre-tax
gain, net of minority interest, on the sale of Level 3 stock
subsequent to the sale of PT LLC. In addition, other
expense changed due to a $14 million increase in interest
income on temporary investments due to proceeds from
the sale of DeSoto County Generating Co., LLC (DeSoto),
Rowan County Power, LLC (Rowan) and our natural gas
drilling and production business (Gas).
Discontinued Operations
Over the last several years we have reduced our
business risk by exiting the majority of our nonregulated
businesses to focus on the core operations of the
Utilities. We divested, or announced divestitures, of
multiple nonregulated businesses during 2007 and 2006.
Consequently, the composition of other continuing
segments has been impacted by these divestitures.
CCO OPERATIONS
CCO – Georgia Operations
On March 9, 2007, our subsidiary Progress Ventures,
Inc. (PVI), entered into a series of transactions to sell
or assign substantially all of its Competitive Commercial
Operations (CCO) physical and commercial assets
and liabilities. Assets divested include approximately
1,900 MW of gas-fired generation assets in Georgia. The
sale of the generation assets closed on June 11, 2007,
for a net sales price of $615 million. We recorded an
estimated loss of $226 million in December 2006. Based
on the terms of the final agreement and post-closing
adjustments, during the year ended December 31, 2007,
we reversed $18 million after-tax of the impairment
recorded in 2006 (See Note 3A).
Additionally, on June 1, 2007, PVI closed the transaction
involving the assignment of a contract portfolio consisting
of full-requirements contracts with 16 Georgia electric
membership cooperatives formerly serviced by CCO (the
Georgia Contracts), forward gas and power contracts,
gas transportation, structured power and other contracts
to a third party. This represents substantially all of our
nonregulated energy marketing and trading operations. As
a result of the assignments, PVI made a net cash payment