Progress Energy 2007 Annual Report Download - page 34

MANAGEMENT’S DISCUSSION AND ANALYSIS
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Net losses from discontinued operations for the coal
mining business were $11 million, $4 million and $11 million
for the years ended December 31, 2007, 2006 and 2005,
respectively.
PROGRESS RAIL
On March 24, 2005, we completed the sale of Progress
Rail Services Corporation (Progress Rail) to One Equity
Partners LLC, a private equity firm unit of J.P. Morgan
Chase & Co. Cash proceeds from the sale were
approximately $429 million, consisting of $405 million base
proceeds plus a working capital adjustment. During the
years ended December 31, 2006 and 2005, we recorded
an estimated after-tax loss for the sale of these assets of
$6 million and $25 million, respectively. Proceeds from the
sale were used to reduce debt (See Note 3H).
Net earnings from discontinued operations for Progress Rail
were $5 million for the year ended December 31, 2005.
APPLICATION OF CRITICAL ACCOUNTING
POLICIES AND ESTIMATES
We prepared our Consolidated Financial Statements in
accordance with GAAP. In doing so, we made certain
estimates that were critical in nature to the results of
operations. The following discusses those significant
estimates that may have a material impact on our
financial results and are subject to the greatest amount
of subjectivity. We have discussed the development
and selection of these critical accounting policies with
the Audit and Corporate Performance Committee (Audit
Committee) of our board of directors.
Utility Regulation
As discussed in Note 7, our regulated utilities segments
are subject to regulation that sets the prices (rates) we
are permitted to charge customers based on the costs
that regulatory agencies determine we are 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 ratemaking
process results in deferral of expense recognition and
the recording of regulatory assets based on anticipated
future cash inflows. As a result of the different ratemaking
processes in each state in which we operate, a significant
amount of regulatory assets has been recorded. We
continually review 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’
ratemaking processes often provide flexibility in the
manner and timing of the depreciation of property, nuclear
decommissioning costs and amortization of the regulatory
assets. See Note 7 for additional information related to the
impact of utility regulation on our operations.
Asset Impairments
As discussed in Note 9, we evaluate the carrying value
of long-lived assets and intangible assets with definite
lives for impairment whenever impairment indicators
exist. Examples of these indicators include current period
losses combined with a history of losses, a projection of
continuing losses, a significant decrease in the market
price of a long-lived asset group, or the likelihood that an
asset group will be disposed of significantly prior to the
end of its useful life. If an impairment 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. Performing an impairment test on
long-lived assets involves management’s judgment in
areas such as identifying circumstances indicating an
impairment may exist, identifying and grouping affected
assets at the appropriate level, and developing the
undiscounted cash flows associated with the asset
group. Estimates of future cash flows contemplate factors
such as expected use of the assets, future production
and sales levels, and expected fluctuations of prices of
commodities sold and consumed. Therefore, estimates
of future cash flows are, by nature, highly uncertain and
may vary significantly from actual results.
The carrying value of our total utility plant, net is
$16.612 billion at December 31, 2007. The carrying value
of our total diversified business property, net is $6 million
at December 31, 2007. In addition, we have certain
diversified business property with a carrying value of
$38 million at December 31, 2007, included in net assets
to be divested (See Note 3I). Our exposure to potential
impairment losses for utility plant, net is mitigated by the
fact that our regulated ratemaking process generally
allows for recovery of our investment in utility plant plus
an allowed return on the investment, as long as the costs
are prudently incurred.
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