Progress Energy 2007 Annual Report Download - page 35

Progress Energy Annual Report 2007
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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) does not exceed total capitalized
costs, we are required to write-down capitalized costs
to the ceiling. We performed this ceiling test calculation
every quarter prior to the sale of the Gas Operations
(See Note 3C). No write-downs were required in 2006
or 2005.
See discussion of synthetic fuels asset impairments in
“Other Matters – Synthetic Fuels Tax Credits” and in
Notes 8 and 9.
Goodwill
As discussed in Note 8, we account for goodwill in
accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets” (SFAS No. 142), which requires that
goodwill be tested for impairment at least annually and
more frequently when indicators of impairment exist.
For our utility segments, the goodwill impairment tests
are performed at the utility operating segment level. We
performed the annual goodwill impairment test for both
the PEC and PEF segments in the second quarters of
2007 and 2006, each of which indicated no impairment.
If the fair values for the utility segments were lower by
10 percent, there still would be no impact on the reported
value of their goodwill.
The carrying amounts of goodwill at December 31, 2007
and 2006, for reportable segments PEC and PEF, were
$1.922 billion and $1.733 billion, respectively. The amounts
assigned to PEC and PEF are recorded in our Corporate
and Other business segment.
We calculated the fair value of our segments and
reporting units by considering various factors, including
valuation studies based primarily on a discounted cash
flow methodology and published industry valuations
and market data as supporting information. These
calculations are dependent on subjective factors such
as management’s estimate of future cash flows and
the selection of appropriate discount and growth rates.
These underlying assumptions and estimates are made
as of a point in time; subsequent changes, particularly
changes in management’s estimate of future cash flows
and the discount rates, growth rates or the timing of
market equilibrium, could result in a future impairment
charge to goodwill.
Synthetic Fuels Tax Credits
Our former Coal and Synthetic Fuels segment was
previously involved in the production and sale of coal-
based solid synthetic fuels as defined under the Internal
Revenue Code (See Note 3B). The production and sale
of the synthetic fuels from these facilities qualified for
tax credits under Section 29/45K if certain requirements
were satisfied, including a requirement that the synthetic
fuels differ significantly in chemical composition from
the coal used to produce such synthetic fuels and that
the synthetic fuels were produced from a facility placed
in service before July 1, 1998. For 2005 and prior years,
the amount of Section 29 credits that we were allowed
to generate in any calendar year was limited by the
amount of our regular federal income tax liability. Section
29 tax credit amounts allowed but not utilized through
December 31, 2005, are carried forward indefinitely
as deferred alternative minimum tax credits on the
Consolidated Balance Sheets. For 2006 and 2007, in
accordance with federal legislation, the Section 29 tax
credits have been redesignated as a Section 45K general
business credit, which removes the regular federal
income tax liability limit on synthetic fuels production and
subjects the credits to a 20-year carry forward period.
This provision allowed us to produce synthetic fuels at a
higher level than we have historically produced, had we
chosen to do so. The synthetic fuels tax credit program
expired at the end of 2007.
In addition, Section 29/45K provided that if the average
wellhead price per barrel for unregulated domestic crude
oil for the year (the Annual Average Price) exceeded a
certain threshold value (the Threshold Price), the amount
of tax credits was reduced for that year. Also, if the Annual
Average Price increased high enough (the Phase-out
Price), the Section 29/45K tax credits were eliminated for
that year. The Threshold Price and the Phase-out Price
were adjusted annually for inflation. We estimate that the
2007 Annual Average Price will result in an approximate
70 percent phase-out of the synthetic fuels tax credits
related to synthetic fuels production in 2007. This estimate
is derived from our estimates of the 2007 Threshold Price
and Phase-out Price of $57 per barrel and $71 per barrel,
respectively, based on an estimated inflation adjustment
for 2007. For 2007 synthetic fuels production, the 2007
Annual Average Price is not known until after the end of
the year. We recorded the 2007 tax credits based on our
estimates of what we believe the Annual Average Price
will be for 2007. Any portion of the tax credits that were
phased out based on the projected 2007 Annual Average
Price exceeding the Threshold Price was not recorded.