Progress Energy 2007 Annual Report Download - page 51

Progress Energy Annual Report 2007
49
SALES OF PARTNERSHIP INTERESTS
In March 2007, we disposed of, through our subsidiary
Progress Fuels, our 100 percent ownership interest in
Ceredo, a subsidiary that produces and sells qualifying
coal-based solid synthetic fuels, to a third-party buyer.
In addition, we entered into an agreement to operate
the Ceredo facility on behalf of the buyer. At closing, we
received cash proceeds of $10 million and a nonrecourse
note receivable of $54 million. Payments on the note
are due as we produce and sell qualifying coal-based
solid synthetic fuels on behalf of the buyer. During 2007,
we produced 2.7 million tons. In accordance with the
terms of the agreement, we received payments on the
note related to 2007 production of $49 million in 2007 and
$5 million subsequent to year-end. The total amount of
proceeds is subject to adjustment once the final value
of the 2007 Section 29/45K credits is known. Pursuant to
the terms of the disposal agreement, the buyer had the
right to unwind the transaction if an Internal Revenue
Service (IRS) reconfirmation private letter ruling was
not received by November 9, 2007, or if certain adverse
changes in tax law, as defined in the agreement, occurred
before November 19, 2007. The IRS reconfirmation private
letter ruling was received on October 29, 2007, and
no adverse change in tax law occurred prior to
November 19, 2007. As of December 31, 2007, due to
indemnification provisions, we recorded losses on
disposal of $3 million based on the estimated value of the
2007 Section 29/45K tax credits. The operations of Ceredo
have been reclassified to discontinued operations, net of
tax on the Consolidated Statements of Income. Subsequent
to the disposal, we remained the primary beneficiary of
Ceredo and continued to consolidate Ceredo in accordance
with FASB Interpretation No. 46R, “Consolidation of
Variable Interest Entities – an Interpretation of ARB No. 51”
(FIN 46R), but we have recorded a 100 percent minority
interest. Consequently, subsequent to the disposal there
was no net earnings impact from Ceredo’s operations. In
connection with the disposal, Progress Fuels and Progress
Energy provided guarantees and indemnifications for
certain legal and tax matters to the buyer, which increases
the loss on disposal or reduces any potential deferred
gain. The ultimate resolution of these matters could result
in adjustments to the loss on disposal in future periods
(See Note 3J and Note 22C).
In June 2004, through our subsidiary Progress Fuels,
we sold in two transactions a combined 49.8 percent
partnership interest in Colona Synfuel Limited Partnership,
LLLP (Colona), one of our synthetic fuels facilities. The
transactions were structured such that proceeds from
the sales would be received over time, which was typical
of such sales in the industry. Gains from the sales are
recognized on a cost-recovery basis. Gain recognition is
dependent on the synthetic fuels production qualifying
for Section 29/45K tax credits and the value of such tax
credits, as discussed above. Until the gain recognition
criteria are met, gains from selling interests in Colona
were deferred. Due to the impact on production from the
2007 idling of the synthetic fuels facilities as discussed
above and pursuant to the terms of the sales agreements,
in January 2008, the purchasers abandoned their
interests in Colona. We recognized a $4 million gain
and $30 million gain on these transactions in the years
ended December 31, 2006 and 2005, respectively, which
have been reclassified to discontinued operations,
net of tax on the Consolidated Statements of Income
(See Note 3L). In 2007, due to the increase in the price of
oil that limits synthetic fuels tax credits, we did not record
any additional gain.
See Note 22D for additional discussion related to our
synthetic fuels operations.
Regulatory Environment
The Utilities’ operations in North Carolina, South Carolina
and Florida are regulated by the NCUC, SCPSC and
the FPSC, respectively. The Utilities are also subject
to regulation by the FERC, the Nuclear Regulatory
Commission (NRC) and other federal and state agencies
common to the utility business. As a result of regulation,
many of the fundamental business decisions, as well
as the rate of return the Utilities are permitted to earn,
are subject to the approval of one or more of these
governmental agencies.
To our knowledge, there is currently no enacted or
proposed legislation in North Carolina, South Carolina
or Florida that would give retail ratepayers the right to
choose their electricity provider or otherwise restructure
or deregulate the electric industry. We cannot anticipate
when, or if, any of these states will move to increase retail
competition in the electric industry.
The retail rate matters affected by state regulatory
authorities are discussed in detail in Notes 7B and 7C.
This discussion identifies specific retail rate matters, the
status of the issues and the associated effects on our
consolidated financial statements.
On December 19, 2007, the president signed into law
the federal Energy Independence and Security Act of
2007. The legislation strengthened Corporate Average
Fuel Economy standards for automotive manufacturers’
fleets of passenger cars and light trucks and significantly
increased the amount of ethanol required to be used as a