Progress Energy 2007 Annual Report Download - page 65

Progress Energy Annual Report 2007
63
DISCONTINUED OPERATIONS
As discussed in Note 3A, our subsidiary, PVI, entered into
a series of transactions to sell or assign substantially all
of its CCO physical and commercial assets and liabilities.
On June 1, 2007, PVI closed the transaction involving
the assignment of a contract portfolio consisting of the
Georgia Contracts, forward gas and power contracts,
gas transportation, structured power and other contracts
to a third party. This represented substantially all of our
nonregulated energy marketing and trading operations.
The sale of the generation assets closed on June 11, 2007.
Additionally, we sold Gas on October 2, 2006 (See Note 3C).
At December 31, 2007, with the exception of the oil price
hedge instruments discussed below, our discontinued
operations did not have outstanding positions in derivative
instruments. For the year ended December 31, 2007,
$88 million of after-tax gains from derivative instruments
related to our nonregulated energy marketing and trading
operations were included in discontinued operations on
the Consolidated Statements of Income.
On January 8, 2007, we entered into derivative contracts
to hedge economically a portion of our 2007 synthetic
fuels cash flow exposure to the risk of rising oil prices
over an average annual oil price range of $63 to $77 per
barrel on a New York Mercantile Exchange (NYMEX)
basis. The notional quantity of these oil price hedge
instruments was 25 million barrels and provided protection
for the equivalent of approximately 8 million tons of 2007
synthetic fuels production. The cost of the hedges was
approximately $65 million. The contracts were marked-
to-market with changes in fair value recorded through
earnings. These contracts ended on December 31,
2007, and were settled for cash on January 8, 2008, with
no material impact to 2008 earnings. Approximately
34 percent of the notional quantity of these contracts
was entered into by Ceredo. As discussed in Note 3J,
we disposed of our 100 percent ownership interest in
Ceredo on March 30, 2007. Progress Energy is the primary
beneficiary of, and continues to consolidate Ceredo
in accordance with FIN 46R, but we have recorded a
100 percent minority interest. Consequently, subsequent to
the disposal there is no net earnings impact for the portion
of the contracts entered into by Ceredo. At December 31,
2007, the fair value of all of these contracts was recorded
as a $234 million short-term derivative asset position,
including $79 million at Ceredo. The fair value of
these contracts was included in receivables, net on
the Consolidated Balance Sheet (See Note 6A).
As discussed in Note 3B, on October 12, 2007, we
permanently ceased production of synthetic fuels at our
majority-owned facilities. Because we have abandoned
our majority-owned facilities and our other synthetic
fuels operations ceased as of December 31, 2007,
gains and losses on these contracts were included in
discontinued operations, net of tax on the Consolidated
Statement of Income in 2007. During the year ended
December 31, 2007, we recorded net pre-tax gains of
$168 million related to these contracts. Of this amount,
$57 million was attributable to Ceredo of which $42 million
was attributed to minority interest for the portion of the
gain subsequent to the disposal of Ceredo.
At December 31, 2006, derivative assets of $107 million
and derivative liabilities of $31 million were included
in assets to be divested and liabilities to be divested,
respectively, on the Consolidated Balance Sheet. Due to
the divestitures discussed above, management determined
that it was no longer probable that the forecasted
transactions underlying certain derivative contracts
would be fulfilled and cash flow hedge accounting for
the contracts was discontinued beginning in the second
quarter of 2006 for Gas and in the fourth quarter of 2006
for CCO. Our discontinued operations did not have
material outstanding positions in commodity cash flow
hedges at December 31, 2006. For the years ended
December 31, 2006 and 2005, excluding amounts
reclassified to earnings due to discontinuance of the
related cash flow hedges, net gains and losses from
derivative instruments related to Gas and CCO on a
consolidated basis were not material and are included
in discontinued operations, net of tax on the Consolidated
Statements of Income. For the year ended December 31,
2006, discontinued operations, net of tax includes $74 million
in after-tax deferred income, which was reclassified to
earnings due to discontinuance of the related cash flow
hedges. For the year ended December 31, 2005, there were
no reclassifications to earnings due to discontinuance of
the related cash flow hedges.