Progress Energy 2007 Annual Report Download - page 75

Progress Energy Annual Report 2007
73
Interest Entities – An Interpretation of ARB No. 51”
(FIN 46R).
In addition to the variable interests listed below for PEC
and PEF, we have interests through other subsidiaries in
several variable interest entities for which we are not
the primary beneficiary. These arrangements include
investments in five limited liability partnerships and
limited liability corporations. At December 31, 2007, the
aggregate additional maximum loss exposure that we
could be required to record in our income statement as
a result of these arrangements was $6 million, which
represents our net remaining investment in the entities.
The creditors of these variable interest entities do not
have recourse to our general credit in excess of the
aggregate maximum loss exposure.
PEC is the primary beneficiary of, and consolidates, two
limited partnerships that qualify for federal affordable
housing and historic tax credits under Section 42 of the
Internal Revenue Code (the Code). At December 31, 2007,
the total assets of the two entities were $37 million, the
majority of which are collateral for the entities’ obligations
and are included in miscellaneous other property and
investments in the Consolidated Balance Sheets.
PEC has an interest in and consolidates a limited
partnership that invests in 17 low-income housing
partnerships that qualify for federal and state tax
credits. PEC has requested the necessary information
to determine if the 17 partnerships are variable interest
entities or to identify the primary beneficiaries; all
entities from which the necessary financial information
was requested declined to provide the information to
PEC and, accordingly, PEC has applied the information
scope exception in FIN 46R, paragraph 4(g), to the
17 partnerships. PEC believes that if it is determined to
be the primary beneficiary of these entities, the effect
of consolidating the entities would result in increases
to total assets, long-term debt and other liabilities, but
would have an insignificant or no impact on PEC’s common
stock equity, net earnings or cash flows.
PEC also has an interest in one power plant resulting
from long-term power purchase contracts. Our only
significant exposure to variability from these contracts
results from fluctuations in the market price of fuel used
by the entity’s plants to produce the power purchased by
PEC. We are able to recover these fuel costs under PEC’s
fuel clause. Total purchases from this counterparty were
$39 million, $45 million and $44 million in 2007, 2006 and
2005, respectively. The generation capacity of the entity’s
power plant is approximately 847 megawatts (MW). PEC
has requested the necessary information to determine if
the power plant owner is a variable interest entity or to
identify the primary beneficiary. The entity declined to
provide us with the necessary financial information and
PEC has applied the information scope exception in FIN
46R, paragraph 4(g), to the power plant. PEC believes
that if it is determined to be the primary beneficiary of the
entity, the effect of consolidating the entity would result
in increases to total assets, long-term debt and other
liabilities, but would have an insignificant or no impact on
PEC’s common stock equity, net earnings or cash flows.
However, because PEC has not received any financial
information from the counterparty, the impact cannot be
determined at this time.
PEC also has interests in several other variable interest
entities for which PEC is not the primary beneficiary.
These arrangements include investments in 21 limited
liability partnerships, limited liability corporations and
venture capital funds and two building leases with
special-purpose entities. At December 31, 2007, the
aggregate maximum loss exposure that PEC could be
required to record on its income statement as a result
of these arrangements totals $19 million, which primarily
represents its net remaining investment in these entities.
The creditors of these variable interest entities do not
have recourse to the general credit of PEC in excess of
the aggregate maximum loss exposure.
PEF has interests in four variable interest entities
for which PEF is not the primary beneficiary. These
arrangements include investments in one venture capital
fund, one limited liability corporation, one building lease
with a special-purpose entity and one operating lease
with a special-purpose entity. At December 31, 2007, the
aggregate maximum loss exposure that PEF could be
required to record in its income statement as a result
of these arrangements was $56 million. The majority of
this exposure is related to a prepayment clause in the
building lease and is not considered equity at risk. The
creditors of these variable interest entities do not have
recourse to the general credit of PEF in excess of the
aggregate maximum loss exposure.
D. Significant Accounting Policies
USE OF ESTIMATES AND ASSUMPTIONS
In preparing consolidated financial statements that
conform to GAAP, management must make estimates
and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets