Progress Energy 2006 Annual Report Download - page 31

Progress Energy Annual Report 2006
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Synthetic fuels operations’ net (loss) profit changed from
a profit of $155 million in 2005 to a loss of $44 million in
2006 primarily due to lower synthetic fuels production as
a result of high oil prices, which increased the potential
phase-out of tax credits. The 6.4 million ton decrease in
synthetic fuels production resulted in $79 million of lower
after-tax losses. The decision to idle our synthetic fuels
facilities necessitated an impairment test and resulted
in the impairment of our synthetic fuels assets (See
Notes 8 and 9). The lower production also resulted in a
$160 million reduction in generated tax credits, and as
a result of the high oil prices, we recorded a $38 million
tax credit reserve due to the estimated phase-out. The
higher 2006 average oil prices and the uncertainty of
the final phase-out percentage for 2006 resulted in a
$17 million after-tax decrease in our gain on sale of assets
due to recognizing a lower gain on the monetization of
the Colona Synfuel Limited Partnership, LLLP (Colona)
facility compared to 2005 (See Note 3J). The gain for 2006
is expected to be recorded in 2007 when the final phase-
out percentage has been calculated. As of December 31,
2006, $7 million of deferred gain was recorded on the
Consolidated Balance Sheet. In addition, results were
unfavorably impacted by the recognition of a valuation
allowance recorded against the deferred tax assets for
state operating loss carry forwards. Due to the impairment
of our synthetic fuels assets, the impairment charge
included approximately $12 million of depreciation and
amortization expense that would otherwise have been
recorded in 2006, and $25 million of depreciation and
amortization expense that would otherwise have been
recorded during 2007.
Synthetic fuels operations’ net (loss) profits increased
in 2005 as compared to 2004 due primarily to an
increase in synthetic fuels production and an additional
$23 million pre-tax gain recognized on the monetization
of the Colona facility compared to 2004 (See Note 3J),
partially offset by an increase in operating expenses. In
addition, earnings in 2005 include a $10 million favorable
tax credit true-up related to 2004. Our total synthetic
fuels production of approximately 10 million tons in 2005
is greater than 2004 production levels of approximately
8 million tons as a result of hurricane costs in 2004, which
reduced our projected 2004 regular tax liability and our
corresponding ability to record tax credits from synthetic
fuels production.
Our future synthetic fuels production levels for 2007
remain uncertain due to the recent volatility of oil prices.
See “Other Matters – Synthetic Fuels Tax Credits” below
for additional information on the impact of oil prices on
Section 29/45K tax credits, the results of our interim
impairment review and a discussion of uncertainties
surrounding our synthetic fuels production in 2007.
COAL TERMINALS AND MARKETING
Coal terminals and marketing (Coal) operations blend
and transload coal as part of the trucking, rail and
barge network for coal delivery. This business also
has an operating fee agreement with our synthetic
fuels operations for procuring and processing of coal
and the transloading and marketing of synthetic fuels.
As a result of the relationship with the synthetic fuels
operations, fluctuations in Coal’s annual earnings are
primarily related to production volumes at our synthetic
fuels facilities. Coal operations contributed earnings of
$12 million, $43 million and $34 million in 2006, 2005 and
2004, respectively. Coal’s 2006 results were negatively
impacted by the impairment of a portion of Coal’s terminal
assets, which resulted in a pre-tax charge of $17 million
($10 million after-tax) and lower revenues related to lower
production at our synthetic fuels facilities and higher cost
of sales due to higher coal prices (See Note 9). These
were partially offset by an $11 million pre-tax reduction
in expense related to a restructured coal supply contract
due to 2005 coal commitments that were not delivered.
During the first quarter of 2006, one of Coal’s supply
contracts was restructured resulting in a payment of
$103 million to Coal. These proceeds covered long-
term coal supply commitments from 2005 through 2007
and will be recognized over the life of the contract as
coal is received and the related inventory is utilized.
Future amortization of these proceeds will be wholly
offset by the increased contract price and is therefore
not expected to materially impact earnings. As a result
of the impairment of Coal’s terminal assets discussed
above, the impairment charge included approximately
$6 million of depreciation expense that would otherwise
have been recorded in 2006, and approximately
$11 million of depreciation expense that would otherwise
have been recorded during 2007. The Coal and Synthetic
Fuels segment has long-term fixed price coal purchase
contracts to provide a portion of the feedstock coal
required to meet 2007 solid synthetic fuels production
or to resell as coal. As a result, the 2006 decline in coal
prices is expected to negatively impact the financial
performance of the Coal and Synthetic Fuels segment
compared to previous years.
The increase in earnings for 2005 compared to 2004 was
primarily due to additional revenues at the coal terminals
related to increased prices and volumes and additional
intersegment fees for both the coal terminals and
marketing operations due to increased synthetic fuels
production. These were partially offset by an increase