Progress Energy 2006 Annual Report Download - page 49

Progress Energy Annual Report 2006
47
Total Section 29/45K credits generated through
December 31, 2006 (including those generated by Florida
Progress prior to our acquisition), were approximately
$1.9 billion, of which $974 million has been used to offset
regular federal income tax liability, $847 million is being
carried forward as deferred tax credits and $38 million
has been reserved due to the estimated phase-out of tax
credits due to high oil prices, as described below.
IMPACT OF CRUDE OIL PRICES
Although the Section 29/45K tax credit program is expected
to continue through 2007, recent market conditions, world
events and catastrophic weather events have increased
the volatility and level of oil prices that could limit the
amount of those credits or eliminate them entirely for
2007. This possibility is due to a provision of Section 29
that provides that if the Annual Average Price exceeds the
Threshold Price, the amount of Section 29/45K tax credits
is reduced for that year. Also, if the Annual Average
Price exceeds the Phase-out Price, the Section 29/45K
tax credits are eliminated for that year. The Threshold
Price and the Phase-out Price are adjusted annually
for inflation.
If the Annual Average Price falls between the Threshold
Price and the Phase-out Price for a year, the amount by
which Section 29/45K tax credits are reduced will depend
on where the Annual Average Price falls in that continuum.
For example, for 2005, the Threshold Price was $53.20 per
barrel and the Phase-out Price was $66.78 per barrel. If the
Annual Average Price had been $59.99 per barrel, there
would have been a 50 percent reduction in the amount of
Section 29 tax credits for that year. Based on the Annual
Average Price of $50.26, there was no phase-out of our
synthetic fuels tax credits in 2005.
The Department of the Treasury calculates the Annual
Average Price based on the Domestic Crude Oil First
Purchases Prices published by the EIA. Because the
EIA publishes its information on a three-month lag, the
secretary of the Treasury finalizes the calculations three
months after the year in question ends. Thus, the Annual
Average Price for calendar year 2006 is expected to be
published in early April 2007.
We estimate that the 2006 Threshold Price will be
approximately $55 per barrel and the Phase-out Price will
be approximately $69 per barrel, based on an estimated
inflation adjustment for 2006. The monthly Domestic
Crude Oil First Purchases Price published by the EIA
has recently averaged approximately $7 lower than the
corresponding daily NYMEX prompt month settlement
price for light sweet crude oil. Through December 31,
2006, the average daily NYMEX settlement price for light
sweet crude oil was $66.25 per barrel. Based upon the
estimated 2006 Threshold Price and Phase-out Price,
assuming that the $7 average differential between the
Domestic Crude Oil First Purchases Price published
by the EIA and the NYMEX settlement price continued
through December 31, 2006, we estimate that the
synthetic fuels tax credit amount for 2006 will be reduced
by approximately 35 percent. Therefore, we reserved
35 percent or approximately $38 million of the $107 million
of tax credits generated during 2006. The final calculations
of any reductions in the value of the tax credits will not
be determined until April 2007 when final 2006 oil prices
are published.
We estimate that the 2007 Threshold Price will be
approximately $56 per barrel and the Phase-out Price will
be approximately $70 per barrel, based on an estimated
inflation adjustment for 2006 and 2007. The monthly
Domestic Crude Oil First Purchases Price published
by the EIA has recently averaged approximately
$7 lower than the corresponding daily NYMEX prompt
month settlement price for light sweet crude oil. As of
January 31, 2007, the average NYMEX futures price
for light sweet crude oil for calendar year 2007 was
$59.50 per barrel. Based upon the estimated 2007
Threshold Price and Phase-out Price, if oil prices for the
rest of 2007 remained at the January 31, 2007, average
2007 futures price level of $59.50 per barrel, we currently
estimate that the synthetic fuels tax credit amount for
2007 would not be reduced.
In January 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.
These contracts will provide protection for the equivalent
of approximately 8 million tons of 2007 synthetic fuels
production and will be marked-to-market with changes in
fair value recorded through earnings. Our synthetic fuels
production levels for 2007 remain uncertain because we
cannot predict with any certainty the Annual Average
Price of oil for 2007. We will continue to monitor the
environment surrounding synthetic fuels production and
will adjust our production as warranted by changing
conditions. See Note 17 and “Quantitative and Qualitative
Disclosures About Market Risk” for a discussion of
market risk and derivatives.