Progress Energy 2006 Annual Report Download - page 50

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S
48
IMPAIRMENT OF SYNTHETIC FUELS AND OTHER
RELATED LONG-LIVED ASSETS
We monitor our long-lived assets for impairment as
warranted. With the idling of our synthetic fuels facilities
during the second quarter of 2006, we performed an
impairment evaluation of our synthetic fuels and other
related operating long-lived assets. The impairment test
considered numerous factors, including, among other
things, continued high oil prices and the then-current “idle”
state of our synthetic fuels facilities. Based on the results
of the impairment test, we recorded pre-tax impairment
charges of $91 million ($55 million after-tax) during the
quarter ended June 30, 2006 (See Notes 8 and 9). These
charges represent the entirety of the asset carrying value
of our synthetic fuels intangible assets and manufacturing
facilities, as well as a portion of the asset carrying value
associated with the river terminals at which the synthetic
fuels manufacturing facilities are located.
SALE OF PARTNERSHIP INTEREST
In June 2004, through our subsidiary Progress Fuels,
we sold in two transactions a combined 49.8 percent
partnership interest in Colona, one of our synthetic fuels
facilities. Substantially all proceeds from the sales will
be received over time, which is typical of such sales
in the industry. Gains from the sales will be recognized
on a cost-recovery basis as the facility produces and
sells synthetic fuels and when there is persuasive
evidence that the sales proceeds have become fixed or
determinable and collectability is reasonably assured.
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 will be deferred. It is possible that
gains will be deferred to subsequent quarters, or to a
subsequent calendar year, until there is persuasive
evidence that no tax credit phase-out will occur for the
applicable calendar year. This could result in shifting
earnings from earlier quarters to later quarters in a
calendar year or to a subsequent calendar year. In the
event that the synthetic fuels tax credits from the Colona
facility are reduced, including from an extended idling
of our production due to an increase in the price of oil
that could limit or eliminate synthetic fuels tax credits,
the amount of proceeds realized from the sale could be
significantly impacted. At December 31, 2006, a pre-tax
gain on monetization of $7 million has been deferred.
Based on the current level of oil prices and subject to
final adjustments, we expect to recognize this gain in
2007. Beginning with the payment for the second quarter
of 2006, the minority interest parties have elected to
defer their cash payments in consideration of the idling of
the synthetic fuels facilities at that time. In consideration
of the resumption of limited synthetic fuels production in
the fourth quarter of 2006, the minority interest parties
made a partial payment in January 2007.
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 these governmental agencies.
PEC and PEF continue to monitor developments impacting
retail competition in their respective service territories.
Movement toward deregulation throughout the nation
has effectively ceased due to numerous factors including,
but not limited to, California’s experience with retail
deregulation. To our knowledge, there is currently no
enacted or proposed legislation in North Carolina, South
Carolina or Florida that would give retail customers 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.
Issues regarding the timing, creation and structure of
transmission organizations are evaluated by the Utilities’
regulatory authorities. We cannot predict the outcome of
these matters (See Note 7D).
On May 5, 2006, the Florida state legislature passed a
comprehensive energy bill, which has been signed by the
governor. The legislation creates a new energy council
tasked with developing a statewide energy policy,
provides incentives to renewable energy sources and
fosters the construction of new nuclear power plants,
including streamlining the siting of nuclear power plants
and related transmission facilities, exempting new