Progress Energy 2006 Annual Report Download - page 72

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
70
accordance with Financial Accounting Standards Board
(FASB) Interpretation No. 46R, “Consolidation of Variable
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, 2006, the
aggregate additional maximum loss exposure that we
could be required to record in our income statement as
a result of these arrangements was $7 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 Code. At December 31, 2006, 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 Sheet.
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
$45 million, $44 million and $42 million in 2006, 2005 and
2004, respectively. The generation capacity of the entity’s
power plant is approximately 835 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 20 limited
liability partnerships, limited liability corporations and
venture capital funds and two building leases with
special-purpose entities. At December 31, 2006, the
aggregate maximum loss exposure that PEC could be
required to record on its income statement as a result
of these arrangements totals $21 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 three variable interest entities
for which PEF is not the primary beneficiary. These
arrangements include investments in one venture capital
fund, one building lease with a special-purpose entity
and one operating lease with a special-purpose entity. At
December 31, 2006, the aggregate maximum loss exposure
that PEF could be required to record in its income statement
as a result of these arrangements was $57 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