Progress Energy 2006 Annual Report Download - page 78

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
76
the implementation year with the offsetting adjustment
recorded to the opening balance of retained earnings.
Companies using the “cumulative effect” transition
method must disclose the nature and amount of each
individual error, including when and how each error being
corrected arose. They must also disclose the fact that
the errors had previously been considered immaterial.
Companies do not have to restate prior period financial
statements at initial application so long as management
properly applied its previous approach.
SAB 108 is effective for us at December 31, 2006. The
implementation of SAB 108 did not have a material effect
on our financial position or results of operations, and
we did not record an adjustment to beginning retained
earnings as permitted by SAB 108.
3. DIVESTITURES
A. CCO – Georgia Operations
On December 13, 2006, our board of directors approved
a plan to pursue the disposition of substantially all of
Progress Ventures, Inc.’s (PVI) Competitive Commercial
Operations (CCO) physical and commercial assets,
which include approximately 1,900 MW of power
generation facilities in Georgia, as well as forward gas
and power contracts, gas transportation, storage and
structured power and other contracts, including the
full requirements contracts with 16 Georgia Electric
Membership Cooperatives (the Georgia Contracts). The
operations of CCO were previously included in the former
Progress Ventures segment. We expect to complete the
disposition plan in 2007. As a result of the disposition plan,
we recorded an after-tax estimated loss of $226 million
in December 2006. In 2007, we anticipate recording
additional material charges in discontinued operations
related to the disposition plan. These additional charges
relate primarily to costs to be incurred to exit the Georgia
Contracts under SFAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities.” These costs
could exceed $200 million after-tax.
The accompanying consolidated financial statements
have been restated for all periods presented to reflect the
operations of CCO as discontinued operations. Interest
expense has been allocated to discontinued operations
based on their respective net assets, assuming a uniform
debt-to-equity ratio across our operations. Interest
expense allocated for the years ended December 31, 2006,
2005 and 2004 was $36 million, $39 million and $40 million,
respectively. We ceased recording depreciation upon
classification of the assets as discontinued operations
in December 2006. After-tax depreciation expense during
the years ended December 31, 2006, 2005 and 2004 was
$14 million, $14 million and $15 million, respectively.
Results of discontinued operations for the years ended
December 31 were as follows:
B. Natural Gas Drilling and Production
On October 2, 2006, we sold our natural gas drilling
and production business (Gas) to EXCO Resources,
Inc. for approximately $1.1 billion in net proceeds.
Gas included Winchester Production Company, Ltd.
(Winchester Production), Westchester Gas Company,
Texas Gas Gathering and Talco Midstream Assets Ltd.;
all were subsidiaries of Progress Fuels Corporation
(Progress Fuels). Proceeds from the sale have been used
primarily to reduce holding company debt and for other
corporate purposes.
Based on the net proceeds associated with the sale, we
recorded an after-tax net gain on disposal of $300 million
during the year ended December 31, 2006.
In December 2004, we sold certain gas-producing
properties and related assets owned by Winchester
Production, which were previously included in the
former Progress Ventures segment. Net proceeds of
approximately $251 million were used to reduce debt.
Because the sale significantly altered the ongoing
relationship between capitalized costs and remaining
proved reserves, under the full-cost method of accounting,
the pre-tax gain of $56 million was recognized in earnings
rather than as a reduction of the basis of our remaining
oil and gas properties. Upon the sale of Gas, the gain was
reclassed from continuing operations to earnings from
discontinued operations.
The accompanying consolidated financial statements
have been restated for all periods presented to reflect
all the operations of Gas as discontinued operations.
Interest expense has been allocated to discontinued
operations based on their respective net assets,
assuming a uniform debt-to-equity ratio across our
operations. Interest expense allocated for the years ended
(in millions) 2006 2005 2004
Revenues $754 $627 $168
Loss before income taxes $(92) $(93) $(39)
Income tax benefit 35 39 16
Net loss from discontinued operations (57) (54) (23)
Estimated loss on disposal of
discontinued operations, including
income tax benefit of $123 (226) – –
Loss from discontinued operations $(283) $(54) $(23)