Progress Energy 2007 Annual Report Download - page 49

Progress Energy Annual Report 2007
47
OTHER MATTERS
Synthetic Fuels Tax Credits
Historically, we have had substantial operations
associated with the production of coal-based solid
synthetic fuels as defined under Section 29 of the Code
(Section 29). The production and sale of these products
qualified for federal income tax credits so long as certain
requirements were satisfied, including a requirement
that the synthetic fuels differ significantly in chemical
composition from the coal used to produce such synthetic
fuels and that the fuel was produced from a facility that
was placed in service before July 1, 1998. Qualifying
synthetic fuels facilities entitled their owners to federal
income tax credits based on the barrel of oil equivalent of
the synthetic fuels produced and sold by these plants. The
tax credits associated with synthetic fuels in a particular
year were phased out if annual average market prices for
crude oil exceeded certain prices. Synthetic fuels were
generally not economical to produce and sell absent the
credits. The synthetic fuels tax credit program expired at
the end of 2007.
TAX CREDITS
Legislation enacted in 2005 redesignated the Section 29
tax credit as a general business credit under Section
45K of the Code (Section 45K) effective January 1, 2006.
The previous amount of Section 29 tax credits that we
were allowed to claim in any calendar year through
December 31, 2005, was limited by the amount of our
regular federal income tax liability. Section 29 tax credit
amounts allowed but not utilized are carried forward
indefinitely as deferred alternative minimum tax credits.
The redesignation of Section 29 tax credits as a Section
45K general business credit removes the regular federal
income tax liability limit on synthetic fuels production and
subjects the credits to a 20-year carry forward period.
This provision allowed us to produce more synthetic
fuels than we have historically produced, should we have
chosen to do so.
Total Section 29/45K credits generated through
December 31, 2007 (including those generated by Florida
Progress prior to our acquisition), were approximately
$2.028 billion, of which $1.054 billion has been used to
offset regular federal income tax liability, $830 million
is being carried forward as deferred tax credits and
$144 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
Section 29 provided that if the Annual Average Price
exceeded the Threshold Price, the amount of Section
29/45K tax credits was reduced for that year. Also, if the
Annual Average Price exceeded the Phase-out Price,
the Section 29/45K tax credits were eliminated for that
year. The Threshold Price and the Phase-out Price were
adjusted annually for inflation.
(in millions) Total Less than 1 year 1-3 years 3-5 years More than 5 years
Long-term debt(a) (See Note 12) $9,668 $877 $806 $1,950 $6,035
Interest payments on long-term debt(b) 6,865 558 1,003 816 4,488
Capital lease obligations (See Note 22B) 657 28 57 63 509
Operating leases (See Note 22B) 740 62 66 58 554
Fuel and purchased power(c) (See Note 22A) 17,644 2,473 3,778 2,534 8,859
Other purchase obligations(d) (See Note 22A) 1,228 808 324 32 64
Minimum pension funding requirements(e) 193 34 105 54 –
Uncertain tax positions(f) (See Note 14) – – – – –
Other commitments(g) 133 13 27 27 66
Total $37,128 $4,853 $6,166 $5,534 $20,575
(a) Our maturing debt obligations are generally expected to be repaid with asset sales and cash from operations or refinanced with new debt issuances in the capital markets.
(b) Interest payments on long-term debt are based on the interest rate effective at December 31, 2007.
(c) Fuel and purchased power commitments represent the majority of our remaining future commitments after debt obligations. Essentially all of our fuel and purchased power costs
are recovered through pass-through clauses in accordance with North Carolina, South Carolina and Florida regulations and therefore do not require separate liquidity support.
(d) We have additional contractual obligations associated with our discontinued CCO operations, which are not reflected in this table. These obligations include other purchase
obligations of $3 million each for 2008 and 2009.
(e) Projected pension funding status is based on current actuarial estimates and is subject to future revision.
(f) Uncertain tax positions of $93 million are not reflected in this table as we cannot predict when open income tax years will be closed with completed examinations. We are not
aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease during the 12-month period
ending December 31, 2008.
(g) In 2008, PEC must begin transitioning North Carolina jurisdictional amounts currently retained internally to its external decommissioning funds. The transition of $131 million must
be complete by December 31, 2017, and at least 10 percent must be transitioned each year.