Progress Energy 2008 Annual Report Download - page 64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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analyses to determine the primary beneficiaries of the
two VIEs. The primary factors in the analyses were
the estimated economic lives of the partnerships and
their net cash flow projections, estimates of available
tax credits, and the likelihood of default on debt and
other commitments. There were no changes to PEC’s
assessment of the primary beneficiary during 2006 through
2008. No financial or other support has been provided to
the VIEs during the periods presented. At December 31,
2008, PEC had assets of $40 million, substantially all of
which was reflected in miscellaneous other property and
investment, and $16 million in long-term debt, $7 million
in other liabilities and deferred credits and $4 million
in accounts payable in the PEC Consolidated Balance
Sheets related to the two VIEs. The assets of the two
VIEs are collateral for, and can only be used to settle,
their obligations. The creditors of these VIEs do not have
recourse to the general credit of PEC and there are no
other arrangements that could expose PEC to losses.
OTHER VARIABLE PEC INTERESTS
PEC has an equity investment in, and consolidates, one
limited partnership investment fund that invests in 17 low-
income housing partnerships that qualify for federal and
state tax credits. The investment fund accounts for the
17 partnerships on the equity method of accounting. PEC
also has an interest in one power plant resulting from long-
term power purchase contracts. PEC’s only significant
exposure to variability from the power purchase 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
$44 million, $39 million and $45 million in 2008, 2007 and
2006, respectively. The generation capacity of the entity’s
power plant is approximately 847 megawatts (MW). PEC
has requested the necessary information to determine if
the investment fund’s 17 partnerships and the power plant
owner are VIEs 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 and the power plant. PEC believes that
if it is determined to be the primary beneficiary of these
entities, the effect of consolidating the power plant and
the investment fund consolidating the 17 partnerships
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 counterparties, the impact
cannot be determined at this time.
VARIABLE INTEREST ENTITIES FOR WHICH PEF IS NOT
THE PRIMARY BENEFICIARY
PEF has a prepayment clause in a building capital lease
with a special purpose entity that is a VIE. In accordance
with the lease agreement, PEF is not required to make any
lease payments over the last 20 years of the lease, during
which period $51 million of rental expense will be recorded
in the PEF Statements of Income. The prepayment clause
is PEF’s only variable interest in the VIE and, therefore,
PEF’s exposure to loss primarily relates to the recovery of
the prepayments through future use of the rental property.
PEF performed qualitative and quantitative analyses and
concluded that it is not the primary beneficiary of the VIE.
The primary factors in the analyses were the lease term, the
fact that the lease payments are not variable interests, the
likelihood of construction and casualty risks to the building
and the existence of insurance to offset those risks, and
the estimated fair value of the building at the end of the
lease term. There were no changes to PEF’s assessment
of the primary beneficiary during 2006 through 2008.
No financial or other support has been provided to the
VIE during the periods presented. At December 31, 2008,
PEF had a $4 million prepayment included in prepayments
and other current assets on the PEF Balance Sheets. No
liabilities associated with the prepayment clause were
recorded. The aggregate maximum exposure to loss at
December 31, 2008, is $51 million, which represents the
loss if the maximum prepayment of rent at the end of year
20 was not recovered through future use of the rental
property or from third-party insurers at that time.
PEF has a residual value guarantee in an operating railcar
lease agreement with a special purpose entity that is
a VIE. The lease agreement has an early termination
clause that permits PEF to terminate the lease in certain
circumstances. If PEF terminates the lease in accordance
with the agreement, it must sell the railcars and remit
the proceeds to the lessor plus any amount for which
the residual value guarantee exceeds the realized value
of the equipment. The residual value guarantee is PEF’s
primary variable interest in the VIE and, therefore, PEF’s
exposure to loss is from the potential decrease in the
fair value of the railcars. PEF performed qualitative and
quantitative analyses and concluded that it is not the
primary beneficiary of the VIE. The primary factors in the
analyses were the terms of the lease, the probability of
exercising the early termination clause, and the estimated
fair value of the railcars. There were no changes to PEF’s
assessment of the primary beneficiary during 2006 through
2008. No financial or other support has been provided to the
VIE during the periods presented. No liabilities associated
with the residual value guarantee were recorded as of
December 31, 2008, because the early termination clause