SecProbe.io

CORRESP
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filename1.htm

September 9, 2005

VIA EDGAR

Securities and Exchange
Commission
100 F Street, N.W.
Washington, D.C. 20549-0308
 Attention:
Mr. Jim Allegretto, Senior Assistant Chief Accountant
                         Division of Corporation Finance

     RE:

     Progress Energy Inc.

Form 10-K for the year ended December 31, 2004

Filed March 16, 2005

File No. 1-15929

Carolina Power and Light Company

Form 10-K for the year ended December 31, 2004

Filed March 16, 2005

File No. 1-03382

Florida Progress Corporation

Form 10-K for the year ended December 31, 2004

Filed March 16, 2005

File No. 1-08349

Florida Power Corporation

Form 10-K for the year ended December 31, 2004

Filed March 16, 2005

File No. 1-03274

Dear Mr. Allegretto:

        Progress
Energy, Inc., a North Carolina corporation (“Progress Energy” or the
“Company”), submits herewith its responses to the comments of the staff (the
“Staff”) of the Securities and Exchange Commission (the “Commission”)
to the above referenced filings contained in its letter to Mr. Robert McGehee of Progress
Energy, dated July 27, 2005.

        Set
forth below are the responses of Progress Energy, Carolina Power & Light Company d/b/a
Progress Energy Carolinas, Inc. (“CP&L” or “PEC”), Florida
Progress Corporation (“Florida Progress” or “FPC”) and Florida Power
Corporation d/b/a Progress Energy Florida, Inc. (“Florida Power” or
“PEF”). For convenience of reference, each Staff comment is reprinted in bold,
numbered to correspond with the paragraph numbers assigned in the July 27, 2005 comment
letter, and is followed by the corresponding response of the respective company. Unless
otherwise noted, all page references are to the pages of Progress Energy’s 2004 Form
10-K.

Comment 1

Retail Rate Matters, page
17

     1.
          Explain to us why you have not had a rate case since 1988. In this regard,
          explain to us if you believe the cause and effect relationship still exists
          under paragraph 57 to SFAS No. 71. In particular, please specifically explain
          how the requirements of paragraph 5(b) with respect to PEC’s specific costs
          of providing service are met. Please be detailed in your response.

Response:

Progress Energy, Inc.

PEC has not had a base rate case
since 1988 because PEC and its governing utilities commissions have periodically concluded
that PEC’s base rates remain reasonable. Such determinations have been made each year
given PEC’s then-current cost of providing service.

The Company believes it is clear that
the referenced cause and effect relationship of costs and revenues stills exists. As
stated in the last sentence of paragraph 57, “for an enterprise with prices regulated
on the basis of its costs, allowable costs are the principal factor that influences its
prices.” Specifically, Paragraph 5(b) of SFAS No. 71 requires that “rates are
designed to recover the specific enterprise’s costs of providing the regulated
services or products.” There is continuous review by PEC and by its governing
utilities commissions as to whether such base rates are appropriate for PEC’s current
cost of providing service. PEC files annual and/or quarterly surveillance reports with
its commissions. These reports compare PEC’s base rate revenues with its current cost
of providing service for the period of the report. In general, PEC or the utilities
commissions can elect to initiate new base rate proceedings if base rates are considered
to be too high or too low with regard to the current cost of providing service.

As indicated above, both PEC and its
governing utilities commissions continually monitor PEC’s rates and revenues compared
to its current costs of providing service, such that PEC’s current rates must be
appropriate given its current allowable costs. Because PEC’s rates are continually
assessed with regard to its current cost of providing service, the Company believes the
paragraph 5(b) requirement is met.

Carolina Power and Light
Company

See above response.

Florida Progress
Corporation

Not applicable.

Florida Power Corporation

Not applicable.

Comment 2

Synthetic Fuels Tax
Credits, page 24

     2.
          Explain to us the type of synthetic fuel you produce and the IRS’s
          position on the synfuel tax credit including compliance with the “in
          service date”. Tell us whether any action has been taken by the Service to
          date. Advise as to whether you have recorded any allowance against the deferred
          tax assets or a tax cushion for benefits taken in light of the adverse IRS field
          auditors’ position or whether any amounts have been specifically
          disallowed. Finally, explain how an adverse outcome could impact your future
          regulatory proceedings or the market value of the CVO’s. Tell us the
          probability of recovery from ratepayers for any disallowed credits and the basis
          for your probability assessment. We may have further comment.

Response:

Progress Energy, Inc.

The Company, through its
subsidiaries, produces a solid coal-based synthetic fuel that is eligible for federal
income tax credits pursuant to Section 29 of the Internal Revenue Code (“Section
29”) if certain criteria are met. Qualifying synthetic fuel plants entitle their
owners to federal income tax credits based on the barrel of oil equivalent of the
synthetic fuel produced and sold by these plants. The Company, through its subsidiaries,
indirectly owns 100% of the following four synthetic fuel limited liability companies:
Solid Energy LLC, Ceredo Synfuel LLC, Solid Fuel LLC, and Sandy River Synfuel LLC
(collectively referred to herein as “Earthco”). The Company also indirectly owns
a cumulative total of 50.2% of Colona Synfuel Limited Partnership, LLLP
(“Colona”) and 10% of New River Synfuel, LLC (equity method investment). See
attached Schedule 4 which summarizes the ownership interests of the synthetic fuel
entities.

During 2001, the Internal Revenue
Service (“IRS”) released Revenue Procedure 2001-30 and Revenue Procedure 2001-34
that outline the conditions that must be met to receive a Private Letter Ruling
(“PLR”) for Section 29 tax credits from the IRS. PLRs represent advance rulings
from the IRS applying its interpretation of the tax law to an entity’s facts for a
specific issue such as whether the proposed product meets the definition of a qualified
fuel under Section 29. In December 2001 and January 2002, favorable PLRs were received for
all four Earthco plants. These PLRs concluded, among other things, that the synthetic fuel
produced by the Earthco plants resulted from a significant chemical change in the coal
feedstock and therefore is a qualified fuel eligible for Section 29 tax credits. The PLRs
establish the placed in service standard that a plant must meet, but do not contain a
ruling on whether the Earthco plants were placed in service before July 1, 1998.

In September 2002, all four of the
Earthco plants were accepted into the IRS’s Pre-Filing Agreement (“PFA”)
program in lieu of the ordinary IRS audit process. The Colona plant, which was undergoing
the ordinary IRS audit at the time, was subsequently accepted into the PFA Program. The
PFA Program allows taxpayers to voluntarily accelerate the IRS audit process in order to
seek resolution of specific issues.

In February 2004, Colona and the IRS
agreed that the Colona plant was placed in service before July 1, 1998 and that the
process used by Colona resulted in significant chemical change in accordance with Section
29. This concluded Colona’s participation in the PFA Program.

In July 2004, the Company was
notified that the IRS field auditors anticipated taking an adverse position regarding the
placed in service date of the Earthco plants. Due to the IRS field auditors’
position, the IRS exercised its right to withdraw from the PFA Program. With the
IRS’s withdrawal from the PFA Program, the review of the Earthco plants was placed
back on the ordinary IRS audit process.

On October 29, 2004, the Company
received the IRS field auditors’ preliminary report concluding that the Earthco
plants had not been placed in service before July 1, 1998, and proposing that the tax
credits generated by those plants be disallowed. The Company disagrees with the field
audit team’s factual findings and believes that the Earthco plants were placed in
service before July 1, 1998. The Company also believes that the report applies an
inappropriate legal standard concerning what constitutes “placed in service.”
The Company currently is contesting the field auditors’ findings and the field audit
team’s proposed disallowance of the tax credits.

Because of the disagreement between
the Company and the field auditors as to the proper legal standard to apply, the Company
believes that it is appropriate to have this issue reviewed by the National Office of the
IRS. Therefore, the Company has asked the National Office to review the issue and clarify
the legal standard to be applied. The Company believes that the appeals process, including
proceedings before the National Office, could take up to two years to complete; however,
it cannot control the actual timing of resolution and cannot predict the outcome of this
matter.

In management’s opinion, the
Company has complied and is complying with all the necessary requirements to qualify for
Section 29 tax credits, and although it cannot provide certainty, it believes that it will
prevail in these matters. The Company accounts for uncertain tax benefits in accordance
with SFAS No. 5, Accounting for Contingencies (“SFAS No. 5”). Under SFAS No. 5,
contingent losses are recorded when it is probable that the tax position will be
disallowed and the amount of the disallowance can be reasonably estimated. Because the
Company does not believe it is probable that the tax credits generated by the Earthco
plants will be disallowed, no allowance or tax cushion has been recorded against the
related deferred tax assets. Should the Company fail to prevail in these matters or a
contingent loss otherwise becomes probable, there could be a material liability for
previously used or carried forward Section 29 tax credits. A discussion of the potential
impact on the Company is contained on pages 139-140 of the Company’s 2004 Form 10-K.

The Company’s Contingent Value
Obligations (“CVOs”) are governed by an agreement that covers the years
2001-2007 (referred to in the agreement as “operation years”). CVO holders have
the right to receive contingent payments equal to 50 percent of any net after-tax cash
flow generated by the Earthco plants in excess of $80 million per year for each of the
operation years. Payments on the CVOs will not be made until tax audit matters are
resolved. If any of the tax credits generated by Earthco plants during the operation years
are disallowed, net after-tax cash flow under the CVO agreement would be reduced by the
amount of the lost income tax benefits, reducing the payments CVO holders would have
otherwise received. In the event of a total disallowance of Section 29 tax credits
generated by the Earthco plants, no payments would be made to holders of CVOs. A
discussion of CVOs is contained on page 119 of the Company’s 2004 Form 10-K.

All of the Company’s investments
in synthetic fuel plants are held in nonregulated subsidiaries, and none of the claimed
credits have been reflected as a reduction of allowable costs in setting rates for the
regulated subsidiaries. Therefore, a disallowance of Section 29 tax credits would not
affect regulatory proceedings before any federal or state utility commission, because the
Company cannot recover any disallowed Section 29 tax credits from ratepayers.
Disallowances or losses from the Company’s nonregulated subsidiaries are not
recoverable through the rates of the Company’s regulated utility subsidiaries.

Carolina Power and Light
Company

Not applicable.

Florida Progress
Corporation

See above response except that page
references are to pages 90-91 of the Florida Progress Form 10-K. See Schedule 4 for
applicable ownership percentages.

Florida Power Corporation

Not applicable.

Comment 3

Competitive Commercial
Operations, page 24

     3.
          Please explain to us what consideration you gave to possible impairment any
          of your CCO gas generation plants in light of high natural gas prices; which
          tend to reduce spark spreads. In particular, explain to us whether any of the
          CCO facilities are under long-term power contracts with similar long-term fixed
          price fuel arrangements. Please provide to us the results of any impairment
          testing performed. Supplement your response with the financial models used to
          estimate future cash flows. If none of the plants were tested for impairment,
          explain why. In this regard, we assume impairment testing would be done at the
          individual plant location. If otherwise, please justify. We may have further
          comment.

Response:

The Company’s Competitive
Commercial Operations (CCO) segment is divided into three regions where it has generation
plants that generate cash flow: South Florida, North Carolina and Georgia. The Company
monitors events and circumstances relating to the CCO generation plants in each of these
regions to determine if the criteria have been met which would require an impairment
review under SFAS No. 144.

South Florida Region
(DeSoto generation facility)

The Company has two combustion
turbines at its DeSoto generation facility in the South Florida region. The output of
these turbines is 100% contracted until May 2007 at prices that are expected to be above
prevailing market prices. The contract is a tolling agreement and does not have a
fixed fuel price component. The South Florida region is projected to be a robust energy
market even beyond 2007, and it is expected that the Company will be able to contract the
assets for several years beyond 2007 with existing parties to the current contracts or
with new parties. One of the factors that has created the high demand for power generation
in the South Florida region is that the market differs from other markets due to the
unique geography of the transmission system and limited inter-connects to other
transmission systems. This market has supply constraints since the only resources
available off-system must come in through the constrained northern inter-connects.

Considering geographic factors,
prevailing contract prices and other market conditions in the South Florida region,
management did not believe that conditions existed during 2004 that indicated that the
carrying value of the DeSoto generation facility was not recoverable. Therefore, no
impairment test under SFAS No. 144 was performed.

North Carolina Region
(Rowan generation facility)

The Company’s North Carolina
region has three combustion turbines and a two-on-one combined cycle at its Rowan
generation facility. The output of the three combustion turbines are contracted through
December 2010 at prices that are expected to be above the prevailing market prices
(contracts are specific to the three combustion turbines). These contracts are tolling
agreements and do not have a fixed fuel price component. While the combustion
turbines are 100% contracted, the combined cycle is available for market sales into North
Carolina and PJM. (PJM is a regional transmission organization that operates in
Pennsylvania, New Jersey and Maryland). The combined cycle generates cash flow primarily
through spot market sales, mid-term structured contracts and the sale of power to the
Georgia market to serve the Company’s full requirements contracts as described in the
Georgia region below. Compared to other regions, the North Carolina region is a quickly
growing market area with no significant over supply of generation. The PJM market also
offers a robust liquid market for Rowan to sell