Duke Energy 2012 Annual Report Download - page 155

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PART II
Combined Notes to Consolidated Financial Statements – (Continued)
DUKE ENERGY CORPORATION • DUKE ENERGY CAROLINAS, LLC • PROGRESS ENERGY, INC. • CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY
CAROLINAS, INC. • FLORIDA POWER CORPORATION d/b/a PROGRESS ENERY FLORIDA, INC. • DUKE ENERGY OHIO, INC. • DUKE ENERGY INDIANA, INC.
lower building elevations, of which Zapata estimated costs of approximately
$2.44 billion with a project duration of 60 months, and; (iv) a “worst case”
scenario, assuming Progress Energy Florida performed the more limited scope
of work, and at the conclusion of that work, additional damage occurred in
the dome and in the lower elevations, which forced replacement of each, of
which Zapata estimated costs of $3.43 billion with a project duration of 96
months. The principal difference between Zapata’s estimate and Progress
Energy Florida’s previous estimate appears to be due to the respective levels of
contingencies included by each party, including higher project risk and longer
project duration. Progress Energy Florida has fi led a copy of the Zapata report
with the FPSC and with the NRC. The FPSC held a status conference on October
30, 2012 to discuss Duke Energy’s analysis of the Zapata report.
On February 5, 2013, following the completion of a comprehensive
analysis, Duke Energy announced its intention to retire Crystal River Unit 3.
Duke Energy concluded that it did not have a high degree of confi dence
that repair could be successfully completed and licensed within estimated
costs and schedule, and that it was in the best interests of Progress Energy
Florida’s customers and joint owners and Duke Energy’s investors to retire
the unit. Progress Energy Florida developed initial estimates of the cost to
decommission the plant during its analysis of whether to repair or retire Crystal
River Unit 3. With the fi nal decision to retire, Progress Energy Florida is working
to develop a comprehensive decommissioning plan, which will evaluate
various decommissioning options and costs associated with each option. The
plan will determine resource needs as well as the scope, schedule and other
elements of decommissioning. Progress Energy Florida intends to use a safe
storage (SAFSTOR) option for decommissioning. Generally, SAFSTOR involves
placing the facility into a safe storage confi guration, requiring limited staffi ng to
monitor plant conditions, until the eventual dismantling and decontamination
activities occur, usually in 40 to 60 years. This decommissioning approach is
currently utilized at a number of retired domestic nuclear power plants and is
one of three generally accepted approaches to decommissioning required by
the NRC. Once an updated site specifi c decommissioning study is completed
it will be fi led with the FPSC. As part of the evaluation of repairing Crystal
River Unit 3, initial estimates of the cost to decommission the plant under the
SAFSTOR option were developed which resulted in an estimate in 2011 dollars
of $989 million. See Note 9 for additional information. Additional specifi cs about
the decommissioning plan are being developed.
Progress Energy Florida maintains insurance coverage against
incremental costs of replacement power resulting from prolonged accidental
outages at Crystal River Unit 3 through NEIL. NEIL provides insurance coverage
for repair costs for covered events, as well as the cost of replacement power
of up to $490 million per event when the unit is out of service as a result of
these events. Actual replacement power costs have exceeded the insurance
coverage. Progress Energy Florida also maintains insurance coverage through
NEIL’s accidental property damage program, which provides insurance coverage
up to $2.25 billion with a $10 million deductible per claim.
Throughout the duration of the Crystal River Unit 3 outage, Progress
Energy Florida worked with NEIL for recovery of applicable repair costs and
associated replacement power costs. NEIL has made payments on the fi rst
delamination; however, NEIL has withheld payment of approximately $70 million
of replacement power cost claims and repair cost claims related to the fi rst
delamination event. NEIL had not provided a written coverage decision for either
delamination and no payments were made on the second delamination and no
replacement power reimbursements were made by NEIL since May 2011. These
considerations led Progress Energy Florida to conclude, in the second quarter of
2012, that it was not probable that NEIL would voluntarily pay the full coverage
amounts that Progress Energy Florida believes them to owe under the applicable
insurance policies. Consistent with the terms and procedures under the
insurance coverage with NEIL, Progress Energy Florida agreed to non-binding
mediation prior to commencing any formal dispute resolution. On February 5,
2013, Progress Energy Florida announced it and NEIL had accepted the
mediator’s proposal whereby NEIL will pay Progress Energy Florida an additional
$530 million. Along with the $305 million which NEIL previously paid, Progress
Energy Florida will receive a total of $835 million in insurance proceeds.
The following table summarizes the Crystal River Unit 3 replacement
power and repair costs and recovery through December 31, 2012.
(in millions)
Replacement
Power Costs
Repair
Costs Total
Spent to date $ 614 $ 338 $ 952
NEIL proceeds received to date (162) (143) (305)
Balance for recovery(a) $ 452 $ 195 $ 647
(a) The portion of replacement power costs that has not been previously recovered from retail customers is
classifi ed within Regulatory assets on Duke Energy’s Consolidated Balance Sheets and Progress Energy
Florida’s Balance Sheet as of December 31, 2012. Also, the $195 million of repair costs are classifi ed within
Regulatory assets on Duke Energy’s Consolidated Balance Sheets and Progress Energy Florida’s Balance Sheets
as of December 31, 2012.
As a result of the 2012 FPSC Settlement Agreement, Progress Energy
Florida will be permitted to recover prudently incurred fuel and purchased
power costs through its fuel clause without regard for the absence of Crystal
River Unit 3 for the period from the beginning of the Crystal River Unit 3 outage
through December 31, 2016.
In accordance with the terms of the 2012 FPSC Settlement Agreement,
with consumer representatives and approved by the FPSC, Progress Energy
Florida retained the sole discretion to retire Crystal River Unit 3. Progress Energy
Florida expects that the FPSC will review the prudence of the retirement decision
in Phase 2 of the Crystal River Unit 3 delamination regulatory docket. Progress Energy
Florida has also asked the FPSC to review the mediated resolution of insurance
claims with NEIL as part of Phase 3 of this regulatory docket. Phase 2 and Phase 3
hearings have been tentatively scheduled to begin on June 19, 2013.
Progress Energy Florida did not begin the repair of Crystal River Unit 3
prior to December 31, 2012. Consistent with the 2012 FPSC Settlement
Agreement regarding the timing of commencement of repairs, Progress Energy
Florida recorded a Regulatory liability of $100 million in the third quarter of 2012
related to replacement power obligations. This amount is included within fuel
used in electric generation and purchased power in Progress Energy Florida’s
and Progress Energy’s Statements of Operations and Comprehensive Income for
the year ended December 31, 2012. Progress Energy Florida will refund this
replacement power liability on a pro rata basis based on the in-service date of
up to $40 million in 2015 and $60 million in 2016. This amount is refl ected as
part of the purchase price allocation of the merger with Progress Energy in Duke
Energy’s Consolidated Financial Statements.
Progress Energy Florida also retained sole discretion to retire the unit
without challenge from the parties to the agreement. As a result, Progress
Energy Florida will be allowed to recover all remaining Crystal River Unit 3
investments and to earn a return on the Crystal River Unit 3 investments set
at its current authorized overall cost of capital, adjusted to refl ect a return on
equity set at 70 percent of the current FPSC authorized return on equity, no
earlier than the fi rst billing cycle of January 2017.
In conjunction with the decision to retire Crystal River Unit 3, Progress
Energy Florida reclassifi ed all Crystal River Unit 3 investments, including
property, plant and equipment; nuclear fuel; inventory; and deferred assets to
a regulatory asset account. At December 31, 2012, Progress Energy Florida had
$1,637 million of net investment in Crystal River Unit 3 recorded in Regulatory