Duke Energy 2012 Annual Report Download - page 156

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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.
assets on its Consolidated Balance Sheet. These amounts are refl ected in the
Regulatory Assets and Liabilities tables presented previously in this disclosure,
of which $1,592 million is refl ected as Retired generation facilities, $25 million
as Nuclear deferral and $20 million as an offset to Removal costs. Progress
Energy Florida recorded $192 million of impairment and other charges related to
the wholesale portion of Crystal River Unit 3 investments, which are not covered
by the 2012 FSPC Settlement Agreement, and other provisions. The signifi cant
majority of this amount is recorded in Impairment charges on Progress Energy
Florida’s and Progress Energy’s Consolidated Statements of Operations and
Comprehensive Income for the year ended December 31, 2012. 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 (See Note 2).
In accordance with the 2012 FPSC Settlement Agreement, NEIL proceeds
received allocable to retail customers will be applied fi rst to replacement power
costs incurred after December 31, 2012 through December 31, 2016, with the
remainder used to write down the remaining Crystal River Unit 3 investments.
Progress Energy Florida believes the decision to retire Crystal River Unit 3,
the actions taken and costs incurred in response to the Crystal River Unit 3
delamination have been prudent and, accordingly, considers replacement power
and capital costs not recoverable through insurance to be recoverable through
its fuel cost-recovery clause or base rates. Additional replacement power costs
and exit cost to wind down the operations at the plant and decommission
Crystal River Unit 3 could be material. Retirement of the plant could impact
funding obligations associated with Progress Energy Florida’s nuclear
decommissioning trust fund.
Progress Energy Florida is a party to a master participation agreement
and other related agreements with the joint owners of Crystal River Unit 3 which
convey certain rights and obligations on Progress Energy Florida and the joint
owners. In December 2012, Progress Energy Florida reached an agreement with
one group of joint owners related to all Crystal River Unit 3 matters.
Progress Energy Florida cannot predict the outcome of matters described
above.
Customer Rate Matters.
In conjunction with the 2012 FPSC Settlement Agreement, Progress
Energy Florida will maintain base rates at the current levels through the last
billing cycle of December 2016, except as described as follows. The agreement
provides for a $150 million increase in revenue requirements effective with
the fi rst billing cycle of January 2013, while maintaining the current return on
equity range of 9.5 percent to 11.5 percent. Additionally, costs associated with
Crystal River Unit 3 investments will be removed from retail rate base effective
with the fi rst billing cycle of January 2013. Progress Energy Florida will accrue,
for future rate-setting purposes, a carrying charge on the Crystal River Unit 3
investment until the Crystal River Unit 3 regulatory asset is recovered in base
rates beginning with the fi rst billing cycle of January 2017. If Progress Energy
Florida’s retail base rate earnings fall below the return on equity range, as
reported on a FPSC-adjusted or pro-forma basis on a Progress Energy Florida
monthly earnings surveillance report, Progress Energy Florida may petition the
FPSC to amend its base rates during the term of the agreement. Refer to the
discussion above regarding recovery of Crystal River Unit 3 investments if
the plant is retired.
Progress Energy Florida will refund $288 million to retail customers
through its fuel clause. Progress Energy Florida will refund $129 million in each
of 2013 and 2014, and an additional $10 million annually to residential and
small commercial customers in 2014, 2015 and 2016. At December 31, 2011,
a regulatory liability was established for the $288 million to be refunded in
future periods. In 2011, the corresponding charge was recorded as a reduction
of operating revenues in Progress Energy Florida’s and Progress Energy’s
Consolidated Statements of Operations and Comprehensive Income. As discussed
above, Progress Energy Florida also recorded a Regulatory liability of $100 million in
the third quarter of 2012 related to replacement power obligations.
Levy Nuclear Station.
On July 30, 2008, Progress Energy Florida fi led its COL application with
the NRC for two Westinghouse AP1000 reactors at its proposed Levy Nuclear
Station (Levy), which the NRC docketed on October 6, 2008. Various parties
fi led a joint petition to intervene in the Levy COL application. On October 31 and
November 1, 2012, the Atomic Safety and Licensing Board held an evidentiary
hearing on portions of the intervention petitions. A decision is expected in
March 2013. In 2008, the FPSC granted Progress Energy Florida’s petition for an
affi rmative Determination of Need and related orders requesting cost recovery
under Florida’s nuclear cost-recovery rule for Levy, together with the associated
facilities, including transmission lines and substation facilities.
On April 30, 2012, as part of its annual nuclear cost recovery fi ling, Progress
Energy Florida updated the Levy project schedule and cost. Due to lower-than-
projected customer demand, the lingering economic slowdown, uncertainty
regarding potential carbon regulation and current low natural gas prices, Progress
Energy Florida has shifted the in-service date for the fi rst Levy unit to 2024, with
the second unit following 18 months later. The revised schedule is consistent
with the recovery approach included in the 2012 FPSC Settlement Agreement.
Although the scope and overnight cost for Levy, including land acquisition, related
transmission work and other required investments, remain essentially unchanged,
the shift in schedule will increase escalation and carrying costs and raise the total
estimated project cost to between $19 billion and $24 billion.
Along with the FPSC’s annual prudence reviews, Progress Energy Florida
will continue to evaluate the project on an ongoing basis based on certain
criteria, including, but not limited to, cost; potential carbon regulation; fossil
fuel prices; the benefi ts of fuel diversifi cation; public, regulatory and political
support; adequate fi nancial cost-recovery mechanisms; appropriate levels of
joint owner participation; customer rate impacts; project feasibility; DSM and
EE programs; and availability and terms of capital fi nancing. Taking into account
these criteria, Levy is considered to be Progress Energy Florida’s preferred
baseload generation option.
Under the terms of the 2012 FSPC Settlement Agreement, Progress
Energy Florida began residential cost-recovery of its proposed Levy Nuclear
Station effective in the fi rst billing cycle of January 2013 at the fi xed rates
contained in the settlement and continuing for a fi ve-year period, with true-up
of any actual costs not recovered during the 5-year period occurring in the fi nal
year. Progress Energy Florida will not fi le for recovery of any new Levy costs
that were not addressed in the 2012 FSPC Settlement Agreement before March
1, 2017 and will not begin recovering those costs from customers before the
fi rst billing cycle of January, 2018, unless otherwise agreed to by the parties to
the agreement. This amount is intended to recover the estimated retail project
costs to date plus costs necessary to obtain the COL and any engineering,
procurement and construction cancellation costs, if Progress Energy Florida
ultimately chooses to cancel that contract. In addition, the consumer parties
will not oppose Progress Energy Florida continuing to pursue a COL for
Levy. The 2012 FSPC Settlement Agreement also provides that Progress
Energy Florida will treat the allocated wholesale cost of Levy (approximately
$68 million) as a retail regulatory asset and include this asset as a component
of rate base and amortization expense for regulatory reporting. Progress Energy
Florida will have the discretion to accelerate and/or suspend such amortization
in full or in part provided that it amortizes all of the regulatory asset by
December 31, 2016.