Progress Energy 2004 Annual Report Download - page 64

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The aggregate maximum loss exposure at December 31, 2004,
that the Company could be required to record in its
income statement as a result of these arrangements
totals approximately $38 million. The creditors of these
variable interest entities do not have recourse to the
general credit of the Company in excess of the
aggregate maximum loss exposure.
D. Significant Accounting Policies
USE OF ESTIMATES AND ASSUMPTIONS
In preparing consolidated financial statements that
conform with GAAP, management must make estimates
and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the consolidated financial
statements and amounts of revenues and expenses
reflected during the reporting period. Actual results
could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes electric utility revenues as
service is rendered to customers. Operating revenues
include unbilled electric utility revenues earned when
service has been delivered but not billed by the end of
the accounting period. Diversified business revenues
are generally recognized at the time products are
shipped or as services are rendered. Leasing activities
are accounted for in accordance with SFAS No. 13,
“Accounting for Leases.” Revenues related to design
and construction of wireless infrastructure are
recognized upon completion of services for each
completed phase of design and construction. Revenues
from the sale of oil and gas production are recognized
when title passes, net of royalties.
FUEL COST DEFERRALS
Fuel expense includes fuel costs or recoveries that are
deferred through fuel clauses established by the electric
utilities’ regulators. These clauses allow the utilities to
recover fuel costs and portions of purchased power
costs through surcharges on customer rates. These
deferred fuel costs are recognized in revenues and fuel
expenses as they are billable to customers.
EXCISE TAXES
PEC and PEF collect from customers certain excise taxes
levied by the state or local government upon the
customers. PEC and PEF account for excise taxes on a
gross basis. For the years ended December 31, 2004, 2003
and 2002, gross receipts tax, franchise taxes and other
excise taxes of approximately $240 million, $217 million
and $212 million, respectively, are included in utility
revenues and taxes other than on income in the
Consolidated Statements of Income.
STOCK-BASED COMPENSATION
The Company measures compensation expense for stock
options as the difference between the market price of its
common stock and the exercise price of the option at the
grant date. The exercise price at which options are
granted by the Company equals the market price at the
grant date, and accordingly, no compensation expense
has been recognized for stock option grants. For
purposes of the pro forma disclosures required by SFAS
No. 148, “Accounting for Stock-Based Compensation –
Transition and Disclosure – An Amendment of FASB
Statement No. 123” (SFAS No. 148), the estimated fair
value of the Company’s stock options is amortized to
expense over the options’ vesting period. The following
table illustrates the effect on net income and earnings
per share if the fair value method had been applied to all
outstanding and unvested awards in each period:
See Note 2 for a discussion of newly issued accounting
guidance related to stock-based compensation.
UTILITY PLANT
Utility plant in service is stated at historical cost less
accumulated depreciation. The Company capitalizes all
construction-related direct labor and material costs of
units of property as well as indirect construction costs.
Certain costs that would otherwise not be capitalized
under GAAP are capitalized in accordance with
regulatory treatment. The cost of renewals and
betterments is also capitalized. Maintenance and repairs
of property (including planned major maintenance
activities), and replacements and renewals of items
determined to be less than units of property, are charged
to maintenance expense as incurred, with the exception
of nuclear outages at PEF. Pursuant to a regulatory order,
62
Notes to Consolidated Financial Statements
(in millions except per share data)
2004 2003 2002
Net income, as reported $759 $782 $528
Deduct: Total stock option expense
determined under fair value method for
all awards, net of related tax effects 10 11 8
Pro forma net income $749 $771 $520
Earnings per share
Basic – as reported $3.13 $3.30 $2.43
Basic – pro forma $3.09 $3.25 $2.40
Diluted – as reported $3.12 $3.28 $2.42
Diluted – pro forma $3.08 $3.24 $2.39