Progress Energy 2004 Annual Report Download - page 65

PEF accrues for nuclear outage costs in advance of
scheduled outages, which occur every two years. The
cost of units of property replaced or retired, less salvage,
is charged to accumulated depreciation. Removal or
disposal costs that do not represent SFAS No. 143,
“Accounting for Asset Retirement Obligations” (SFAS No.
143), are charged to a regulatory liability.
Allowance for funds used during construction (AFUDC)
represents the estimated debt and equity costs of capital
funds necessary to finance the construction of new
regulated assets. As prescribed in the regulatory uniform
system of accounts, AFUDC is charged to the cost of the
plant. The equity funds portion of AFUDC is credited to
other income and the borrowed funds portion is credited
to interest charges.
ASSET RETIREMENT OBLIGATIONS
Effective January 1, 2003, the Company adopted the
guidance in SFAS No. 143 to account for legal obligations
associated with the retirement of certain tangible long-
lived assets. The present value of retirement costs for
which the Company has a legal obligation are recorded
as liabilities with an equivalent amount added to the
asset cost and depreciated over an appropriate period.
The liability is then accreted over time by applying an
interest method of allocation to the liability.
The adoption of this statement had no impact on the
income of the regulated entities, as the effects were
offset by the establishment of a regulatory asset and a
regulatory liability pursuant to SFAS No. 71 (See Note 8A).
The North Carolina Utilities Commission (NCUC), the
Public Service Commission of South Carolina (SCPSC)
and the Florida Public Service Commission (FPSC) issued
orders to authorize deferral of all prospective effects
related to SFAS No. 143 as a regulatory asset or liability
(See Note 8A). Therefore, SFAS No. 143 has no impact on
the income of the regulated entities.
DEPRECIATION AND AMORTIZATION – UTILITY PLANT
For financial reporting purposes, substantially all
depreciation of utility plant other than nuclear fuel is
computed on the straight-line method based on the
estimated remaining useful life of the property, adjusted
for estimated salvage (See Note 6A). Pursuant to their
rate-setting authority, the NCUC, SCPSC and FPSC can
also grant approval to accelerate or reduce depreciation
and amortization of utility assets (See Note 8).
Amortization of nuclear fuel costs is computed primarily
on the units-of-production method. In the Company’s retail
jurisdictions, provisions for nuclear decommissioning
costs are approved by the NCUC, the SCPSC and the FPSC
and are based on site-specific estimates that include the
costs for removal of all radioactive and other structures at
the site. In the wholesale jurisdictions, the provisions for
nuclear decommissioning costs are approved by the
Federal Energy Regulatory Commission (FERC).
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to
include unrestricted cash on hand, cash in banks and
temporary investments purchased with a maturity of
three months or less.
INVENTORY
The Company accounts for inventory using the average-
cost method. Inventories are valued at the lower of
average cost or market.
REGULATORY ASSETS AND LIABILITIES
The Company’s regulated operations are subject to SFAS
No. 71, which allows a regulated company to record costs
that have been or are expected to be allowed in the
ratemaking process in a period different from the period in
which the costs would be charged to expense by a
nonregulated enterprise. Accordingly, the Company
records assets and liabilities that result from the
regulated ratemaking process that would not be recorded
under GAAP for nonregulated entities. These regulatory
assets and liabilities represent expenses deferred for
future recovery from customers or obligations to be
refunded to customers and are primarily classified in the
Consolidated Balance Sheets as regulatory assets and
regulatory liabilities (See Note 8A).
DIVERSIFIED BUSINESS PROPERTY
Diversified business property is stated at cost less
accumulated depreciation. If an impairment is recognized
on an asset, the fair value becomes its new cost basis.
The costs of renewals and betterments are capitalized.
The cost of repairs and maintenance is charged to
expense as incurred. For properties other than oil and gas
properties, depreciation is computed on a straight-line
basis using the estimated useful lives disclosed in Note
6B. Depletion of mineral rights is provided on the units-of-
production method based upon the estimates of
recoverable amounts of clean mineral.
The Company uses the full-cost method to account for its
oil and gas properties. Under the full-cost method,
substantially all productive and nonproductive costs
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Progress Energy Annual Report 2004