Progress Energy 2004 Annual Report Download - page 66

incurred in connection with the acquisition, exploration
and development of oil and gas reserves are capitalized.
These capitalized costs include the costs of all unproved
properties and internal costs directly related to
acquisition and exploration activities. The amortization
base also includes the estimated future cost to develop
proved reserves. Except for costs of unproved properties
and major development projects in progress, all costs are
amortized using the units-of-production method on a
country by country basis over the life of the Company’s
proved reserves. Accordingly, all property acquisition,
exploration, and development costs of proved oil and gas
properties, including the costs of abandoned properties,
dry holes, geophysical costs and annual lease rentals are
capitalized as incurred, including internal costs directly
attributable to such activities. Related interest expense
incurred during property development activities is
capitalized as a cost of such activity. Net capitalized
costs of unproved property are reclassified as proved
property and well costs when related proved reserves
are found. Costs to operate and maintain wells and field
equipment are expensed as incurred. In accordance with
Rule 4-10 of Regulation S-X, sales or other dispositions of
oil and gas properties are accounted for as adjustments
to capitalized costs, with no gain or loss recorded unless
certain significance tests are met.
GOODWILL AND INTANGIBLE ASSETS
Goodwill is subject to at least an annual assessment for
impairment by applying a two-step fair-value-based test.
This assessment could result in periodic impairment
charges. Intangible assets are being amortized based on
the economic benefit of their respective lives.
UNAMORTIZED DEBT PREMIUMS, DISCOUNTS
AND EXPENSES
Long-term debt premiums, discounts and issuance
expenses are amortized over the terms of the debt
issues. Any expenses or call premiums associated with
the reacquisition of debt obligations by the utilities are
amortized over the applicable life using the straight-line
method consistent with ratemaking treatment (See
Note 8A).
INCOME TAXES
The Company and its affiliates file a consolidated federal
income tax return. Deferred income taxes have been
provided for temporary differences. These occur when
there are differences between the book and tax carrying
amounts of assets and liabilities. Investment tax credits
related to regulated operations have been deferred and
are being amortized over the estimated service life of the
related properties. Credits for the production and sale of
synthetic fuel are deferred as AMT credits to the extent
they cannot be or have not been utilized in the annual
consolidated federal income tax returns, and are
included in income tax expense (benefit) in the
Consolidated Statements of Income.
DERIVATIVES
The Company accounts for derivative instruments in
accordance with SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (SFAS
No. 133), as amended by SFAS No. 138 and SFAS No. 149.
SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as assets
or liabilities in the balance sheet and measure those
instruments at fair value, unless the derivatives meet the
SFAS No. 133 criteria for normal purchases or normal
sales and are designated as such. The Company
generally designates derivative instruments as normal
purchases or normal sales whenever the SFAS No. 133
criteria are met. If normal purchase or normal sale
criteria are not met, the Company will generally
designate the derivative instruments as cash flow or fair
value hedges if the related SFAS No. 133 hedge criteria
are met. During 2003, the FASB reconsidered an
interpretation of SFAS No. 133. See Note 18 for the effect
of the interpretation and additional information regarding
risk management activities and derivative transactions.
ENVIRONMENTAL
As discussed in Note 22, the Company accrues
environmental remediation liabilities when the criteria for
SFAS No. 5, “Accounting for Contingencies” (SFAS No.
5), have been met. Environmental expenditures that
relate to an existing condition caused by past operations
and that have no future economic benefits are expensed.
Accruals for estimated losses from environmental
remediation obligations generally are recognized no later
than completion of the remedial feasibility study. Such
accruals are adjusted as additional information develops
or circumstances change. Costs of future expenditures
for environmental remediation obligations are not
discounted to their present value. Recoveries of
environmental remediation costs from other parties are
recognized when their receipt is deemed probable.
Environmental expenditures that have future economic
benefits are capitalized in accordance with the
Company’s asset capitalization policy.
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Notes to Consolidated Financial Statements