Progress Energy 2007 Annual Report Download - page 26

MANAGEMENT’S DISCUSSION AND ANALYSIS
24
not have a material impact on earnings. The difference
between fuel and purchased power costs incurred and
associated fuel revenues that are subject to recovery
is deferred for future collection from or refund to
customers.
Fuel and purchased power expenses were $1.683 billion for
2007, which represents a $176 million increase compared
to 2006. Fuel used in electric generation increased
$208 million to $1.381 billion compared to 2006. This
increase is primarily due to a $156 million increase in fuel
used in generation and a $54 million increase in deferred
fuel expense. Fuel used in generation increased primarily
due to a change in generation mix as the percentage of
generation supplied by natural gas increased in response
to plant outages and higher system requirements driven
by favorable weather. Deferred fuel expense increased
primarily due to the collection of fuel costs from customers
that had been previously under-recovered. Purchased
power expenses decreased $32 million to $302 million
compared to prior year. The decrease in purchased
power is due to lower cogeneration as a result of contract
changes with one of PEC’s co-generators.
Fuel and purchased power expenses were $1.507 billion
for 2006, which represents a $117 million increase
compared to 2005. Fuel used in electric generation
increased $137 million to $1.173 billion compared to 2005.
This increase is due to a $141 million increase in deferred
fuel expense partially offset by a $5 million decrease in
fuel used in generation. Deferred fuel expense increased
primarily due to the collection of fuel costs from customers
that had been previously under-recovered. Fuel used in
generation decreased primarily due to lower system
requirements. Purchased power expenses decreased
$20 million to $334 million compared to prior year. The
decrease in purchased power is due primarily to a change
in volume as a result of lower system requirements.
Operation and Maintenance
O&M expenses were $1.024 billion for 2007, which
represents a $94 million increase compared to 2006.
This increase is driven primarily by the $49 million higher
plant outage and maintenance costs (partially due to
three nuclear outages in the current year compared to
only two in the prior year) and $29 million due to higher
employee benefit costs. The higher employee benefit
costs are primarily due to current year changes in
equity compensation plans and higher relative employee
incentive goal achievement in 2007 compared to 2006. We
do not expect the increase related to changes in equity
compensation plans to continue in 2008.
O&M expenses were $930 million for 2006, which
represents an $11 million decrease compared to 2005.
This decrease is driven primarily by the $55 million impact
of postretirement and severance expenses incurred in
2005 related to the cost-management initiative partially
offset by $30 million of higher 2006 outage expenses at
nuclear plants and capital project write-offs of $16 million
in 2006.
Depreciation and Amortization
Depreciation and amortization expense was $519 million
for 2007, which represents a $52 million decrease
compared to 2006. This decrease is primarily attributable
to a $106 million decrease in the Clean Smokestacks Act
amortization, partially offset by $37 million additional
depreciation associated with the accelerated cost-
recovery program for nuclear generating assets
(See Note 7B), $11 million charge to reduce PEC’s
GridSouth Transco, LLC (GridSouth) regional transmission
organization (RTO) development costs (See Note 7D)
and the $7 million impact of depreciable asset base
increases. We recorded $34 million of Clean Smokestacks
Act amortization during 2007 compared to $140 million in
2006 (See Note 7B). We recorded $37 million of additional
depreciation associated with the accelerated cost-
recovery program for nuclear generating assets during
2007 compared to none in 2006.
Depreciation and amortization expense was $571 million
for 2006, which represents a $10 million increase
compared to 2005. This increase is primarily attributable
to the $12 million impact of depreciable asset base
increases and $3 million of deferred environmental cost
amortization partially offset by a $7 million decrease in
the Clean Smokestacks Act amortization. We recorded
$140 million of Clean Smokestacks Act amortization
during 2006 compared to $147 million in 2005.
Taxes Other than on Income
Taxes other than on income were $192 million, $191 million
and $178 million for 2007, 2006 and 2005, respectively.
The $13 million increase in 2006 compared to 2005 is
primarily due to a $7 million increase in property taxes
and a $6 million increase in gross receipts taxes related
to higher revenue. Gross receipts taxes are collected
from customers and recorded as revenues and then
remitted to the applicable taxing authority. Therefore,
these taxes have no material impact on earnings.