Progress Energy 2004 Annual Report Download - page 68

66
Notes to Consolidated Financial Statements
compensation expense under SFAS No. 123R for all
awards it grants after July 1, 2005, and it will record
compensation expense (as previous awards continue to
vest) for the unvested portion of previously granted
awards that remain outstanding at July 1, 2005. In 2004,
the Company made the decision to cease granting stock
options and intends to replace that compensation
program with other programs. Therefore, the amount of
stock option expense expected to be recorded in 2005 is
below the amount that would have been recorded if the
stock option program had continued. The Company
expects to record approximately $3 million of pre-tax
expense for stock options in 2005.
PROPOSED FASB INTERPRETATION OF SFAS NO. 109,
“ACCOUNTING FOR INCOME TAXES”
In July 2004, the FASB stated that it plans to issue an
exposure draft of a proposed interpretation of SFAS No.
109, “Accounting for Income Taxes” (SFAS No. 109), that
would address the accounting for uncertain tax
positions. The FASB has indicated that the interpretation
would require that uncertain tax benefits be probable of
being sustained in order to record such benefits in the
consolidated financial statements. The exposure draft is
expected to be issued in the first quarter of 2005. The
Company cannot predict what actions the FASB will take
or how any such actions might ultimately affect the
Company’s financial position or results of operations, but
such changes could have a material impact on the
Company’s evaluation and recognition of Section 29 tax
credits (See Note 23E).
3. HURRICANE-RELATED COSTS
Hurricanes Charley, Frances, Ivan and Jeanne struck
significant portions of the Company’s service territories
during the third quarter of 2004, significantly impacting
PEF’s territory. As of December 31, 2004, restoration of the
Company’s systems from hurricane-related damage was
estimated at $398 million. PEC incurred restoration costs
of $13 million, of which $12 million was charged to
operation and maintenance expense and $1 million was
charged to capital expenditures. PEF had estimated total
costs of $385 million, of which $47 million was charged to
capital expenditures, and $338 million was charged to the
storm damage reserve pursuant to a regulatory order.
In accordance with a regulatory order, PEF accrues
$6 million annually to a storm damage reserve and is
allowed to defer losses in excess of the accumulated
reserve for major storms. Under the order, the storm
reserve is charged with operation and maintenance
expenses related to storm restoration and with capital
expenditures related to storm restoration that are in
excess of expenditures assuming normal operating
conditions. As of December 31, 2004, $291 million of
hurricane restoration costs in excess of the previously
recorded storm reserve of $47 million had been classified
as a regulatory asset recognizing the probable
recoverability of these costs. On November 2, 2004, PEF
filed a petition with the FPSC to recover $252 million of
storm costs plus interest from retail ratepayers over a
two-year period. Storm reserve costs of $13 million were
attributable to wholesale customers. The Company has
received approval from the FERC to amortize these costs
consistent with recovery of such amounts in wholesale
rates. PEF continues to review the restoration cost
invoices received. Given that not all invoices have been
received as of December 31, 2004, PEF will update its
petition with the FPSC upon receipt and audit of all actual
charges incurred. Hearings on PEF’s petition for recovery
of $252 million of storm costs filed with the FPSC are
scheduled to begin on March 30, 2005.
On November 17, 2004, the Citizens of the State of Florida,
by and through Harold McLean, Public Counsel, and the
Florida Industrial Power Users Group (FIPUG),
(collectively, Joint Movants), filed a Motion to Dismiss
PEF’s petition to recover the $252 million in storm costs.
On November 24, 2004, PEF responded in opposition to
the motion, which was also the FPSC staff’s position in its
recommendation to the Commission on December 21,
2004, that it should deny the Motion to Dismiss. On
January 4, 2005, the Commission ruled in favor of PEF and
denied Joint Movant’s Motion to Dismiss.
PEF’s January 2005 notice to the FPSC of its intent to file
for an increase in its base rates effective January 1, 2006,
anticipates the need to replenish the depleted storm
reserve balance and adjust the annual $6 million accrual
in light of recent storm history to restore the reserve to
an adequate level over a reasonable time period (See
Note 8C).
PEC does not have an ongoing regulatory mechanism to
recover storm costs; therefore, hurricane restoration
costs recorded in the third quarter of 2004 were charged
to operations and maintenance expenses or capital
expenditures based on the nature of the work performed.
In connection with other storms, PEC has previously
sought and received permission from the NCUC and the
SCPSC to defer storm expenses and amortize them over
a five-year period. PEC did not seek deferral of 2004 storm
costs from the NCUC (See Note 8B).