Progress Energy 2008 Annual Report Download - page 24

MANAGEMENT’S DISCUSSION AND ANALYSIS
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selection of appropriate discount and growth rates. These
underlying assumptions and estimates are made as of a
point in time; subsequent changes, particularly changes
in management’s estimate of future cash flows and the
discount rates, interest rates, growth rates or the timing
of market equilibrium, could result in a future impairment
charge to goodwill.
We monitor for events or circumstances that may indicate
an interim goodwill impairment test is necessary. We have
considered the distress in the financial markets during
2008 and the impact on the fair value of our reporting
units and concluded an interim goodwill impairment test
was not necessary.
Unbilled Revenue
As discussed in Note 1, we recognize electric utility
revenues as service is rendered to customers. Operating
revenues included unbilled electric utilities base revenues
earned when service has been delivered but not billed by
the end of the accounting period. The determination of
electricity sales to individual customers is based on meter
readings, which occur on a systematic basis through the
month. At the end of each month, electricity delivered to
customers since the last meter reading is estimated and
a corresponding accrual for the electric utility revenues
associated with unbilled sales is recognized. Unbilled
revenues are estimated by applying a weighted average
revenue/kWh for all customer classes to the number of
estimated kWh delivered but not billed. The calculation
of unbilled revenue is affected by factors that include
fluctuations in energy demand for the unbilled period,
seasonality, weather, customer usage patterns, price in
effect for each customer class and estimated transmission
and distribution line losses. At December 31, 2008 and 2007,
amounts recorded as receivables on the Consolidated
Balance Sheets related to unbilled revenues were
$182 million and $175 million, respectively.
Income Taxes
Judgment and the use of estimates are required in
developing the provision for income taxes and reporting
of tax-related assets and liabilities. As discussed in
Note 14, we account for the effects of income taxes in
accordance with SFAS No. 109, “Accounting for Income
Taxes” (SFAS No. 109), and FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (FIN 48).
Under SFAS No. 109, deferred income tax assets and
liabilities are provided, representing the future effects
on income taxes for temporary differences between
the bases of assets and liabilities for financial reporting
and tax purposes. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary
differences are expected to be recovered or settled. The
probability of realizing deferred tax assets is based on
forecasts of future taxable income and the availability
of tax planning strategies that can be implemented, if
necessary, to realize deferred tax assets. We establish a
valuation allowance when it is more likely than not that all,
or a portion of, a deferred tax asset will not be realized.
The interpretation of tax laws involves uncertainty.
Ultimate resolution of income tax matters may result
in favorable or unfavorable impacts to net income and
cash flows, and adjustments to tax-related assets and
liabilities could be material. In accordance with FIN 48, the
uncertainty and judgment involved in the determination
and filing of income taxes are accounted for by prescribing
a minimum recognition threshold that a tax position is
required to meet before being recognized in the financial
statements. A two-step process is required for the
application of FIN 48: recognition of the tax benefit based
on a “more-likely-than-not” threshold, and measurement
of the largest amount of tax benefit that is greater than
50 percent likely of being realized upon ultimate settlement
with the taxing authority.
Pension Costs
As discussed in Note 16A, we maintain qualified
noncontributory defined benefit retirement (pension)
plans. We also have supplementary defined benefit
pension plans that provide benefits to higher-level
employees. Our reported costs are dependent on
numerous factors resulting from actual plan experience
and assumptions of future experience. For example, such
costs are impacted by employee demographics, changes
made to plan provisions, actual plan asset returns and
key actuarial assumptions, such as expected long-term
rates of return on plan assets and discount rates used in
determining benefit obligations and annual costs.
Due to a slight increase in the market interest rates for
high-quality (AAA/AA) debt securities, which are used
as the benchmark for setting the discount rate used to
calculate the present value of future benefit payments,
we increased the discount rate to approximately 6.30%
at December 31, 2008, from approximately 6.20% at
December 31, 2007, which will not significantly affect
2009 pension costs. Our discount rates are selected
based on a plan-by-plan study, which matches our
projected benefit payments to a high-quality corporate
yield curve. Consistent with general market conditions,
our plan assets performed poorly in 2008 with returns of