Progress Energy 2010 Annual Report Download - page 101

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Progress Energy Annual Report 2010
The determination of the fair values of pension and
postretirement plan assets incorporates various factors
required under GAAP. The assets of the plan include
exchange traded securities (classified within Level 1) and
other marketable debt and equity securities, most of which
are valued using Level 1 inputs for similar instruments,
and are classified within Level 2 investments.
Most over-the-counter investments are valued using
observable inputs for similar instruments or prices from
similar transactions and are classified as Level 2. Over-
the-counter investments where significant unobservable
inputs are used, such as financial pricing models, are
classified as Level 3 investments.
Investments in private equity are valued using observable
inputs, when available, and also include comparable
market transactions, income and cost basis valuation
techniques. The market approach includes using
comparable market transactions or values. The income
approach generally consists of the net present value of
estimated future cash flows, adjusted as appropriate for
liquidity, credit, market and/or other risk factors. Private
equity investments are classified as Level 3 investments.
Investments in commingled funds are not publically
traded, but the underlying assets held in these funds are
traded in active markets and the prices for these assets
are readily observable. Holdings in commingled funds
are classified as Level 2 investments.
Hedge funds are based primarily on the net asset values
and other financial information provided by management
of the private investment funds. Hedge funds are
classified as Level 2 if the plan is able to redeem the
investment with the investee at net asset value as of the
measurement date, or at a later date within a reasonable
period of time. Hedge funds are classified as Level 3 if the
investment cannot be redeemed at net asset value or it
cannot be determined when the fund will be redeemed.
Investments in timber are valued primarily on valuations
prepared by independent property appraisers. These
appraisals are based on cash flow analysis, current
market฀ capitalization฀ rates,฀ recent฀ comparable฀ sales฀
transactions, actual sales negotiations and bona fide
purchase offers. Inputs include the species, age, volume
and condition of timber stands growing on the land;
the location, productivity, capacity and accessibility of
the timber tracts; current and expected log prices; and
current local prices for comparable investments. Timber
investments are classified as Level 3 investments.
CONTRIBUTION AND BENEFIT PAYMENT EXPECTATIONS
In 2011, we expect to make contributions of $300 million-
$400 million directly to pension plan assets and $1 million
of discretionary contributions directly to the OPEB plan
assets. The expected benefit payments for the pension
benefit plan for 2011 through 2015 and in total for 2016
through 2020, in millions, are approximately $168, $176,
$178, $189, $193 and $1,016, respectively. The expected
benefit payments for the OPEB plan for 2011 through
2015 and in total for 2016 through 2020, in millions, are
approximately $45, $48, $51, $53, $56 and $306, respectively.
The expected benefit payments include benefit payments
directly from plan assets and benefit payments directly
from our assets. The benefit payment amounts reflect our
net cost after any participant contributions and do not
reflect reductions for expected prescription drug-related
federal subsidies. The expected federal subsidies for
2011 through 2015 and in total for 2016 through 2020,
in millions, are approximately $4, $5, $5, $6, $6 and $43,
respectively.
The Patient Protection and Affordable Care Act (PPACA)
and the related Health Care and Education Reconciliation
Act, which made various amendments to the PPACA,
were enacted in March 2010. The PPACA contains a
provision that changes the tax treatment related to a
federal subsidy available to sponsors of retiree health
benefit plans that provide a prescription drug benefit that
is at least actuarially equivalent to the benefits under
Medicare Part D. The subsidy is known as the Retiree
Drug Subsidy. Employers are not currently taxed on the
Retiree Drug Subsidy payments they receive. However,
as a result of the PPACA as amended, Retiree Drug
Subsidy payments will effectively become taxable in tax
years beginning after December 31, 2012, by requiring the
amount of the subsidy received to be offset against the
employer’s deduction for health care expenses. Under
GAAP, changes in tax law are accounted for in the period
of enactment. Accordingly, an additional tax expense of
$22฀million฀has฀been฀recognized฀ during฀ the฀ year฀ended฀
December 31, 2010.
B. Florida Progress Acquisition
During 2000, we completed our acquisition of Florida
Progress. Florida Progress’ pension and OPEB liabilities,
assets and net periodic costs are reflected in the above
information as appropriate. Certain of Florida Progress’
nonbargaining unit benefit plans were merged with our
benefit plans effective January 1, 2002.