Progress Energy 2010 Annual Report Download - page 20

16
MANAGEMENT’S DISCUSSION AND ANALYSIS
The decrease in retail kWh sales in 2009 was primarily
due to a decrease in average usage per retail customer
due to economic conditions in the United States. PEC’s
industrial kWh sales decreased 9.0 percent from 2008,
primarily due to reductions in textile manufacturing in the
Carolinas as a result of global competition and domestic
consolidation as well as a downturn in the lumber and
building materials segment as a result of declines in
construction. Wholesale kWh sales decreased for 2009
primarily due to decreased excess generation sales
resulting from unfavorable market dynamics.
EXPENSES
Fuel and Purchased Power
Fuel and purchased power costs represent the costs of
generation, which include fuel purchases for generation
and energy purchased in the market to meet customer
load. Fuel and a portion of purchased power expenses
are recovered primarily through cost-recovery clauses,
and as such, changes in these expenses do 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 and is
recorded as deferred fuel expense, which is included
in fuel used in electric generation on the Consolidated
Statements of Income.
Fuel and purchased power expenses totaled $1.988 billion
for 2010, which represents a $79 million increase
compared to 2009. This increase was primarily due to
the $324 million impact of higher system requirements
resulting from favorable weather and the impact of
nuclear plant outages on PEC’s generation mix, partially
offset by $151 million decreased current year fuel costs
driven by lower coal and gas prices and $104 million lower
deferred fuel expense. The decrease in deferred fuel
expense was primarily due to higher fuel and purchased
power expenses and lower fuel rates in North Carolina.
Fuel and purchased power expenses totaled $1.909 billion
for 2009, which represents a $217 million increase
compared to 2008. This increase was primarily due
to $248 million higher deferred fuel expense and the
$86 million net impact of higher fuel costs driven by
higher coal prices, partially offset by $128 million impact
of lower system requirements. The increase in deferred
fuel expense was primarily due to the implementation of
higher fuel rates in North Carolina.
Operation and Maintenance
O&M expense was $1.158 billion for 2010, which
represents an $86 million increase compared to 2009.
This increase was primarily due to $78 million higher
nuclear plant outage and maintenance costs, $11 million
higher employee benefits expense driven by revised
actuarial estimates, $7 million higher emission expense
primarily due to sales of nitrogen oxides (NOx) emission
allowances in the prior year and the $2 million impairment
of other assets, partially offset by $27 million lower coal
plant retirement charges. The higher nuclear plant outage
and maintenance costs are primarily due to three nuclear
refueling and maintenance outages in 2010 compared
to two in 2009 as well as extended outages and more
emergent work in 2010 as compared to 2009. Management
does฀not฀consider฀impairments฀and฀charges฀recognized฀
for the retirement of generating units prior to the end of
their estimated useful lives to be representative of PEC’s
fundamental core earnings. Therefore, the impacts of
these items are excluded in computing PEC’s Ongoing
Earnings. Certain O&M expense such as the cost of
reagents for emission control equipment and wheeling
charges are recoverable through cost-recovery clauses.
In aggregate, O&M expenses primarily recoverable
through base rates increased $69 million compared to
the same period in 2009.
O&M expense was $1.072 billion for 2009, which
represents a $42 million increase compared to 2008.
This increase was primarily due to coal plant retirement
charges of $28 million, higher employee benefits expense
of $12 million and storm costs of $9 million, partially offset
by lower emission allowance expense of $13 million
resulting from lower system requirements, changes
in generation mix and sales of NOx allowances. As
previously discussed, coal plant retirement charges
are excluded in computing PEC’s Ongoing Earnings.
Also, as previously discussed, certain O&M expenses
are recoverable through cost-recovery clauses. In
aggregate, O&M expenses primarily recoverable through
base rates increased $29 million compared to the same
period in 2008.
Depreciation, Amortization and Accretion
Depreciation,฀ amortization฀ and฀ accretion฀ expense฀
was $479 million, $470 million and $518 million for 2010,
2009 and 2008, respectively. The $48 million decrease
in 2009 compared to 2008 was primarily attributable
to the $52 million of depreciation associated with
the accelerated cost-recovery program for nuclear
generating฀assets฀recognized฀in฀2008฀and฀the฀$15฀million฀