Progress Energy 2010 Annual Report Download - page 28

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MANAGEMENT’S DISCUSSION AND ANALYSIS
values of our total utility plant, net at December 31,
2010 and 2009, was $21.240 billion and $19.733 billion,
respectively.
As discussed in Note 13, our financial assets and
liabilities are primarily comprised of derivative financial
instruments and marketable debt and equity securities
held in our nuclear decommissioning trusts. Substantially
all฀ unrealized฀ gains฀ and฀ losses฀ on฀ derivatives฀ and฀ all฀
unrealized฀gains฀and฀losses฀on฀nuclear฀decommissioning฀
trust investments are deferred as regulatory liabilities or
assets consistent with ratemaking treatment. Therefore,
the impact of fair value measurements from recurring
financial assets and liabilities on our earnings is not
significant.
Asset Retirement Obligations
Asset Retirement Obligations (AROs) represent legal
obligations associated with the retirement of certain
tangible long-lived assets. The present values of
retirement costs for which we have a legal obligation
are recorded as liabilities with an equivalent amount
added to the asset cost and depreciated over the useful
life of the associated asset. The liability is then accreted
over time by applying an interest method of allocation to
the liability.
AROs have no impact on our income as the effects are
offset by the establishment of regulatory assets and
regulatory liabilities in order to reflect the ratemaking
treatment of the related costs.
Our total AROs at December 31, 2010, were $1.200 billion.
We calculated the present value of our AROs based on
estimates which are dependent on subjective factors
such as management’s estimated retirement costs,
the timing of future cash flows and the selection of
appropriate discount and cost escalation rates. These
underlying assumptions and estimates are made as of a
point in time and are subject to change. These changes
could materially affect the AROs, although changes in
such estimates should not affect earnings, because
these costs are expected to be recovered through rates.
Nuclear decommissioning AROs represent 95 percent
of Progress Energy’s total AROs at December 31, 2010.
To฀determine฀nuclear฀decommissioning฀AROs,฀we฀utilize฀
periodic site-specific cost studies in order to estimate
the nature, cost and timing of planned decommissioning
activities for our nuclear plants. Our regulators require
updated cost estimates for nuclear decommissioning
every five years. These cost studies are subject to change
based on a variety of factors including, but not limited
to, cost escalation, changes in technology applicable to
nuclear decommissioning and changes in federal, state
or local regulations. Changes in PEC’s and PEF’s nuclear
decommissioning site-specific cost estimates or the use
of alternative cost escalation or discount rates could
be material to the nuclear decommissioning liabilities
recognized.
PEC obtained updated cost studies for its nuclear plants
in 2009, using 2009 cost factors, which PEC filed with the
NCUC in 2010. If the site-specific cost estimates increased
by 10 percent, PEC’s AROs would have increased by
$77 million. If the inflation adjustment increased 25 basis
points, PEC’s AROs would have increased by $169 million.
Similarly, an increase in the discount rate of 25 basis
points would have decreased PEC’s AROs by $56 million.
PEF obtained an updated cost study for its nuclear plant
in 2008, using 2008 cost factors, which PEF filed with
the FPSC in 2009 as part of PEF’s base rate filing. As
discussed in Note 4C, the FPSC deferred review of PEF’s
nuclear decommissioning study from the rate case to
be addressed in 2010 in order for FPSC staff to assess
PEF’s study in combination with other utilities anticipated
to submit nuclear decommissioning studies in 2010. PEF
was not required to prepare a new site-specific nuclear
decommissioning study in 2010; however, PEF was
required to update the 2008 study with the most currently
available escalation rates in 2010, which was filed with
the FPSC in December 2010. If the site-specific cost
estimates increased by 10 percent, PEF’s AROs would
have increased by $32 million. If the inflation adjustment
increased 25 basis points, PEF’s AROs would have
increased by $25 million. Similarly, an increase in the
discount rate of 25 basis points would have decreased
PEF’s AROs by $21 million.
Goodwill
As discussed in Note 8, goodwill is required to be tested
for impairment at least annually and more frequently
when indicators of impairment exist. All of our goodwill
is allocated to our utility reporting units and our goodwill
impairment tests are performed at the utility reporting unit
level. The carrying amounts of goodwill at December 31,
2010 and 2009, for the PEC and PEF reporting units were
$1.922 billion and $1.733 billion, respectively.
As discussed in Note 1D, in October 2010 we prospectively
changed our annual goodwill testing date from