Progress Energy 2010 Annual Report Download - page 30

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MANAGEMENT’S DISCUSSION AND ANALYSIS
their fair values exceeded their carrying values, and no
interim impairment test was necessary.
Unbilled Revenue
As฀ discussed฀ in฀ Note฀ 1,฀ we฀ recognize฀ electric฀ utility฀
revenues as service is rendered to customers. Operating
revenues include unbilled electric utilities base revenues,
primarily related to retail 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 throughout 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฀
retail 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,
2010 and 2009, amounts recorded as receivables on the
Consolidated Balance Sheets related to unbilled revenues
were $223 million and $193 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, deferred income tax assets and liabilities represent
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
GAAP, 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:
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 decrease in the market interest rates for
high-quality (AAA/AA) debt securities, which are
used as the benchmark for setting the discount
rate to calculate the present value of future benefit
payments, we decreased the discount rate to 5.65% at
December 31, 2010, from 6.00% at December 31, 2009,
which will increase 2011 pension costs, all other factors
remaining constant. 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 well in 2010 with returns of
approximately 13%. That positive asset performance
will result in decreased pension costs in 2011, all other
factors remaining constant. In addition, contributions to
pension plan assets in late 2010 and in 2011 will result in
decreased pension costs in 2011 due to increased asset
balances and resulting expected earnings on those
assets, all other factors remaining constant. Evaluations
of the effects of these and other factors on our 2011
pension costs have not been completed, but we estimate
that฀ the฀ total฀ cost฀ recognized฀ for฀ pensions฀ in฀ 2011฀ will฀
be $70 million to $80 million, compared with $88 million
recognized฀in฀2010.฀