Allegheny Power 2010 Annual Report Download - page 114

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99
FirstEnergy accounts for uncertainty in income taxes recognized in its financial statements. Accounting guidance
prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax
positions taken or expected to be taken on a company’s tax return. After reaching settlements at appeals in 2010 related
primarily to the capitalization of certain costs for the tax years 2004-2008 and an unrelated federal tax matter related to
prior year gains and losses recognized from the disposition of assets, as well as receiving final approval from the Joint
Committee on Taxation for several items that were under appeals for tax years 2001-2003, FirstEnergy recognized
approximately $78 million of net tax benefits in 2010, including $21 million that favorably affected FirstEnergy’s effective
tax rate. The remaining portion of the tax benefit increased FirstEnergy’s accumulated deferred income taxes.
Upon reaching a settlement on several items under appeal for the tax years 2001-2003, as well as other items that
effectively settled in 2009, FirstEnergy recognized approximately $100 million of net tax benefits, including $161 million
that favorably affected FirstEnergy’s effective tax rate. The offsetting $61 million primarily related to tax items where the
uncertainty was removed and the tax refund will be received when the tax years are closed.
Upon completion of the federal tax examinations for tax years 2004-2006, as well as other tax settlements reached in
2008, FirstEnergy recognized approximately $42 million of net tax benefits, including $7 million that favorably affected
FirstEnergy’s effective tax rate. The remaining balance of the tax benefits recognized in 2008 adjusted goodwill as a
purchase price adjustment ($20 million) and accumulated deferred income taxes for temporary tax items ($15 million).
As of December 31, 2010, it is reasonably possible that approximately $42 million of the unrecognized benefits may be
resolved within the next twelve months, of which up to approximately $2 million, if recognized, would affect FirstEnergy’s
effective tax rate. The potential decrease in the amount of unrecognized tax benefits is primarily associated with issues
related to the capitalization of certain costs and various state tax items.
In 2009, FirstEnergy, on behalf of the Utilities, filed a change in accounting method related to the costs to repair and
maintain electric utility network (transmission and distribution) assets. In 2010, approximately $325 million of costs were
included as a repair deduction on FirstEnergy’s 2009 consolidated tax return, which reduced taxable income and
increased the amount of tax refunds that were applied to FirstEnergy’s 2010 estimated federal tax payments. Due to the
flow through of the Pennsylvania state income tax benefit for this change in accounting, FirstEnergy’s effective tax rate
was reduced by $6 million in 2010. In connection with completing FirstEnergy’s 2009 consolidated tax return, FES
recognized an $8 million adjustment that increased its income tax expense in 2010. The effects of these adjustments
were not material to 2009 or 2010.
In 2008, FirstEnergy, on behalf of FGCO and NGC, filed a change in accounting method related to the costs to repair and
maintain electric generation stations. During the second quarter of 2009, the IRS approved the change in accounting
method and $281 million of costs were included as a repair deduction on FirstEnergy’s 2008 consolidated tax return.
Since the IRS did not complete its review over this change in accounting method by the extended filing date of
FirstEnergy’s federal tax return, FirstEnergy increased the amount of unrecognized tax benefits by $34 million in the third
quarter of 2009, with a corresponding adjustment to accumulated deferred income taxes for this temporary tax item.
There was no impact on FirstEnergy’s effective tax rate for 2009.