Allegheny Power 2011 Annual Report Download - page 113

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After reaching settlements on appeal 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 appeal 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 2009 effective tax rate. The offsetting $61 million primarily related to tax items where the uncertainty was removed
and the tax refund was received.
As of December 31, 2011, it is reasonably possible that approximately $44 million of unrecognized tax benefits may be resolved
during 2012, of which up to approximately $10 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 federal income 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.
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 federal income 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.
The following table summarizes the changes in unrecognized tax positions for the years ended 2011, 2010 and 2009.
Balance, January 1, 2009
Current year increases
Prior years increases
Prior years decreases
Decrease for settlement
Balance, December 31, 2009
Current year increases
Prior years increases
Prior years decreases
Decrease for settlement
Balance, December 31, 2010
Increase due to merger with AE
Prior years increases
Prior years decreases
Balance, December 31, 2011
FirstEnergy
(In millions)
$ 219
41
46
(100)
(15)
$ 191
10
2
(81)
(77)
$ 45
97
10
(35)
$ 117
FES
$ 5
34
2
—
—
$ 41
6
—
(4)
(2)
$ 41
—
8
(4)
$ 45
OE
$ (30)
4
103
—
—
$ 77
2
—
(19)
(58)
$ 2
—
—
(2)
$ —
CEI
$ (26)
3
52
—
—
$ 29
(1)
—
(15)
(14)
$ (1)
—
1
—
$ —
TE
$ (4)
—
10
—
—
$ 6
—
—
(6)
—
$ —
—
—
—
$ —
JCP&L
$ 42
—
—
(28)
—
$ 14
—
—
(21)
7
$ —
—
—
—
$ —
Met-Ed
$ 28
—
—
(15)
—
$ 13
2
—
(2)
(11)
$ 2
—
—
(2)
$ —
Penelec
$ 24
—
—
(13)
—
$ 11
1
—
(5)
(6)
$ 1
—
—
(1)
$ —
FirstEnergy recognizes interest expense or income related to uncertain tax positions. That amount is computed by applying the
applicable statutory interest rate to the difference between the tax position recognized and the amount previously taken or expected
to be taken on the federal income tax return. FirstEnergy includes net interest and penalties in the provision for income taxes. As
a result of the merger with AE in 2011, the amount of accrued interest increased by $6 million. The interest associated with the
2011 settlement of the claim favorably affected FirstEnergy's effective tax rate by $7 million in 2011. The reversal of accrued interest
associated with the recognized tax benefits favorably affected FirstEnergy’s effective tax rate by $12 million in 2010. The reversal
of accrued interest associated with the $161 million in recognized tax benefits favorably affected FirstEnergy’s effective tax rate in
2009 by $56 million.