Allegheny Power 2011 Annual Report Download - page 73

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pleas. The court granted the motion to dismiss on September 7, 2010. The plaintiffs appealed the decision to the Court of Appeals
of Ohio. On October 21, 2011, the Court of Appeals rendered its decision affirming the dismissal of the Complaint by the Court of
Common Pleas on all counts except for one relating to an allegation of fraud. The Companies timely filed a notice of appeal on
December 5, 2011 with the Supreme Court of Ohio challenging this one aspect of the Court of Appeals opinion. The Supreme Court
of Ohio has not yet acted on the appeal.
There are various lawsuits, claims (including claims for asbestos exposure) and proceedings related to FirstEnergy's normal business
operations pending against FirstEnergy and its subsidiaries. The other potentially material items not otherwise discussed above
are described under Note 15, Regulatory Matters.
FirstEnergy accrues legal liabilities only when it concludes that it is probable that it has an obligation for such costs and can
reasonably estimate the amount of such costs. In cases where FirstEnergy determines that it is not probable, but reasonably possible
that it has a material obligation, it discloses such obligations and the possible loss or range of loss and if such estimate can be
made. If it were ultimately determined that FirstEnergy or its subsidiaries have legal liability or are otherwise made subject to liability
based on any of the matters referenced above, it could have a material adverse effect on FirstEnergy's or its subsidiaries' financial
condition, results of operations and cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
FirstEnergy prepares consolidated financial statements in accordance with GAAP. Application of these principles often requires a
high degree of judgment, estimates and assumptions that affect financial results. FirstEnergy's accounting policies require significant
judgment regarding estimates and assumptions underling the amounts included in the financial statements. Additional information
regarding the application of accounting policies are included in the Combined Notes to the Consolidated Financial Statements.
Revenue Recognition
FirstEnergy follows the accrual method of accounting for revenues, recognizing revenue for electricity that has been delivered to
customers but not yet billed through 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 unbilled sales is recognized. The determination
of unbilled sales and revenues requires management to make estimates regarding electricity available for retail load, transmission
and distribution line losses, demand by customer class, applicable billing demands, weather-related impacts, number of days
unbilled and tariff rates in effect within each customer class.
Regulatory Accounting
FirstEnergy’s regulated distribution and regulated independent transmission segments are subject to regulations that sets the prices
(rates) the Utilities, ATSI, TrAIL and PATH are permitted to charge customers based on costs that the regulatory agencies determine
are permitted to recover. At times, regulators permit the future recovery through rates of costs that would be currently charged to
expense by an unregulated company. This ratemaking process results in the recording of regulatory assets and liabilities based on
anticipated future cash inflows and outflows. FirstEnergy regularly reviews these assets to assess their ultimate recoverability within
the approved regulatory guidelines. Impairment risk associated with these assets relates to potentially adverse legislative, judicial
or regulatory actions in the future.
Pensions and OPEB Accounting
FirstEnergy provides noncontributory qualified defined benefit pension plans that cover substantially all of its employees and non-
qualified pension plans that cover certain employees. The plans provide defined benefits based on years of service and compensation
levels.
FirstEnergy provides a portion of non-contributory pre-retirement basic life insurance for employees who are eligible to retire. Health
care benefits, which include certain employee contributions, deductibles and co-payments, are also available upon retirement to
certain employees, their dependents and, under certain circumstances, their survivors. FirstEnergy also has obligations to former
or inactive employees after employment, but before retirement, for disability-related benefits.
As described in Note 1, Organization, Basis of Presentation and Significant Accounting Policies, FirstEnergy elected to change its
method of recognizing actuarial gains and losses for its defined benefit pension plans and OPEB plans effective in 2011. Previously,
FirstEnergy recognized the net actuarial gains and losses as a component of AOCI and amortized the gains and losses into income
over the remaining service life of affected employees within the related plans, to the extent such gains and losses were outside a
corridor of the greater of 10% of the market-related value of plan assets or 10% of the plans' projected benefit obligation.
FirstEnergy has elected to immediately recognize the change in the fair value of plan assets and net actuarial gains and losses
annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement. The remaining
components of pension and OPEB expense, primarily service, interest, assumed return on assets and prior service costs, will be
recorded on a quarterly basis.