Allegheny Power 2013 Annual Report Download - page 109
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94
state law limitations on the long-term utilization of NOL carryforwards. The results of operations in 2012 for those companies
decreased accumulated deferred income tax liabilities by approximately $50 million.
In December 2012, two subsidiaries of FES, FG and NG, completed a conversion from corporations to limited liability companies
(LLCs). For income tax purposes, these LLCs are treated as divisions (i.e., disregarded entities) of their parent company, FES. The
LLC conversions, in combination with anticipated future taxable income, will contribute to the realization of certain state deferred
tax assets. In 2011, an unregulated subsidiary of FirstEnergy converted to an LLC which, based on anticipated future taxable
income, resulted in the partial reversal of a valuation allowance, reducing income tax expense in 2011 by $27 million.
During 2012, certain FirstEnergy operating companies adopted a new federal tax accounting method (effective for the 2011
consolidated federal tax return) for the deductibility of expenses for repairs to transmission and distribution assets, pursuant to IRS
safe harbor guidance. In accordance with the IRS guidance, a cumulative adjustment was made on the 2011 consolidated federal
tax return, increasing tax deductions and decreasing taxable income by approximately $417 million. The increased federal tax
deductions created a corresponding state tax benefit that reduced FirstEnergy's effective tax rate by approximately $12 million in
2012. The IRS has agreed that the new method of accounting is compliant with the IRS guidance.
FES and the Utilities are party to an intercompany income tax allocation agreement with FirstEnergy and its other subsidiaries that
provides for the allocation of consolidated tax liabilities. Net tax benefits attributable to FirstEnergy, excluding any tax benefits
derived from interest expense associated with acquisition indebtedness from the merger with GPU, are reallocated to the subsidiaries
of FirstEnergy that have taxable income. That allocation is accounted for as a capital contribution to the company receiving the tax
benefit.