Allegheny Power 2013 Annual Report Download - page 78

63
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 underlying the amounts included in the financial statements. Additional information
regarding the application of accounting policies is included in the Combined Notes to 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. See Note 1, Organization and Basis of Presentation for additional
details.
Regulatory Accounting
FirstEnergy’s regulated distribution and regulated transmission segments are subject to regulations that set 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 be recovered. 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. See Note 15, Regulatory Matters for additional information.
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 some non-contributory pre-retirement basic life insurance for employees who are eligible to retire. Health care
benefits and/or subsidies to purchase health insurance, which include certain employee contributions, deductibles and co-payments,
may also be 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.
FirstEnergy’s pensions and OPEB funding policy is based on actuarial computations using the projected unit credit method. During
the year ended December 31, 2013, FirstEnergy did not make any contributions to its qualified pension plan. The underfunded
status of FirstEnergy’s qualified and non-qualified pension and OPEB plans as of December 31, 2013 was $2.5 billion.
In selecting an assumed discount rate, FirstEnergy considers currently available rates of return on high-quality fixed income
investments expected to be available during the period to maturity of the pension and OPEB obligations. The assumed discount
rates for pensions were 5.00%, 4.25% and 5.00% as of December 31, 2013, 2012 and 2011, respectively. The assumed discount
rates for OPEB were 4.75%, 4.00% and 4.75% as of December 31, 2013, 2012 and 2011, respectively.
FirstEnergy’s assumed rate of return on pension plan assets considers historical market returns and economic forecasts for the
types of investments held by the pension trusts. In 2013, FirstEnergy’s qualified pensions and OPEB plan assets lost $(22) million
or (0.3)% compared to amounts earned of $660 million, or 9.2% in 2012. The qualified pension and OPEB costs in 2013 and 2012
were computed using an assumed 7.75% rate of return for both years on plan assets which generated $535 million and $523
million of expected returns on plan assets, respectively. The expected return on pensions and OPEB assets is based on the trusts’
asset allocation targets and the historical performance of risk-based and fixed income securities. The gains or losses generated
as a result of the difference between expected and actual returns on plan assets will increase or decrease future net periodic pension
and OPEB cost as the difference is recognized annually in the fourth quarter of each fiscal year or whenever a plan is determined
to qualify for remeasurement.
Based on discount rates of 5.00% for pension, 4.75% for OPEB and an estimated return on assets of 7.75%, FirstEnergy expects
its 2014 pre-tax net periodic postemployment benefit credits (including amounts capitalized) to be approximately $48 million
(excluding any actuarial mark-to-market adjustments that would be recognized in 2014). The following table reflects the portion of
pensions and OPEB costs that were charged to expense, including any pension and OPEB mark-to-market adjustments, in the
three years ended December 31, 2013.