Allegheny Power 2014 Annual Report Download - page 70

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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 14, Regulatory Matters for additional information.
Pension 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 pension and OPEB funding policy is based on actuarial computations using the projected unit credit method. During
the year ended December 31, 2014, 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, 2014 was $3.7 billion.
FirstEnergy recognizes as a pension and OPEB mark-to-market adjustment 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 costs, interest on obligations, assumed
return on assets and prior service costs, are recorded on a quarterly basis. The pension and OPEB mark-to-market adjustment for
the years ended December 31, 2014, 2013, and 2012 were $1,243 million ($835 million net of amounts capitalized), $(396) million
($(256) million net of amounts capitalized), and $875 million ($609 million net of amounts capitalized), respectively.
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 pension were 4.25%, 5.00% and 4.25% as of December 31, 2014, 2013 and 2012, respectively. The assumed discount
rates for OPEB were 4.00%, 4.75% and 4.00% as of December 31, 2014, 2013 and 2012, 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 2014, FirstEnergy’s qualified pension and OPEB plan assets earned $387 million
or 6.2% compared to losses of $(22) million, or (0.3)% in 2013 and assumed a 7.75% rate of return for both years on plan assets
which generated $496 million and $535 million of expected returns on plan assets, respectively. The expected return on pension
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.
During 2014 the Society of Actuaries published new mortality tables and improvement scales reflecting improved life expectancies
and an expectation that the trend will continue. An analysis of FirstEnergy pension and OPEB plan mortality data indicated the use
of the RP2000 mortality table with projection scale BB2D was most appropriate. As such, the RP2000 mortality table with projection
scale BB2D was utilized to determine the 2014 benefit cost and obligation as of December 31, 2014 for the FirstEnergy pension