Allegheny Power 2015 Annual Report Download - page 73

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operationthroughApril22,2037.Priortothatdecision,theNRCCommissionersdeniedanintervenor'srequesttoreopentherecord
andadmit acontentionon theNRC’s ContinuedStorage Rule.OnAugust6,2015,thisintervenorsoughtreviewoftheNRC
Commissioners'decisionbeforetheU.S.CourtofAppealsfortheDCCircuit.FENOChasmovedtointerveneinthatproceeding.
AspartofroutineinspectionsoftheconcreteshieldbuildingatDavisBessein2013,FENOCidentifiedchangestothesubsurface
laminarcrackingconditionoriginallydiscoveredin2011.Theseinspectionsrevealedthatthecrackingconditionhadpropagateda
smallamountinselectareas.FENOC'sanalysisconfirmsthatthebuildingcontinuestomaintainitsstructuralintegrity,anditsability
tosafely performall ofits functions.In aMay28,2015, InspectionReportregardingtheapparentcause evaluationon crack
propagation,theNRCissuedanoncitedviolationforFENOC’sfailuretorequestandobtainalicenseamendmentforitsmethodof
evaluatingthesignificanceoftheshieldbuildingcracking.TheNRCalsoconcludedthattheshieldbuildingremainedcapableof
performingitsdesignsafetyfunctionsdespitetheidentifiedlaminarcrackingandthatthisissuewasofverylowsafetysignificance.
FENOCplanstosubmitalicenseamendmentapplicationrelatedtotheShieldBuildinganalysisin2016.
OnMarch12,2012,theNRCissuedordersrequiringsafetyenhancementsatU.S.reactorsbasedonrecommendationsfromthe
lessonslearnedTaskForcereviewoftheaccidentatJapan'sFukushimaDaiichinuclearpowerplant.Theseordersrequireadditional
mitigationstrategiesforbeyonddesignbasisexternalevents,andenhancedequipmentformonitoringwaterlevelsinspentfuel
pools. The NRC also requested that licensees including FENOC: reanalyze earthquake and flooding risks using the latest
informationavailableconductearthquakeandfloodinghazardwalkdownsattheirnuclearplantsassesstheabilityofcurrent
communicationssystemsandequipmenttoperformunderaprolongedlossofonsiteandoffsiteelectricalpowerandassessplant
staffing levelsneeded to fillemergency positions.These and otherNRCrequirements adoptedasa result oftheaccident at
FukushimaDaiichiarelikelytoresultinadditionalmaterialcostsfromplantmodificationsandupgradesatFirstEnergy'snuclear
facilities.
OtherLegalMatters
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lossorrangeoflossinthesemattersisnotexpectedtobematerial
toFirstEnergyoritssubsidiaries.TheotherpotentiallymaterialitemsnototherwisediscussedabovearedescribedunderNote14,
RegulatoryMattersoftheCombinedNotestoConsolidatedFinancialStatements.
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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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.
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RevenueRecognition
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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.
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FirstEnergyreviewstheprobabilityofrecoveryofregulatoryassetsateachbalancesheetdateandwheneverneweventsoccur.
Similarly,FirstEnergyrecordsregulatoryliabilitieswhenadeterminationismadethatarefundisprobableorwhenorderedbya
commission.Factorsthatmayaffectprobabilityincludechangesintheregulatoryenvironment,issuanceofaregulatorycommission
orderorpassageofnewlegislation.Ifrecoveryofaregulatoryassetisnolongerprobable,FirstEnergywillwriteoffthatregulatory
assetasachargeagainstearnings.

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,2015,FirstEnergymadecontributionsof$143milliontoitsqualifiedpensionplan.Theunderfundedstatus
ofFirstEnergy’squalifiedandnonqualifiedpensionandOPEBplansasofDecember31,2015was$4.0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monthlybasis.ThepensionandOPEBmarktomarketadjustmentforthe
yearsendedDecember31,2015,2014,and2013were$369million($242millionnetofamountscapitalized),$1,243million($835
millionnetofamountscapitalized),and$(396)million($(256)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4.50%,4.25%and5.00%asofDecember31,2015,2014and2013,respectively.Theassumeddiscountratesfor
OPEBwere4.25%,4.00%and4.75%asofDecember31,2015,2014and2013,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2015,FirstEnergy’squalifiedpensionandOPEBplanassetsexperiencedlossesof
$(172)millionor(2.7)%comparedto$387million,or6.2%in2014andlossesof$(22)million,or(0.3)%in2013andassumeda
7.75%rateofreturnforbothyearsonplanassetswhichgenerated$476million,$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.The
expectedreturnonplanassetsfor2016wasloweredto7.50%.

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RP2014mortalitytablewithbluecollaradjustmentforfemalesandprojectionscaleSS2014INTwasmostappropriateasof
December31,2015.Assuch,theRP2014mortalitytablewithprojectionscaleSS2014INTwasutilizedtodeterminethe2015benefit
costandobligationasofDecember31,2015fortheFirstEnergypensionandOPEBplans.TheimpactofusingtheRP2014mortality
tableandprojectionscaleSS2014INTresultedinanincreaseintheprojectedbenefitobligationof$49millionand$1millionforthe
pensionandOPEBplans,respectively,andwasincludedinthe2015pensionandOPEBmarktomarketadjustment.

Basedondiscountratesof4.50%forpension,4.25%forOPEBandanestimatedreturnonassetsof7.50%,FirstEnergyexpectsits
2016pretaxnetperiodicbenefitcost(includingamountscapitalized)tobeapproximately$122million(excludinganyactuarialmark
tomarketadjustmentsthatwouldberecognizedin2016).ThefollowingtablereflectstheportionofpensionandOPEBcoststhat
werechargedtoexpense,includinganypensionandOPEBmarktomarketadjustments,inthethreeyearsendedDecember31,
2015.
PostemploymentBenefitsExpense(Credits)
2015
2014
2013
(Inmillions)
Pension
$
316
$
939
$
(134
)
OPEB
(61
)
(101
)
(196
)
Total
$
255
$
838
$
(330
)
