Allegheny Power 2015 Annual Report Download - page 74

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58
Health care cost trends continue to increase and will affect future OPEB costs. The 2015 composite health care trend rate
assumptions were approximately 6.05.5%, compared to 7.57.0% in 2014, gradually decreasing to 4.5% in later years. In
determining FirstEnergy’s trend rate assumptions, included are the specific provisions of FirstEnergy’s health care plans, the
demographicsandutilizationratesofplanparticipants,actualcostincreasesexperiencedinFirstEnergy’shealthcareplans,and
projectionsoffuturemedicaltrendrates.Theeffectson2016pensionandOPEBnetperiodicbenefitcostsfromchangesinkey
assumptionsareasfollows:

IncreaseinNetPeriodicBenefitCostsfromAdverseChangesinKeyAssumptions
Assumption
AdverseChange
Pension
OPEB
Total
(Inmillions)
Discountrate Decreaseby.25%
273
19

$
292
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Longtermreturnonassets Decreaseby.25%
13
1

$
14

Healthcaretrendrate Increaseby1.0% N/A 25

$
25


PleaseseeNote3,PensionandOtherPostemploymentBenefitsforadditionalinformation.
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LongLivedAssets
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FirstEnergyreviewslonglivedassetsforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingvalueof
suchassetsmaynotberecoverable.Therecoverabilityofalonglivedassetismeasuredbycomparingitscarryingvaluetothesum
ofundiscountedfuturecashflowsexpectedtoresultfromtheuseandeventualdispositionoftheasset.Ifthecarryingvalueisgreater
thantheundiscountedcashflows,animpairmentexistsandalossisrecognizedfortheamountbywhichthecarryingvalueofthe
longlivedassetexceedsitsestimatedfairvalue.FirstEnergyutilizestheincomeapproach,basedupondiscountedcashflowsto
estimatefairvalue.SeeNote1,OrganizationandBasisofPresentation.
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AssetRetirementObligations
FErecognizesanAROforthefuturedecommissioningofitsnuclearpowerplantsandfutureremediationofotherenvironmental
liabilitiesassociatedwithallofitslonglivedassets.TheAROliabilityrepresentsanestimateofthefairvalueofFE'scurrentobligation
relatedto nuclear decommissioning andtheretirement or remediationof environmental liabilitiesof otherassets.A fairvalue
measurementinherentlyinvolvesuncertaintyintheamountandtimingofsettlementoftheliability.FEusesanexpectedcashflow
approachtomeasurethefairvalueofthenucleardecommissioningandenvironmentalremediationARO.Thisapproachapplies
probabilityweightingtodiscountedfuturecashflowscenariosthatreflectarangeofpossibleoutcomes.Thescenariosconsider
settlementoftheAROattheexpirationofthenuclearpowerplant'scurrentlicense,settlementbasedonanextendedlicenseterm
andexpectedremediationdates.ThefairvalueofanAROisrecognizedintheperiodinwhichitisincurred.Theassociatedasset
retirementcostsarecapitalizedaspartofthecarryingvalueofthelonglivedassetandaredepreciatedoverthelifeoftherelated
asset.
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Conditionalretirementobligationsassociatedwithtangiblelonglivedassetsarerecognizedatfairvalueintheperiodinwhichthey
areincurredifareasonableestimatecanbemade,eventhoughtheremaybeuncertaintyabouttimingormethodofsettlement.
Whensettlementisconditionalonafutureeventoccurring,itisreflectedinthemeasurementoftheliability,notthetimingofthe
liabilityrecognition.
AROsasofDecember31,2015,aredescribedfurtherinNote13,AssetRetirementObligations.
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IncomeTaxes
FirstEnergyrecordsincometaxesinaccordancewiththeliabilitymethodofaccounting.Deferredincometaxesreflectthenettax
effectof temporarydifferencesbetween thecarryingamountsofassetsandliabilitiesforfinancialreportingpurposesand the
amountsrecognizedfortaxpurposes.Investmenttaxcredits,whichweredeferredwhenutilized,arebeingamortizedoverthe
recoveryperiodoftherelatedproperty.Deferredincometaxliabilitiesrelatedtotemporarytaxandaccountingbasisdifferencesand
taxcreditcarryforwarditemsarerecognizedatthestatutoryincometaxratesineffectwhentheliabilitiesareexpectedtobepaid.
Deferredtaxassetsarerecognizedbasedonincometaxratesexpectedtobeineffectwhentheyaresettled.

FirstEnergyaccountsforuncertaintyinincometaxesrecognizedinitsfinancialstatements.Weaccountforuncertainincometax
positionsusingabenefitrecognitionmodelwithatwostepapproach,amorelikelythannotrecognitioncriterionandameasurement
attributethatmeasuresthepositionasthelargestamountoftaxbenefitthatisgreaterthan50%likelyofbeingultimatelyrealized
uponsettlement.Ifitisnotmorelikelythannotthatthebenefitwillbesustainedonitstechnicalmerits,nobenefitwillberecorded.
Uncertaintax positionsthatrelateonlytotimingofwhen anitemis includedonataxreturnareconsideredtohave metthe
recognitionthreshold.FirstEnergyrecognizesinterestexpenseorincomerelatedtouncertaintaxpositions.Thatamountiscomputed
byapplyingtheapplicablestatutoryinterestratetothedifferencebetweenthetaxpositionrecognizedandtheamountpreviously
takenorexpectedtobetakenonthetaxreturn.FirstEnergyincludesnetinterestandpenaltiesintheprovisionforincometaxes.See
Note5,Taxesforadditionalinformation.
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59
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Goodwill
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Inabusinesscombination,theexcessofthepurchasepriceovertheestimatedfairvaluesoftheassetsacquiredandliabilities
assumedisrecognizedasgoodwill.FirstEnergyevaluatesgoodwillforimpairmentannuallyonJuly31andmorefrequentlyif
indicatorsofimpairmentarise.Inevaluatinggoodwillforimpairment,FirstEnergyassessesqualitativefactorstodeterminewhetherit
ismorelikelythannot(thatis,likelihoodofmorethan50%)thatthefairvalueofareportingunitislessthanitscarryingvalue
(includinggoodwill).IfFirstEnergyconcludesthatitisnotmorelikelythannotthatthefairvalueofareportingunitislessthanits
carryingvalue,thennofurthertestingisrequired.However,ifFirstEnergyconcludesthatitismorelikelythannotthatthefairvalueof
areportingunitislessthanitscarryingvalueorbypassesthequalitativeassessment,thenthetwostepquantitativegoodwill
impairmenttestisperformedtoidentifyapotentialgoodwillimpairmentandmeasuretheamountofimpairmenttoberecognized,if
any.

For2015,FirstEnergyperformedaqualitativeassessmentoftheRegulatedDistributionandRegulatedTransmissionreportingunits,
assessingeconomic,industryandmarketconsiderationsinadditiontothereportingunit'soverallfinancialperformance.Itwas
determinedthatthefairvaluesofthesereportingunitswere,morelikelythannot,greaterthantheircarryingvaluesandaquantitative
analysiswasnotnecessaryfor2015.

FirstEnergyperformedaquantitativeassessmentoftheCESreportingunitasofJuly31,2015.Keyassumptionsincorporatedinto
theCESdiscountedcashflowanalysisrequiringsignificantmanagementjudgmentincludedthefollowing:
•FutureEnergyandCapacityPrices:FirstEnergyusedobservablemarketinformationforneartermforwardpowerprices,
PJMauctionresultsforneartermcapacitypricing,andalongertermpricingmodelforenergyandcapacitythatconsidered
theimpactofkeyfactorssuchasloadgrowth,plantretirements,carbonandotherenvironmentalregulations,andnatural
gaspipelineconstruction,aswellascoalandnaturalgaspricing.
•RetailSalesandMargin:FirstEnergyusedCES'currentretailtargetedportfoliotoestimatefutureretailsalesvolumeas
wellashistoricalfinancialresultstoestimateretailmargins.
•OperatingandCapitalCosts:FirstEnergyusedestimatedfutureoperatingandcapitalcosts,includingtheestimated
impact on costs of pending carbon and other environmental regulations, as well as costs associated with capacity
performancereformsinthePJMmarket.
•DiscountRate:Adiscountrateof8.25%,basedonacapitalstructure,returnondebtandreturnonequityofselected
comparablecompanies.
•Terminal Value: A terminal value of 7.0x earnings before interest, taxes, depreciation and amortization based on
considerationofpeergroupdataandanalystconsensusexpectations.

Basedontheresultsofthequantitativeanalysis,thefairvalueoftheCESreportingunitexceededitscarryingvaluebyapproximately
10%.Continuedweakeconomicconditions,lowerthanexpectedpowerandcapacityprices,ahighercostofcapital,andrevised
environmentalrequirementscouldhaveanegativeimpactonfuturegoodwillassessments.

SeeNote1,OrganizationandBasisofPresentationforadditionaldetails.

NEWACCOUNTINGPRONOUNCEMENTS

InMay2014,theFASBissued,ASU201409"RevenuefromContractswithCustomers",requiringentitiestorecognizerevenueby
applyingafivestepmodelinaccordancewiththecoreprincipletodepictthetransferofpromisedgoodsorservicestocustomersin
anamountthatreflectstheconsiderationtowhichtheentityexpectstobeentitledinexchangeforthosegoodsorservices.In
addition,theaccountingforcoststoobtainorfulfillacontractwithacustomerisspecifiedanddisclosurerequirementsforrevenue
recognitionareexpanded.InAugust2015,theFASBissuedafinalAccountingStandardsUpdatedeferringtheeffectivedateuntil
fiscalyearsbeginningafterDecember15,2017.Earlierapplicationispermittedonlyasofannualreportingperiodsbeginningafter
December15,2016,(theoriginaleffectivedate).Thestandardshallbeappliedretrospectivelytoeachperiodpresentedorasa
cumulativeeffectadjustmentasofthedateofadoption.FirstEnergyiscurrentlyevaluatingtheimpactonitsfinancialstatementsof
adoptingthisstandard.

InFebruary2015,theFASBissued,ASU201502"Consolidations:AmendmentstotheConsolidationAnalysis",whichamends
currentconsolidationguidanceincludingchangestoboththevariableandvotinginterestmodelsusedbycompaniestoevaluate
whetheranentityshouldbeconsolidated. ThisstandardiseffectiveforinterimandannualperiodsbeginningafterDecember15,
2015,andearlyadoptionispermitted. Areportingentitymustapplytheamendmentsusingamodifiedretrospectiveapproachby
recording a cumulativeeffect adjustment to equity as of the beginning of the period of adoption or apply the amendments
retrospectively.FirstEnergydoesnotexpectthisamendmenttohaveamaterialeffectonitsfinancialstatements.

InApril2015,theFASBissued,ASU201503"SimplifyingthePresentationofDebtIssuanceCosts",whichrequiresdebtissuance
coststobepresentedonthebalancesheetasadirectdeductionfromthecarryingvalueoftheassociateddebtliability,consistent
withthepresentationofadebtdiscount.Theguidanceiseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafter
December15,2015,andinterimperiodswithinthosefiscalyears.Earlyadoptionispermittedforfinancialstatementsthathavenot
beenpreviouslyissued.Uponadoption,anentitymustapplythenewguidanceretrospectivelytoallpriorperiodspresentedinthe