Allegheny Power 2010 Annual Report Download - page 110

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Power Purchase Agreements
FirstEnergy subsidiaries JCPL, Met-Ed and Penelec have 21 long term power purchase agreements totaling 1,339 MW
with NUG entities. The agreements were entered into pursuant to the Public Utility Regulatory Policies Act of 1978.
FirstEnergy was not involved in the creation of, and has no equity or debt invested in, these entities. FirstEnergy
evaluated these power purchase agreements to determine if certain NUG entities may be VIEs to the extent they own a
plant that sells substantially all of its output to the Utilities and the contract price for power is correlated with the plant’s
variable costs of production.
FirstEnergy has determined that for all but two of these NUG entities, neither JCP&L, nor Met-Ed nor Penelec have
variable interests in the entities or the entities are governmental or not-for-profit organizations that are not within the
scope of consolidation consideration for VIEs. JCP&L may hold variable interests in the remaining two entities, which sell
their output at variable prices that correlate to some extent with the operating costs of the plants. However, FirstEnergy
applied the scope exception that exempts enterprises unable to obtain the necessary information to evaluate entities.
Since JCP&L has no equity or debt interests in the NUG entities, its maximum exposure to loss relates primarily to the
above-market costs it incurs for power. FirstEnergy expects any above-market costs it incurs to be recovered from
customers. Purchased power costs related to the two contracts that may contain a variable interest were $243 million
and $225 million for the years ended December 31, 2010 and 2009, respectively.
Loss Contingencies
FirstEnergy has variable interests in certain sale-leaseback transactions. FirstEnergy is not the primary beneficiary of
these interests as it does not have control over the significant activities affecting the economics of the arrangement.
FES and the Ohio Companies are exposed to losses under their applicable sale-leaseback agreements upon the
occurrence of certain contingent events that each company considers unlikely to occur. The maximum exposure under
these provisions represents the net amount of casualty value payments due upon the occurrence of specified casualty
events that render the applicable plant worthless. Net discounted lease payments would not be payable if the casualty
loss payments were made. The following table discloses each company's net exposure to loss based upon the casualty
value provisions mentioned above as of December 31, 2010:
Maximum Discounted Lease Net
Exposure Payments, net (1) Exposure
(In millions)
FES $ 1,360 $ 1,167 $ 193
OE 666 474 192
CEI(2) 622 72 550
TE(2) 622 346 276
(1)
The net present value of FirstEnergy's consolidated sale and
leaseback operating lease commitments is $1.6 billion.
(2)
CEI and TE are jointly and severally liable for the maximum loss
amounts under certain sale-leaseback agreements.
See Note 7 for a discussion of CEI’s and TE’s assignment of their leasehold interests in the Bruce Mansfield Plant to
FGCO.
9. INCOME TAXES
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. Details of income taxes for the three years ended December 31, 2010 are
shown below: