Allegheny Power 2010 Annual Report Download - page 52

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37
While these types of guarantees are normally parental commitments for the future payment of subsidiary obligations,
subsequent to the occurrence of a credit rating downgrade to below investment grade, an acceleration or funding
obligation or a “material adverse event,” the immediate posting of cash collateral, provision of an LOC or accelerated
payments may be required of the subsidiary. As of December 31, 2010, FirstEnergy’s maximum exposure under these
collateral provisions was $468 million, as shown below:
Collateral Provisions FES Utilities Total
(In millions)
Credit rating downgrade to below investment grade (1) $ 364 $ 65 $ 429
Material adverse event (2) 39 - 39
Total $ 403 $ 65 $ 468
(1)
Includes $137 million and $54 million that is also considered an acceleration of payment or funding obligation at FES and the
Utilities, respectively.
(2)
Includes $33 million that is also considered an acceleration of payment or funding obligation at FES.
Stress case conditions of a credit rating downgrade or “material adverse event” and hypothetical adverse price
movements in the underlying commodity markets would increase the total potential amount to $532 million consisting of
$486 million due to a below investment grade credit rating (of which $224 million is related to an acceleration of payment
or funding obligation) and $46 million due to “material adverse event” contractual clauses.
Most of FirstEnergy's surety bonds are backed by various indemnities common within the insurance industry. Surety
bonds and related guarantees of $82 million provide additional assurance to outside parties that contractual and statutory
obligations will be met in a number of areas including construction contracts, environmental commitments and various
retail transactions.
In addition to guarantees and surety bonds, FES’ contracts, including power contracts with affiliates awarded through
competitive bidding processes, typically contain margining provisions which require the posting of cash or LOCs in
amounts determined by future power price movements. Based on FES’ power portfolio as of December 31, 2010, and
forward prices as of that date, FES has posted collateral of $185 million. Under a hypothetical adverse change in forward
prices (95% confidence level change in forward prices over a one year time horizon), FES would be required to post an
additional $28 million. Depending on the volume of forward contracts and future price movements, FES could be required
to post higher amounts for margining.
In connection with FES’ obligations to post and maintain collateral under the two-year PSA entered into by FES and the
Ohio Companies following the CBP auction on May 13-14, 2009, NGC entered into a Surplus Margin Guaranty in an
amount up to $500 million. The Surplus Margin Guaranty is secured by an NGC FMB issued in favor of the Ohio
Companies.
FES’ debt obligations are generally guaranteed by its subsidiaries, FGCO and NGC, and FES guarantees the debt
obligations of each of FGCO and NGC. Accordingly, present and future holders of indebtedness of FES, FGCO and NGC
will have claims against each of FES, FGCO and NGC regardless of whether their primary obligor is FES, FGCO or
NGC.
As noted above under Capital Resources and Liquidity, FirstEnergy, together with WMB Loan Ventures LLC and WMB
Loan Ventures II LLC have provided a guaranty of the borrowers’ obligations under the $350 million syndicated two-year
senior secured term loan facility entered into by Signal Peak and Global Rail. In addition, FEV and the other entities that
directly own the equity interest in the borrowers have pledged those interests to the banks as collateral for the facility.
OFF-BALANCE SHEET ARRANGEMENTS
FES and the Ohio Companies have obligations that are not included on their Consolidated Balance Sheets related to
sale and leaseback arrangements involving the Bruce Mansfield Plant, Perry Unit 1 and Beaver Valley Unit 2, which are
satisfied through operating lease payments. The total present value of these sale and leaseback operating lease
commitments, net of trust investments, was $1.6 billion as of December 31, 2010.
MARKET RISK INFORMATION
FirstEnergy uses various market risk sensitive instruments, including derivative contracts, primarily to manage the risk of
price and interest rate fluctuations. FirstEnergy's Risk Policy Committee, comprised of members of senior management,
provides general oversight for risk management activities throughout the company.