Allegheny Power 2011 Annual Report Download - page 55

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securities and 9% were invested in short-term investments, with limitations related to concentration and investment grade ratings.
The investments are carried at their market values of approximately $1,699 million, $258 million and $207 million for fixed income
securities, equity securities and short-term investments, respectively, as of December 31, 2011, excluding ($52) million of net
receivables, payables and accrued income. A hypothetical 10% decrease in prices quoted by stock exchanges would result in a
$26 million reduction in fair value as of December 31, 2011. The decommissioning trusts of JCP&L, Met-Ed and Penelec are subject
to regulatory accounting, with unrealized gains and losses recorded as regulatory assets or liabilities, since the difference between
investments held in trust and the decommissioning liabilities will be recovered from or refunded to customers. NGC, OE and TE
recognized in earnings the unrealized losses on available-for-sale securities held in their NDT as OTTI. A decline in the value of
FirstEnergy’s NDT or a significant escalation in estimated decommissioning costs could result in additional funding requirements.
During 2011, approximately $1 million, $4 million and $1 million was contributed to the NDTs of JCP&L, OE and TE, respectively.
FENOC has submitted a $95 million parental guarantee to the NRC for a short-fall in nuclear decommissioning funding to Beaver
Valley Unit 1 and Perry.
CREDIT RISK
Credit risk is defined as the risk that a counterparty to a transaction will be unable to fulfill its contractual obligations. FirstEnergy
evaluates the credit standing of a prospective counterparty based on the prospective counterparty's financial condition. FirstEnergy
may impose specified collateral requirements and use standardized agreements that facilitate the netting of cash flows. FirstEnergy
monitors the financial conditions of existing counterparties on an ongoing basis. An independent risk management group oversees
credit risk.
Wholesale Credit Risk
FirstEnergy measures wholesale credit risk as the replacement cost for derivatives in power, natural gas, coal and emission
allowances, adjusted for amounts owed to or due from counterparties for settled transactions. The replacement cost of open positions
represents unrealized gains, net of any unrealized losses, where FirstEnergy has a legally enforceable right of set-off. FirstEnergy
monitors and manages the credit risk of wholesale marketing, risk management and energy transacting operations through credit
policies and procedures, which include an established credit approval process, daily monitoring of counterparty credit limits, the
use of credit mitigation measures such as margin, collateral and the use of master netting agreements. FirstEnergy aggressively
manages the quality of its portfolio of energy contracts, evidenced by a current weighted average risk rating for energy contract
counterparties of BBB (S&P).
Retail Credit Risk
FirstEnergy is exposed to retail credit risk through competitive electricity activities, which serve residential, commercial and industrial
companies. Retail credit risk results when customers default on contractual obligations or fail to pay for service rendered. This risk
represents the loss that may be incurred due to the nonpayment of customer accounts receivable balances, as well as the loss
from the resale of energy previously committed to serve customers.
Retail credit risk is managed through established credit approval policies, monitoring customer exposures and the use of credit
mitigation measures such as deposits in the form of LOCs, cash or prepayment arrangements.
Retail credit quality is dependent on the economy and the ability of customers to manage through unfavorable economic cycles
and other market changes. If the business environment were to be negatively affected by changes in economic or other market
conditions, FirstEnergy's retail credit risk may be adversely impacted.
REGULATORY MATTERS
Regulatory assets represent incurred costs that have been deferred because of their probable future recovery from customers
through regulated rates. Regulatory liabilities represent amounts that are expected to be credited to customers through future
regulated rates or amounts collected from customers for costs not yet incurred. FirstEnergy and the Utilities net their regulatory
assets and liabilities based on federal and state jurisdictions.