Allegheny Power 2013 Annual Report Download - page 120

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market prices for the current year and next three years based on observable data and internal models using historical
trends and market data for the remaining years under contract. The internal models use forecasted energy purchase
prices as an input when prices are not defined by the contract. Forecasted market prices are based on ICE quotes
and management assumptions. Generation MWH reflects data provided by contractual arrangements and historical
trends. The model calculates the fair value by multiplying the prices by the generation MWH. Generally, significant
increases or decreases in inputs in isolation could result in a higher or lower fair value measurement.
LCAPP contracts are financially settled agreements that allow eligible generators to receive payments from, or
make payments to, JCP&L, pursuant to an annually calculated load-ratio share of the capacity produced by the
generator based upon the annual forecasted peak demand as determined by PJM. LCAPP contracts are recorded
at fair value and adjusted periodically using a mark-to-model methodology, which approximates market. The primary
unobservable input into the model is forecasted regional capacity prices. Pricing for the LCAPP contracts is a
combination of PJM RPM capacity auction prices and internal models using historical trends and market data for
the remaining years under contract. Capacity prices beyond the 2016/2017 delivery year are developed through a
simulation of future PJM RPM auctions. The capacity price forecast assumes a continuation of the current PJM
RPM market design and is reflective of the regional peak demand growth and generation fleet additions and
retirements that underlie FirstEnergy’s long-term energy price forecast. Generally, significant increases or decreases
in inputs in isolation could result in a higher or lower fair value measurement. During the fourth quarter of 2013, all
LCAPP contracts were terminated. See Note 10, Derivative Instruments for additional information.
FirstEnergy primarily applies the market approach for recurring fair value measurements using the best information available.
Accordingly, FirstEnergy maximizes the use of observable inputs and minimizes the use of unobservable inputs. There were no
changes in valuation methodologies used as of December 31, 2013, from those used as of December 31, 2012. The determination
of the fair value measures takes into consideration various factors, including but not limited to, nonperformance risk, counterparty
credit risk and the impact of credit enhancements (such as cash deposits, LOCs and priority interests). The impact of these forms
of risk was not significant to the fair value measurements.
Transfers between levels are recognized at the end of the reporting period. There were no transfers between levels during the years
ended December 31, 2013 and 2012. The following tables set forth the recurring assets and liabilities that are accounted for at fair
value by level within the fair value hierarchy:
FirstEnergy
Recurring Fair Value Measurements December 31, 2013 December 31, 2012
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets (In millions)
Corporate debt securities $ —$ 1,365 $ — $ 1,365 $ — $ 1,259 $ — $ 1,259
Derivative assets - commodity contracts 7 208 — 215 — 252 — 252
Derivative assets - FTRs —— 4 4 — — 8 8
Derivative assets - NUG contracts(1) —— 20 20 — — 36 36
Equity securities(2) 317 — — 317 310 — — 310
Foreign government debt securities —109 — 109 — 126 — 126
U.S. government debt securities —165 — 165 — 179 — 179
U.S. state debt securities —228 — 228 — 299 — 299
Other(3) 187 255 — 442 126 227 — 353
Total assets $ 511 $ 2,330 $ 24 $ 2,865 $ 436 $ 2,342 $ 44 $ 2,822
Liabilities
Derivative liabilities - commodity contracts $ (13) $ (100) $ — $ (113) $ (3) $ (151) $ — $ (154)
Derivative liabilities - FTRs —— (12) (12) — — (9) (9)
Derivative liabilities - NUG contracts(1) —— (222) (222) — — (290) (290)
Derivative liabilities - LCAPP contracts(1) —— — — — — (144) (144)
Total liabilities $ (13) $ (100) $ (234) $ (347) $ (3) $ (151) $ (443) $ (597)
Net assets (liabilities)(4) $ 498 $ 2,230 $ (210) $ 2,518 $ 433 $ 2,191 $ (399) $ 2,225
(1) NUG and LCAPP contracts are subject to regulatory accounting treatment and do not impact earnings.
(2) NDT funds hold equity portfolios whose performance is benchmarked against the Alerian MLP Index or the Wells Fargo Hybrid and Preferred
Securities REIT index.
(3) Primarily consists of short-term cash investments.
(4) Excludes $10 million and $110 million as of December 31, 2013 and December 31, 2012, respectively, of receivables, payables, taxes and
accrued income associated with financial instruments reflected within the fair value table.