Allegheny Power 2013 Annual Report Download - page 125

110
10. DERIVATIVE INSTRUMENTS
FirstEnergy is exposed to financial risks resulting from fluctuating interest rates and commodity prices, including prices for electricity,
natural gas, coal and energy transmission. To manage the volatility relating to these exposures, FirstEnergy’s Risk Policy Committee,
comprised of senior management, provides general management oversight for risk management activities throughout FirstEnergy.
The Risk Policy Committee is responsible for promoting the effective design and implementation of sound risk management programs
and oversees compliance with corporate risk management policies and established risk management practice. FirstEnergy also
uses a variety of derivative instruments for risk management purposes including forward contracts, options, futures contracts and
swaps.
FirstEnergy accounts for derivative instruments on its Consolidated Balance Sheets at fair value unless they meet the normal
purchases and normal sales criteria. Derivatives that meet those criteria are accounted for under the accrual method of accounting,
and their effects are included in earnings at the time of contract performance. Changes in the fair value of derivative instruments
that qualified and were designated as cash flow hedge instruments are recorded in AOCI. Changes in the fair value of derivative
instruments that are not designated as cash flow hedge instruments are recorded in net income on a mark-to-market basis.
FirstEnergy has contractual derivative agreements through 2020.
Cash Flow Hedges
FirstEnergy has used cash flow hedges for risk management purposes to manage the volatility related to exposures associated
with fluctuating commodity prices and interest rates. The effective portion of gains and losses on a derivative contract is reported
as a component of AOCI with subsequent reclassification to earnings in the period during which the hedged forecasted transaction
affects earnings.
Total net unamortized gains included in AOCI associated with instruments previously designated to be in a cash flow hedging
relationship totaled $2 million and $10 million as of December 31, 2013 and December 31, 2012, respectively. Since the forecasted
transactions remain probable of occurring, these amounts will be amortized into earnings over the life of the hedging instruments.
Approximately $10 million is expected to be amortized to income during the next twelve months.
FirstEnergy has used forward starting swap agreements to hedge a portion of the consolidated interest rate risk associated with
anticipated issuances of fixed-rate, long-term debt securities of its subsidiaries. These derivatives were treated as cash flow hedges,
protecting against the risk of changes in future interest payments resulting from changes in benchmark U.S. Treasury rates between
the date of hedge inception and the date of the debt issuance. Total unamortized losses included in AOCI associated with prior
interest rate cash flow hedges totaled $59 million and $70 million as of December 31, 2013 and December 31, 2012, respectively.
Based on current estimates, approximately $9 million will be amortized to interest expense during the next twelve months.
As of December 31, 2013 and December 31, 2012, no commodity or interest rate derivatives were designated as cash flow hedges.
Refer to Note 2, Accumulated Other Comprehensive Income, for reclassifications from AOCI during the years ended December 31,
2013 and 2012.
Fair Value Hedges
FirstEnergy has used fixed-for-floating interest rate swap agreements to hedge a portion of the consolidated interest rate risk
associated with the debt portfolio of its subsidiaries. These derivative instruments were treated as fair value hedges of fixed-rate,
long-term debt issues, protecting against the risk of changes in the fair value of fixed-rate debt instruments due to lower interest
rates.
Unamortized gains included in long-term debt associated with prior fixed-for-floating interest rate swap agreements totaled $44
million and $79 million as of December 31, 2013 and December 31, 2012, respectively. Based on current estimates, approximately
$12 million will be amortized to interest expense during the next twelve months. Reclassifications from long-term debt into interest
expense totaled approximately $19 million and $22 million during the years ended December 31, 2013 and 2012, respectively. In
connection with the redemptions of senior notes by FES, PN, and ME and taxable bonds by CEI and OE, unamortized gains
associated with fixed for floating interest rate swap agreements of $17 million were included in the Loss on debt redemptions in
the Consolidated Statements of Income for the year ended December 31, 2013. Refer to Note 12, Capitalization, for additional
information regarding FirstEnergy's debt redemptions during the year ended December 31, 2013. In 2012, FirstEnergy terminated
all forward starting swap agreements resulting in cash proceeds and a net gain, recorded as a reduction to interest expense, of
approximately $6 million.
As of December 31, 2013 and December 31, 2012, no commodity or interest rate derivatives were designated as fair value hedges.