Allegheny Power 2014 Annual Report Download - page 115

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Commodity Derivatives
FirstEnergy uses both physically and financially settled derivatives to manage its exposure to volatility in commodity prices.
Commodity derivatives are used for risk management purposes to hedge exposures when it makes economic sense to do so,
including circumstances where the hedging relationship does not qualify for hedge accounting.
Electricity forwards are used to balance expected sales with expected generation and purchased power. Natural gas futures are
entered into based on expected consumption of natural gas primarily for use in FirstEnergy’s combustion turbine units. Heating oil
futures are entered into based on expected consumption of oil and the financial risk in FirstEnergy’s coal transportation contracts.
Derivative instruments are not used in quantities greater than forecasted needs.
As of December 31, 2014, FirstEnergy's net asset position under commodity derivative contracts was $5 million, which related to
FES positions. Under these commodity derivative contracts, FES posted $83 million of collateral. Certain commodity derivative
contracts include credit risk related contingent features that would require FES to post $5 million of additional collateral if the credit
rating for its debt were to fall below investment grade.
Based on derivative contracts held as of December 31, 2014, an adverse change of 10% in commodity prices would increase net
income by approximately $1 million during the next twelve months.
Interest Rate Swaps
As of December 31, 2014 and December 31, 2013, no interest rate swaps were outstanding.
NUGs
As of December 31, 2014, FirstEnergy's net liability position under NUG contracts was $151 million representing contracts held at
JCP&L, ME and PN. NUG contracts represent purchased power agreements with third-party non-utility generators that are transacted
to satisfy certain obligations under PURPA. Changes in the fair value of NUG contracts are subject to regulatory accounting treatment
and do not impact earnings.
FTRs
As of December 31, 2014, FirstEnergy's and FES' net asset position under FTRs was $25 million and $14 million, respectively and
FES posted $5 million of collateral. FirstEnergy holds FTRs that generally represent an economic hedge of future congestion
charges that will be incurred in connection with FirstEnergy’s load obligations. FirstEnergy acquires the majority of its FTRs in an
annual auction through a self-scheduling process involving the use of ARRs allocated to members of an RTO that have load serving
obligations and through the direct allocation of FTRs from the PJM RTO. The PJM RTO has a rule that allows directly allocated
FTRs to be granted to LSEs in zones that have newly entered PJM. For the first two planning years, PJM permits the LSEs to
request a direct allocation of FTRs in these new zones at no cost as opposed to receiving ARRs. The directly allocated FTRs differ
from traditional FTRs in that the ownership of all or part of the FTRs may shift to another LSE if customers choose to shop with the
other LSE.
The future obligations for the FTRs acquired at auction are reflected on the Consolidated Balance Sheets and have not been
designated as cash flow hedge instruments. FirstEnergy initially records these FTRs at the auction price less the obligation due to
the RTO, and subsequently adjusts the carrying value of remaining FTRs to their estimated fair value at the end of each accounting
period prior to settlement. Changes in the fair value of FTRs held by FES and AE Supply are included in other operating expenses
as unrealized gains or losses. Unrealized gains or losses on FTRs held by FirstEnergy’s utilities are recorded as regulatory assets
or liabilities. Directly allocated FTRs are accounted for under the accrual method of accounting, and their effects are included in
earnings at the time of contract performance.