Allegheny Power 2014 Annual Report Download - page 137

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NEIL, which provides coverage (NEIL I) for the extra expense of replacement power incurred due to prolonged accidental outages
of nuclear units. Under NEIL I, FirstEnergy’s subsidiaries have policies, renewable annually, corresponding to their respective
nuclear interests, which provide an aggregate indemnity of up to approximately $1.96 billion (NG-$1.93 billion) for replacement
power costs incurred during an outage after an initial 20-week waiting period. Members of NEIL I pay annual premiums and are
subject to assessments if losses exceed the accumulated funds available to the insurer. FirstEnergy’s present maximum aggregate
assessment for incidents at any covered nuclear facility occurring during a policy year would be approximately $14 million (NG-
$13 million).
FirstEnergy is insured as to its respective nuclear interests under property damage insurance provided by NEIL to the operating
company for each plant. Under these arrangements, up to $2.75 billion of coverage for decontamination costs, decommissioning
costs, debris removal and repair and/or replacement of property is provided. FirstEnergy pays annual premiums for this coverage
and is liable for retrospective assessments of up to approximately $74 million (NG-$72 million).
FirstEnergy intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that
replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs
arising from a nuclear incident at any of FirstEnergy’s plants exceed the policy limits of the insurance in effect with respect to that
plant, to the extent a nuclear incident is determined not to be covered by FirstEnergy’s insurance policies, or to the extent such
insurance becomes unavailable in the future, FirstEnergy would remain at risk for such costs.
The NRC requires nuclear power plant licensees to obtain minimum property insurance coverage of $1.06 billion or the amount
generally available from private sources, whichever is less. The proceeds of this insurance are required to be used first to ensure
that the licensed reactor is in a safe and stable condition and can be maintained in that condition so as to prevent any significant
risk to the public health and safety. Within 30 days of stabilization, the licensee is required to prepare and submit to the NRC a
cleanup plan for approval. The plan is required to identify all cleanup operations necessary to decontaminate the reactor sufficiently
to permit the resumption of operations or to commence decommissioning. Any property insurance proceeds not already expended
to place the reactor in a safe and stable condition must be used first to complete those decontamination operations that are ordered
by the NRC. FirstEnergy is unable to predict what effect these requirements may have on the availability of insurance proceeds.
GUARANTEES AND OTHER ASSURANCES
FirstEnergy has various financial and performance guarantees and indemnifications which are issued in the normal course of
business. These contracts include performance guarantees, stand-by letters of credit, debt guarantees, surety bonds and
indemnifications. FirstEnergy enters into these arrangements to facilitate commercial transactions with third parties by enhancing
the value of the transaction to the third party.
As of December 31, 2014, outstanding guarantees and other assurances aggregated approximately $4.0 billion, consisting of
parental guarantees ($712 million), subsidiaries' guarantees ($2,338 million) and other guarantees ($649 million).
Of this amount, substantially all relates to guarantees of wholly-owned consolidated entities. FES' debt obligations are generally
guaranteed by its subsidiaries, FG and NG, and FES guarantees the debt obligations of each of FG and NG. Accordingly, present
and future holders of indebtedness of FES, FG, and NG would have claims against each of FES, FG, and NG, regardless of whether
their primary obligor is FES, FG, or NG.
COLLATERAL AND CONTINGENT-RELATED FEATURES
In the normal course of business, FE and its subsidiaries routinely enter into physical or financially settled contracts for the sale
and purchase of electric capacity, energy, fuel and emission allowances. Certain bilateral agreements and derivative instruments
contain provisions that require FE or its subsidiaries to post collateral. This collateral may be posted in the form of cash or credit
support with thresholds contingent upon FE's or its subsidiaries' credit rating from each of the major credit rating agencies. The
collateral and credit support requirements vary by contract and by counterparty. The incremental collateral requirement allows for
the offsetting of assets and liabilities with the same counterparty, where the contractual right of offset exists under applicable master
netting agreements.
Bilateral agreements and derivative instruments entered into by FE and its subsidiaries have margining provisions that require
posting of collateral. Based on FES' power portfolio exposure as of December 31, 2014, FES has posted collateral of $175 million
and AE Supply has posted no collateral. The Regulated Distribution segment has posted collateral of $1 million.
These credit-risk-related contingent features stipulate that if the subsidiary were to be downgraded or lose its investment grade
credit rating (based on its senior unsecured debt rating), it would be required to provide additional collateral. Depending on the
volume of forward contracts and future price movements, higher amounts for margining could be required.
Subsequent to the occurrence of a senior unsecured credit rating downgrade to below S&P's BBB- and Moody's Baa3, or a “material
adverse event,” the immediate posting of collateral or accelerated payments may be required of FE or its subsidiaries. The following
table discloses the additional credit contingent contractual obligations that may be required under certain events as of December 31,
2014: