Allegheny Power 2014 Annual Report Download - page 56

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new debt securities. As discussed in Note 6, Leases of the Combined Notes to Consolidated Financial Statements, FirstEnergy’s
investments in capital trusts effectively reduce future lease obligations, also reducing interest rate risk.
Comparison of Carrying Value to Fair Value
Year of Maturity 2015 2016 2017 2018 2019 There- after Total Fair Value
(In millions)
Assets:
Investments Other Than Cash
and Cash Equivalents:
Fixed Income $ 6 $ 5 $ 2 $ — $ — $ 1,751 $ 1,764 $ 1,768
Average interest rate 8.8% 8.9% 8.9% —% —% 3.8% 4.9%
Liabilities:
Long-term Debt:
Fixed rate $ 381 $ 662 $ 1,517 $ 1,329 $ 1,035 $13,612 $ 18,536 $ 20,441
Average interest rate 5.3% 5.5% 6.1% 4.8% 6.5% 5.2% 5.3%
Variable rate $ — $ 200 — 6 $ 1,000 $ 86 $ 1,292 $ 1,292
Average interest rate —% 1.7% —% —% 1.9% —% 1.7%
CREDIT RISK
Credit risk is defined as the risk that a counterparty to a transaction will be unable to fulfill its contractual obligations. FirstEnergy
and FES evaluate the credit standing of a prospective counterparty based on the prospective counterparty's financial condition.
FirstEnergy and FES may impose specific collateral requirements and use standardized agreements that facilitate the netting of
cash flows. FirstEnergy and FES monitor the financial conditions of existing counterparties on an ongoing basis. An independent
risk management group oversees credit risk.
Wholesale Credit Risk
FirstEnergy and FES measure 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 and FES have a legally enforceable right
of offset. FirstEnergy and FES monitor and manage 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's and FES' portfolio of energy contracts has a current weighted average risk rating of A (S&P) for energy contract
counterparties.
Retail Credit Risk
FirstEnergy's and FES' principal retail credit risk exposure relates to its 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 affected by 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 and FES' retail credit risk may be adversely impacted.
OUTLOOK
STATE REGULATION
Each of the Utilities' retail rates, conditions of service, issuance of securities and other matters are subject to regulation in the states
in which it operates - in Maryland by the MDPSC, in Ohio by the PUCO, in New Jersey by the NJBPU, in Pennsylvania by the
PPUC, in West Virginia by the WVPSC and in New York by the NYPSC. The transmission operations of PE in Virginia are subject
to certain regulations of the VSCC. In addition, under Ohio law, municipalities may regulate rates of a public utility, subject to appeal
to the PUCO if not acceptable to the utility.