Allegheny Power 2015 Annual Report Download - page 114

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98
•PowerPurchaseAgreementsFirstEnergyevaluateditspowerpurchaseagreementsanddeterminedthatcertainNUG
entitiesatitsRegulatedDistributionsegmentmaybeVIEstotheextentthattheyownaplantthatsellssubstantiallyallofits
outputtotheapplicableutilitiesandthecontractpriceforpoweriscorrelatedwiththeplant’svariablecostsofproduction.
FirstEnergymaintains15longtermpowerpurchaseagreementswithNUGentitiesthatwereenteredintopursuantto
PURPA.FirstEnergywasnotinvolvedinthecreationof,andhasnoequityordebtinvestedin,anyoftheseentities.
FirstEnergyhasdeterminedthatforallbutoneoftheseNUGentities,itdoesnothaveavariableinterestintheentitiesor
theentitiesdonotmeetthecriteriatobeconsideredaVIE.FirstEnergymayholdavariableinterestintheremainingone
entityhowever,itappliedthescopeexceptionthatexemptsenterprisesunabletoobtainthenecessaryinformationto
evaluateentities.
BecauseFirstEnergyhasnoequityordebtinterestsintheNUGentities,itsmaximumexposuretolossrelatesprimarilyto
the abovemarket costs incurred for power. FirstEnergy expects any abovemarket costs incurred at its Regulated
Distributionsegmenttoberecoveredfromcustomers.Purchasedpowercostsrelatedtothecontractsthatmaycontaina
variableinterestwere$116millionand$185million,respectively,duringtheyearsendedDecember31,2015and2014.
•SaleandLeasebackTransactionsFESandcertainoftheOhioCompanieshaveobligationsthatarenotincludedon
theirConsolidatedBalanceSheetsrelatedtothePerryUnit1,BeaverValleyUnit2,and2007BruceMansfieldUnit1sale
and leaseback arrangements, which are satisfied through operating lease payments. FirstEnergy is not the primary
beneficiaryoftheseinterestsasitdoesnothavecontroloverthesignificantactivitiesaffectingtheeconomics ofthe
arrangements.AsofDecember31,2015,FirstEnergy'sleaseholdinterestwas3.75%ofPerryUnit1,93.83%ofBruce
MansfieldUnit1and2.60%ofBeaverValleyUnit2.
OnJune24,2014,OEexerciseditsirrevocablerighttorepurchasefromtheremainingownerparticipantsthelessors'
interestsinBeaverValleyUnit2attheendoftheleaseterm(June1,2017),whichrighttorepurchasewasassignedtoNG.
Additionally,onJune24,2014,NGenteredintoapurchaseagreementwithanownerparticipanttopurchaseitslessor
equityinterestsoftheremainingnonaffiliatedleaseholdinterestinPerryUnit1onMay23,2016,whichisjustpriortothe
endoftheleaseterm.Uponthecompletionofthesetransactions,NGwillhaveobtainedallofthelessorequityinterestsat
PerryUnit1andBeaverValleyUnit2.
FESandotherFEsubsidiariesareexposedtolossesundertheirapplicablesaleandleasebackagreementsuponthe
occurrenceofcertaincontingentevents.Themaximumexposureundertheseprovisionsrepresentsthenetamountof
casualtyvaluepaymentsdueupontheoccurrenceofspecifiedcasualtyevents.Netdiscountedleasepaymentswouldnot
bepayableifthecasualtylosspaymentsweremade.Thefollowingtablediscloseseachcompany’snetexposuretoloss
baseduponthecasualtyvalueprovisionsasofDecember31,2015:
Maximum
Exposure
DiscountedLease
Payments,net
Net
Exposure
(Inmillions)
FirstEnergy
$
1,225
$
950
$
275
FES
$
1,155
$
933
$
222
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99
9.FAIRVALUEMEASUREMENTS
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RECURRINGFAIRVALUEMEASUREMENTS
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Authoritativeaccountingguidanceestablishesafairvaluehierarchythatprioritizestheinputsusedtomeasurefairvalue.This
hierarchygivesthehighestprioritytoLevel1measurementsandthelowestprioritytoLevel3measurements.Thethreelevelsofthe
fairvaluehierarchyandadescriptionofthevaluationtechniquesareasfollows:
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Level1  Quotedpricesforidenticalinstrumentsinactivemarket
Level2  Quotedpricesforsimilarinstrumentsinactivemarket
 Quotedpricesforidenticalorsimilarinstrumentsinmarketsthatarenotactive
 Modelderivedvaluationsforwhichallsignificantinputsareobservablemarketdata
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Modelsareprimarilyindustrystandardmodelsthatconsidervariousassumptions,includingquotedforwardpricesfor
commodities,timevalue,volatilityfactorsandcurrentmarketandcontractualpricesfortheunderlyinginstruments,
aswellasotherrelevanteconomicmeasures.

Level3  Valuationinputsareunobservableandsignificanttothefairvaluemeasurement

FirstEnergyproducesalongterm powerand capacitypriceforecastannuallywithperiodicupdatesas market
conditionschange.Whenunderlyingpricesarenotobservable,pricesfromthelongtermpriceforecast,whichhas
beenreviewedandapprovedbyFirstEnergy'sRiskPolicyCommittee,areusedtomeasurefairvalue.Amore
detaileddescriptionofFirstEnergy'svaluationprocessesforFTRsandNUGsareasfollows:
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FTRsarefinancialinstrumentsthatentitletheholdertoastreamofrevenues(orcharges)basedonthehourlyday
aheadcongestionpricedifferencesacrosstransmissionpaths.FTRsareacquiredbyFirstEnergyintheannual,
monthlyandlongtermRTOauctionsandareinitiallyrecordedusingtheauctionclearingpricelesscost.Afterinitial
recognition,FTRs'carryingvaluesareperiodicallyadjustedtofairvalueusingamarktomodelmethodology,which
approximatesmarket.Theprimaryinputsintothemodel,whicharegenerallylessobservablethanobjectivesources,
arethemostrecentRTOauctionclearingpricesandtheFTRs'remaininghours.Themodelcalculatesthefairvalue
bymultiplyingthe mostrecentauctionclearingpriceby theremainingFTRhourslesstheproratedFTR cost.
Generally, significant increases or decreases in inputs in isolation could result in a higher or lower fair value
measurement.SeeNote10,DerivativeInstruments,foradditionalinformationregardingFirstEnergy'sFTRs.

NUGcontractsrepresentpurchasepoweragreementswiththirdpartynonutilitygeneratorsthataretransactedto
satisfycertainobligationsunderPURPA.NUGcontractcarryingvaluesarerecordedatfairvalueandadjusted
periodicallyusingamarktomodelmethodology,whichapproximatesmarket.Theprimaryunobservableinputsinto
themodelareregionalpowerpricesandgenerationMWHs.PricingfortheNUGcontractsisacombinationof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MWHsreflectsdataprovidedbycontractualarrangementsandhistorical
trends.ThemodelcalculatesthefairvaluebymultiplyingthepricesbythegenerationMWHs.Generally,significant
increasesordecreasesininputsinisolationcouldresultinahigherorlowerfairvaluemeasurement.

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,2015,fromthoseusedasofDecember31,2014.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.
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