Allegheny Power 2015 Annual Report Download - page 143



126
CollateralProvisions FES AESupply Utilities Total
(Inmillions)
SplitRating(Oneratingagency'sratingbelowinvestmentgrade) $ 198
$ 6
$ 41
$ 245
BB+/Ba1CreditRatings $ 231
$ 6
$ 41
$ 278
Fullimpactofcreditcontingentcontractualobligations $ 363
$ 16
$ 41
$ 420

Excluded from the preceding chart are the potential collateral obligations due to affiliate transactions between the Regulated
DistributionsegmentandCESsegment.AsofDecember31,2015,neitherFESnorAESupplyhadanycollateralpostedwiththeir
affiliates.IntheeventofaseniorunsecuredcreditratingdowngradetobelowS&P'sBBorMoody'sBa3,FESwouldberequiredto
post$8millionwithaffiliatedparties.

OTHERCOMMITMENTSANDCONTINGENCIES

FirstEnergyisaguarantorunderasyndicatedseniorsecuredtermloanfacilitydueMarch3,2020,underwhichGlobalHolding
borrowed$300million.InadditiontoFirstEnergy,SignalPeak,GlobalRail,GlobalMiningGroup,LLCandGlobalCoalSalesGroup,
LLC,eachbeingadirector indirectsubsidiaryofGlobalHolding,havealsoprovidedtheirjointandseveralguarantiesof the
obligationsofGlobalHoldingunderthefacility.

InconnectionwithGlobalHolding'stermloanfacility,aportionofGlobalHolding'sdirectandindirectmembershipinterestsinSignal
Peak,GlobalRailandtheiraffiliatesalongwitheachofFEV'sandWMBMarketingVentures,LLC's331/3%membershipinterestsin
GlobalHolding,arepledgedtothelendersunderGlobalHolding'sfacilityascollateral.FailurebyGlobalHoldingtomeettheterms
andconditionsunderitstermloanfacilitycouldrequireFirstEnergytobeobligatedundertheprovisionsofitsguarantee,resultingin
consolidationofGlobalHoldingbyFE.

Duringthefirstquarterof2015,asubsidiaryofGlobalHoldingeliminateditsrighttoput2milliontonsannuallythrough2024fromthe
SignalPeakminetoFGinexchangeforFirstEnergyextendingitsguaranteeunderGlobalHolding's$300millionseniorsecuredterm
loanfacilitythrough2020,resultinginapretaxchargeof$24million.SeeNote8,VariableInterestEntities,andNote1,Organization,
BasisofPresentationandSignificantAccountingPoliciesInvestments,foradditionalinformationregardingFEV'sinvestmentin
GlobalHolding.

ENVIRONMENTALMATTERS

Variousfederal,stateandlocalauthoritiesregulateFirstEnergywithregardtoairandwaterqualityandotherenvironmentalmatters.
CompliancewithenvironmentalregulationscouldhaveamaterialadverseeffectonFirstEnergy'searningsandcompetitivepositionto
theextentthatFirstEnergycompeteswithcompaniesthatarenotsubjecttosuchregulationsand,therefore,donotbeartheriskof
costsassociatedwithcompliance,orfailuretocomply,withsuchregulations.

CleanAirAct

FirstEnergycomplieswithSO2andNOxemissionreductionrequirementsundertheCAAandSIP(s)byburninglowersulfurfuel,
utilizingcombustioncontrolsandpostcombustioncontrols,generatingmoreelectricityfromlowerornonemittingplantsand/orusing
emissionallowances.

CSAPRrequiresreductionsofNOxandSO2emissionsintwophases(2015and2017),ultimatelycappingSO2emissionsinaffected
statesto2.4milliontonsannuallyandNOxemissionsto1.2milliontonsannually.CSAPRallowstradingofNOxandSO2emission
allowancesbetweenpowerplantslocatedinthesamestateandinterstatetradingofNOxandSO2emissionallowanceswithsome
restrictions.TheU.S.CourtofAppealsfortheD.C.CircuitorderedtheEPAonJuly28,2015,toreconsidertheCSAPRcapsonNOx
andSO2emissionsfrompowerplantsin13states,includingOhio,PennsylvaniaandWestVirginia.Thisfollowsthe2014U.S.
SupremeCourtrulinggenerallyupholdingEPA’sregulatoryapproachunderCSAPR,butquestioningwhetherEPArequiredupwind
statestoreduceemissionsbymorethantheircontributiontoairpollutionindownwindstates.EPAproposedaCSAPRupdateruleon
November16,2015,thatwouldreducesummertimeNOxemissionsfrompowerplantsin23statesintheeasternU.S.,including
Ohio,PennsylvaniaandWestVirginia,beginningin2017.DependingonhowtheEPAandthestatesimplementCSAPR,thefuture
costofcompliancemaybesubstantialandchangestoFirstEnergy'sandFES'operationsmayresult.

EPAtightenedtheprimaryandsecondaryNAAQSforozonefromthe2008standardlevelsof75PPBto70PPBonOctober1,2015.
EPAstatedthevastmajorityofU.S.countieswillmeetthenew70PPBstandardby2025duetootherfederalandstaterulesand
programsbutEPAwilldesignatethosecountiesthatfailtoattainthenew2015ozoneNAAQSbyOctober1,2017.Stateswillthen
haveroughlythreeyearstodevelopimplementationplanstoattainthenew2015ozoneNAAQS.DependingonhowtheEPAandthe
statesimplementthenew2015ozoneNAAQS,thefuturecostofcompliancemaybesubstantialandchangestoFirstEnergy’sand
FES’operationsmayresult.

MATSimposesemissionlimitsformercury,PM,andHClforallexistingandnewfossilfuelfiredelectricgeneratingunitseffectivein
April2015withaveragingofemissionsfrommultipleunitslocatedatasingleplant.UndertheCAA,statepermittingauthoritiescan


127
grantanadditionalcomplianceyearthroughApril2016,asneeded,includinginstanceswhennecessarytomaintainreliabilitywhere
electricgeneratingunitsarebeingclosed.OnDecember28,2012,theWVDEPgrantedaconditionalextensionthroughApril16,
2016forMATScomplianceattheFortMartin,HarrisonandPleasantsplants.OnMarch20,2013,thePADEPgrantedanextension
throughApril16,2016forMATScomplianceattheHatfield'sFerryandBruceMansfieldplants.OnFebruary5,2015,theOEPA
grantedanextensionthroughApril16,2016forMATScomplianceattheBayShoreandSammisplants.Nearlyallspendingfor
MATScomplianceatBayShoreandSammishasbeencompletedthrough2014.Inaddition,anEPAenforcementpolicydocument
contemplatesuptoanadditionalyeartoachievecompliance,throughApril2017,undercertaincircumstancesforreliabilitycritical
units.OnJune29,2015,theUnitedStatesSupremeCourtreversedaU.S.CourtofAppealsfortheD.C.Circuitdecisionthatupheld
MATS,rejectingEPA’sregulatoryapproachthatcostsarenotrelevanttothedecisionofwhetherornottoregulatepowerplant
emissionsunderSection112oftheCleanAirActandremandedthecasebacktotheU.S.CourtofAppealsfortheD.C.Circuitfor
furtherproceedings.TheU.S.CourtofAppealsfortheD.C.CircuitlaterremandedMATSbacktoEPA,whorepresentedtosuchcourt
thattheEPAisontracktoissueafinalizedMATSbyApril15,2016.Subjecttotheoutcomeofanyfurtherproceedingsbeforethe
U.S. Court ofAppeals for the D.C. Circuit and how the MATS are ultimately implemented, FirstEnergy's total capital cost for
compliance(overthe2012to2018timeperiod)iscurrentlyexpectedtobeapproximately$345million(CESsegmentof$168million
andRegulatedDistributionsegmentof$177million),ofwhich$202millionhasbeenspentthroughDecember31,2015($80million
atCESand$122millionatRegulatedDistribution).

AsaresultofMATS,EastlakeUnits13,AshtabulaUnit5andLakeShoreUnit18weredeactivatedinApril2015,whichcompletes
thedeactivationof5,429MWofcoalfiredplantssince2012.

OnAugust3,2015,FG,asubsidiaryofFES,submittedtotheAAAofficeinNewYork,N.Y.,ademandforarbitrationandstatementof
claimagainstBNSFandCSXseekingadeclarationthatMATSconstitutedaforcemajeurethatexcusesFG’sperformanceunderits
coaltransportationcontractwiththeseparties.Specifically,thedisputearisesfromacontractforthetransportationbyBNSFandCSX
ofaminimumof3.5milliontonsofcoalannuallythrough2025tocertaincoalfiredpowerplantsownedbyFGthatarelocatedin
Ohio.AsaresultofandincompliancewithMATS,thoseplantsweredeactivatedbyApril16,2015.InJanuary2012,FGnotified
BNSFandCSXthatMATSconstitutedaforcemajeureeventunderthecontractthatexcusedFG’sfurtherperformance.Separately,
onAugust4,2015,BNSFandCSXsubmittedtotheAAAofficeinWashington,D.C.,ademandforarbitrationandstatementofclaim
againstFGallegingthatFGbreachedthecontractandthatFG’sdeclarationofaforcemajeureunderthecontractisnotvalidand
seekingdamagesincluding,butnotlimitedto,lostprofitsunderthecontractthrough2025.Aspartofitsstatementofclaim,arightto
liquidateddamagesisalleged.Thearbitrationpanelhasdeterminedtoconsolidatetheclaimswithaliabilityhearingexpectedto
begininNovember2016,and,ifnecessary,adamageshearingisexpectedtobegininMay2017.Thedecisiononliabilityis
expectedtobeissuedwithinsixtydaysfromtheendoftheliabilityhearings.FirstEnergyandFEScontinuetobelievethatMATS
constitutesaforcemajeureeventunderthecontractasitrelatestothedeactivatedplantsandthatFG’sperformanceunderthe
contractisthereforeexcused.FirstEnergyandFES intendtovigorouslyasserttheirpositionin thearbitrationproceedings.If,
however,thearbitrationpanelrulesinfavorofBNSFandCSX,theresultsofoperationsandfinancialconditionofbothFirstEnergy
andFEScouldbemateriallyadverselyimpacted.FirstEnergyandFESareunabletoestimatethelossorrangeofloss.

FGisalsoapartytoanothercoaltransportationcontractcoveringthedeliveryof2.5milliontonsannuallythrough2025,aportionof
whichistobedeliveredtoanothercoalfiredplantownedbyFGthatwasdeactivatedasaresultofMATS.FGhasasserteda
defenseofforcemajeureinresponsetodeliveryshortfallstosuchplantunderthiscontractaswell.IfFirstEnergyandFESfailto
reacharesolutionwiththeapplicablecounterpartiestothecontract,andifitwereultimatelydeterminedthat,contrarytoFirstEnergy’s
andFES’belief,theforcemajeureprovisionsofthatcontractdonotexcusethedeliveryshortfallstothedeactivatedplant,theresults
ofoperationsandfinancialconditionofbothFirstEnergyandFEScouldbemateriallyadverselyimpacted.FirstEnergyandFESare
unabletoestimatethelossorrangeofloss.

Astobothcoaltransportationagreementsreferencedabove,FESpaidinsettlementapproximately$70millioninliquidateddamages
fordeliveryshortfallsin2014relatedtoitsdeactivatedplants.

Astoaspecificcoalsupplyagreement,FirstEnergyandAESupplyhaveassertedterminationrightseffectivein2015.Inresponseto
notificationofthetermination,thecoalsuppliercommencedlitigationallegingFirstEnergyandAESupplydonothavesufficient
justification to terminate the agreement. FirstEnergy andAE Supply have filed an answer denying any liability related to the
termination.Thismatteriscurrentlyinthediscoveryphaseoflitigationandnotrialdatehasbeenestablished.Thereare6milliontons
remainingunderthecontractfordelivery.Atthistime,FirstEnergycannotestimatethelossorrangeoflossregardingtheongoing
litigationwithrespecttothisagreement.

InSeptember2007,AEreceivedanNOVfromtheEPAallegingNSRandPSDviolationsundertheCAA,aswellasPennsylvania
andWestVirginiastatelawsatthecoalfiredHatfield'sFerryandArmstrongplantsinPennsylvaniaandthecoalfiredFortMartinand
WillowIslandplantsinWestVirginia.TheEPA'sNOVallegesequipmentreplacementsduringmaintenanceoutagestriggeredthepre
constructionpermittingrequirementsundertheNSRandPSDprograms.OnJune29,2012,January31,2013,andMarch27,2013,
EPA issued CAA section 114 requests for the Harrison coalfired plant seeking information and documentation relevant to its
operationandmaintenance,includingcapitalprojectsundertakensince2007.OnDecember12,2014,EPAissuedaCAAsection114
requestfor theFortMartincoalfiredplant seekinginformation anddocumentationrelevantto itsoperation andmaintenance,
includingcapitalprojectsundertakensince2009.FirstEnergyintendstocomplywiththeCAAbut,atthistime,isunabletopredictthe
outcomeofthismatterorestimatethelossorrangeofloss.
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