Allegheny Power 2015 Annual Report Download - page 58

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arrangementexpiringin2040.FromtimetotimeFirstEnergyandthesecompaniesenterintodiscussionswithcertainpartiestothe
arrangementsregardingacquisitionofownerparticipantandotherinterests.However,FirstEnergycannotprovideassurancethatany
suchacquisitionswilloccuronsatisfactorytermsoratall.

InFebruary2014,NGpurchasedlessorequityinterestsinOE'sexistingsaleandleasebackofBeaverValleyUnit2forapproximately
$94million.InNovember2014,NGrepurchasedlessorequityinterestsinOE'sexistingsaleandleasebackofPerryUnit1for
approximately$87million.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.
MARKETRISKINFORMATION
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FirstEnergyusesvariousmarketrisksensitiveinstruments,includingderivativecontracts,primarilytomanagetheriskofpriceand
interestratefluctuations.FirstEnergy’sRiskPolicyCommittee,comprisedofmembersofseniormanagement,providesgeneral
oversightforriskmanagementactivitiesthroughoutthecompany.
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CommodityPriceRisk

FirstEnergyisexposedtofinancialrisksresultingfromfluctuatingcommodityprices,includingpricesforelectricity,naturalgas,coal
and energy transmission. FirstEnergy's Risk Management Committee is responsible for promoting the effective design and
implementation of sound risk management programs and oversees compliance with corporate risk management policies and
establishedriskmanagementpractice.FirstEnergyusesavarietyofderivativeinstrumentsforriskmanagementpurposesincluding
forwardcontracts,options,futurescontractsandswaps.

Thevaluationofderivativecontractsisbasedonobservablemarketinformationtotheextentthatsuchinformationisavailable.In
caseswheresuchinformationisnotavailable,FirstEnergyreliesonmodelbasedinformation.Themodelprovidesestimatesoffuture
regionalpricesforelectricityandanestimateofrelatedpricevolatility.FirstEnergyusestheseresultstodevelopestimatesoffair
valueforfinancialreportingpurposesandforinternalmanagementdecisionmaking(seeNote9,FairValueMeasurements,ofthe
CombinedNotestoConsolidatedFinancialStatements).Sourcesofinformationforthevaluationofnetcommodityderivativeassets
andliabilitiesasofDecember31,2015aresummarizedbyyearinthefollowingtable:

SourceofInformation
FairValuebyContractYear
2016
2017
2018
2019
2020
Thereafter
Total
(Inmillions)
Pricesactivelyquoted
(1)

$
(6

)
$
1

$
—

$
—

$
—

$
—
$
(5
)
Otherexternalsources
(2)
 18

(1

)
(21

)
(26

)
—

—
(30
)
Pricesbasedonmodels (4

)
2

—

—

(7

)
—
(9
)
Total
(3)

$
8

$
2

$
(21

)
$
(26

)
$
(7

)
$
—
$
(44
)

(1) RepresentsexchangetradedNewYorkMercantileExchangefuturesandoptions.
(2)PrimarilyrepresentscontractsbasedonbrokerandICEquotes.
(3)Includes$(136)millioninnonhedgederivativecontractsthatareprimarilyrelatedtoNUGcontractsatcertainoftheUtilities.NUGcontractsare
subjecttoregulatoryaccountinganddonotimpactearnings.
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FirstEnergyperformssensitivityanalysestoestimateitsexposuretothemarketriskofitscommoditypositions.Basedonderivative
contractsasofDecember31,2015,notsubjecttoregulatoryaccounting,anincreaseincommoditypricesof10%woulddecreasenet
incomebyapproximately$30millionduringthenext12months.

EquityPriceRisk

AsofDecember31,2015,theFirstEnergypensionandOPEBplanassetswereapproximatelyallocatedasfollows:41%inequity
securities,35%infixedincomesecurities,6%inabsolutereturnstrategies,10%inrealestateand8%incashandshortterm
securities.Adeclineinthevalueofplanassetscouldresultinadditionalfundingrequirements.FirstEnergy’sfundingpolicyisbased
onactuarialcomputationsusingtheprojectedunitcreditmethod.DuringtheyearendedDecember31,2015,FirstEnergymadea
$143millioncontributiontoitsqualifiedpensionplan.SeeNote3,PensionandOtherPostemploymentBenefits,oftheCombined
NotestoConsolidatedFinancialStatementsforadditionaldetailsonFirstEnergy'spensionplansandOPEB.In2015,FirstEnergy's
pensionplanandOPEBassetsincurredlossesof$(172)million,or(2.7)%,ascomparedtoanexpectedreturnonplanassetsof
7.75%.
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43
NDTfundshavebeenestablishedtosatisfyNG’sandotherFirstEnergysubsidiaries'nucleardecommissioningobligations.Asof
December31,2015,approximately68%ofthefundswereinvestedinfixedincomesecurities,25%ofthefundswereinvestedin
equitysecuritiesand7%wereinvestedinshortterminvestments,withlimitationsrelatedtoconcentrationandinvestmentgrade
ratings.Theinvestmentsarecarriedattheirmarketvaluesofapproximately$1,552million,$576millionand$147millionforfixed
incomesecurities,equitysecuritiesandshortterminvestments,respectively,asofDecember31,2015,excluding$7millionofnet
receivables,payablesandaccruedincome.Ahypothetical10%decreaseinpricesquotedbystockexchangeswouldresultina$58
millionreductioninfairvalueasofDecember31,2015.CertainFirstEnergysubsidiariesrecognizeinearningstheunrealizedlosses
onAFSsecuritiesheldinitsNDTasOTTI.AdeclineinthevalueofFirstEnergy’sNDTfundsorasignificantescalationinestimated
decommissioningcostscouldresultinadditionalfundingrequirements.During2015,FirstEnergycontributedapproximately$15
milliontotheNDT.

InterestRateRisk

FirstEnergy’sexposuretofluctuationsinmarketinterestratesisreducedsinceasignificantportionofdebthasfixedinterestrates,as
notedinthetablebelow.FirstEnergyissubjecttotheinherentinterestraterisksrelatedtorefinancingmaturingdebtbyissuing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20162017201820192020
There
afterTotal
Fair
Value
(Inmillions)
Assets:
InvestmentsOtherThanCash
andCashEquivalents:
FixedIncome $ 5 $ 2 $ — $ — $ — $ 1,794 $ 1,801 $ 1,802
Averageinterestrate8.9% 8.9% —% —% —% 3.6% 3.6%
Liabilities:
LongtermDebt:
Fixedrate $ 660 $ 1,517 $ 1,330 $ 1,035 $ 541 $ 13,867 $ 18,950 $ 20,225
Averageinterestrate5.5% 6.1% 4.8% 6.5% 5.5% 5.2% 5.3%
Variablerate $ — $ 2 $ 6 $ 1,000 $ 200 $ 86 $ 1,294 $ 1,294
Averageinterestrate —% 3.5% —% 2.2% 1.9% —% 2.0%

CREDITRISK

Creditriskisdefinedastheriskthatacounterpartytoatransactionwillbeunabletofulfillitscontractualobligations.FirstEnergy
evaluatesthecreditstandingofaprospectivecounterpartybasedontheprospectivecounterparty'sfinancialcondition.FirstEnergy
mayimposespecificcollateralrequirementsandusestandardizedagreementsthatfacilitatethenettingofcashflows.FirstEnergy
monitorsthefinancialconditionsofexistingcounterpartiesonanongoingbasis.Anindependentriskmanagementgroupoversees
creditrisk.

WholesaleCreditRisk

FirstEnergy measures 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hasalegallyenforceablerightofoffset.
FirstEnergymonitorsandmanages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.Themajorityof
FirstEnergy'senergycontractcounterpartiesmaintaininvestmentgradecreditratings.

RetailCreditRisk

FirstEnergy's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.