Allegheny Power 2015 Annual Report Download - page 59

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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.
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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) $ —
$ (44)
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(1) RepresentsexchangetradedNewYorkMercantileExchangefuturesandoptions.
(2)PrimarilyrepresentscontractsbasedonbrokerandICEquotes.
(3)Includes$(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.
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EquityPriceRisk
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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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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
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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.