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Derivative Instruments
 9 Months Ended
Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS
DERIVATIVE INSTRUMENTS

FirstEnergy is exposed to financial risks resulting from fluctuating interest rates and commodity prices, including prices for electricity, natural gas, coal and energy transmission. To manage the volatility related to these exposures, FirstEnergy’s Risk Policy Committee, comprised of senior management, provides general management oversight for risk management activities throughout FirstEnergy. The Risk Policy 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 also uses a variety of derivative instruments for risk management purposes including forward contracts, options, futures contracts and swaps.

FirstEnergy accounts for derivative instruments on its Consolidated Balance Sheets at fair value (unless they meet the normal purchases and normal sales criteria) as follows:

•
Changes in the fair value of derivative instruments that are designated and qualify as cash flow hedges are recorded to AOCI with subsequent reclassification to earnings in the period during which the hedged forecasted transaction affects earnings.
•
Changes in the fair value of derivative instruments that are designated and qualify as fair value hedges are recorded as an adjustment to the item being hedged. When fair value hedges are discontinued, the adjustment recorded to the item being hedged is amortized into earnings.
•
Changes in the fair value of derivative instruments that are not designated in a hedging relationship are recorded in earnings on a mark-to-market basis, unless otherwise noted.

Derivative instruments meeting the normal purchases and normal sales criteria are accounted for under the accrual method of accounting with their effects included in earnings at the time of contract performance.

FirstEnergy has contractual derivative agreements through 2020.

Cash Flow Hedges

FirstEnergy has used cash flow hedges for risk management purposes to manage the volatility related to exposures associated with fluctuating commodity prices and interest rates.

Total pre-tax net unamortized losses included in AOCI associated with instruments previously designated as cash flow hedges totaled $11 million as of September 30, 2016 and December 31, 2015. Since the forecasted transactions remain probable of occurring, these amounts will be amortized into earnings over the life of the hedging instruments. Less than $1 million of net unamortized losses is expected to be amortized to income during the next twelve months.

FirstEnergy has used forward starting interest rate swap agreements to hedge a portion of the consolidated interest rate risk associated with anticipated issuances of fixed-rate, long-term debt securities of its subsidiaries. These derivatives were designated as cash flow hedges, protecting against the risk of changes in future interest payments resulting from changes in benchmark U.S. Treasury rates between the date of hedge inception and the date of the debt issuance. Total pre-tax unamortized losses included in AOCI associated with prior interest rate cash flow hedges totaled $35 million and $42 million as of September 30, 2016 and December 31, 2015, respectively. Based on current estimates, approximately $8 million of these unamortized losses are expected to be amortized to interest expense during the next twelve months.

Refer to Note 5, Accumulated Other Comprehensive Income, for reclassifications from AOCI during the three and nine months ended September 30, 2016 and 2015.

As of September 30, 2016 and December 31, 2015, no commodity or interest rate derivatives were designated as cash flow hedges.

Fair Value Hedges

FirstEnergy has used fixed-for-floating interest rate swap agreements to hedge a portion of the consolidated interest rate risk associated with the debt portfolio of its subsidiaries. As of September 30, 2016 and December 31, 2015, no fixed-for-floating interest rate swap agreements were outstanding.

Unamortized gains included in long-term debt associated with prior fixed-for-floating interest rate swap agreements totaled $12 million and $20 million as of September 30, 2016 and December 31, 2015, respectively. During the next twelve months, approximately $8 million of unamortized gains are expected to be amortized to interest expense. Amortization of unamortized gains included in long-term debt totaled approximately $2 million during the three months ended September 30, 2016 and $3 million during the three months ended September 30, 2015. Amortization of unamortized gains included in long-term debt totaled approximately $8 million during the nine months ended September 30, 2016 and $9 million during the nine months ended September 30, 2015.

Commodity Derivatives

FirstEnergy uses both physically and financially settled derivatives to manage its exposure to volatility in commodity prices. Commodity derivatives are used for risk management purposes to hedge exposures when it makes economic sense to do so, including circumstances where the hedging relationship does not qualify for hedge accounting.

Electricity forwards are used to balance expected sales with expected generation and purchased power. Natural gas futures are entered into based on expected consumption of natural gas primarily for use in FirstEnergy’s combustion turbine units. Derivative instruments are not used in quantities greater than forecasted needs.

As of September 30, 2016, FirstEnergy’s net asset position under commodity derivative contracts was $103 million, which related to FES positions. Under these commodity derivative contracts, FES posted $9 million of collateral and received $22 million of collateral.

Based on commodity derivative contracts held as of September 30, 2016, an increase in commodity prices of 10% would decrease net income by approximately $37 million during the next twelve months.

NUGs

As of September 30, 2016, FirstEnergy's net liability position under NUG contracts was $118 million, representing contracts held at JCP&L, ME and PN. Changes in the fair value of NUG contracts are subject to regulatory accounting treatment and do not impact earnings.

FTRs

As of September 30, 2016, FirstEnergy's and FES' net asset associated with FTRs was $6 million and $2 million, respectively, and FES posted $7 million of collateral. FirstEnergy holds FTRs that generally represent an economic hedge of future congestion charges that will be incurred in connection with FirstEnergy’s load obligations. FirstEnergy acquires the majority of its FTRs in an annual auction through a self-scheduling process involving the use of ARRs allocated to members of PJM that have load serving obligations.

The future obligations for the FTRs acquired at auction are reflected on the Consolidated Balance Sheets and have not been designated as cash flow hedge instruments. FirstEnergy initially records these FTRs at the auction price less the obligation due to PJM, and subsequently adjusts the carrying value of remaining FTRs to their estimated fair value at the end of each accounting period prior to settlement. Changes in the fair value of FTRs held by FES and AE Supply are included in other operating expenses as unrealized gains or losses. Unrealized gains or losses on FTRs held by the Utilities are recorded as regulatory assets or liabilities. Directly allocated FTRs are accounted for under the accrual method of accounting, and their effects are included in earnings at the time of contract performance.

FirstEnergy records the fair value of derivative instruments on a gross basis. The following table summarizes the fair value and classification of derivative instruments on FirstEnergy’s Consolidated Balance Sheets:

Derivative Assets
 
Derivative Liabilities
 
Fair Value
 
 
Fair Value
 
September 30,
2016
 
December 31,
2015
 
 
September 30,
2016
 
December 31,
2015
 
(In millions)
 
 
(In millions)
Current Assets - Derivatives
 
 
 
 
Current Liabilities - Derivatives
 
 
 
Commodity Contracts
$
139

 
$
150

 
Commodity Contracts
$
(84
)
 
$
(94
)
FTRs
13

 
7

 
FTRs
(7
)
 
(12
)
 
152

 
157

 
 
(91
)
 
(106
)
 
 
 
 
 
 
 
 
 
Deferred Charges and Other Assets - Other
 
 
 
 
Noncurrent Liabilities - Adverse Power Contract Liability
 
 
 
 
 
 
 
 
NUGs(1)
(118
)
 
(137
)
Commodity Contracts
98

 
78

 
Noncurrent Liabilities - Other
 
 
 
FTRs
—

 
1

 
Commodity Contracts
(50
)
 
(37
)
NUGs(1)
—

 
1

 
FTRs
—

 
(1
)
 
98

 
80

 
 
(168
)
 
(175
)
Derivative Assets
$
250

 
$
237

 
Derivative Liabilities
$
(259
)
 
$
(281
)


(1) 
NUG contracts are subject to regulatory accounting treatment and do not impact earnings.

FirstEnergy enters into contracts with counterparties that allow for the offsetting of derivative assets and derivative liabilities under netting arrangements with the same counterparty. Certain of these contracts contain margining provisions that require the use of collateral to mitigate credit exposure between FirstEnergy and these counterparties. In situations where collateral is pledged to mitigate exposures related to derivative and non-derivative instruments with the same counterparty, FirstEnergy allocates the collateral based on the percentage of the net fair value of derivative instruments to the total fair value of the combined derivative and non-derivative instruments. The following tables summarize the fair value of derivative assets and derivative liabilities on FirstEnergy’s Consolidated Balance Sheets and the effect of netting arrangements and collateral on its financial position:

 
 
 
 
Amounts Not Offset in Consolidated Balance Sheet
 
 
September 30, 2016
 
Fair Value
 
Derivative Instruments
 
Cash Collateral (Received)/Pledged
 
Net Fair Value
 
 
(In millions)
Derivative Assets
 
 
 
 
 
 
 
 
Commodity contracts
 
$
237

 
$
(120
)
 
$
(22
)
 
$
95

FTRs
 
13

 
(7
)
 
—

 
6

NUG contracts
 
—

 
—

 
—

 
—

 
 
$
250

 
$
(127
)
 
$
(22
)
 
$
101

 
 
 
 
 
 
 
 
 
Derivative Liabilities 
 
 
 
 
 
 
 
 
Commodity contracts
 
$
(134
)
 
$
120

 
$
8

 
$
(6
)
FTRs
 
(7
)
 
7

 
—

 
—

NUG contracts
 
(118
)
 
—

 
—

 
(118
)
 
 
$
(259
)
 
$
127

 
$
8

 
$
(124
)
 
 
 
 
 
 
 
 
 


 
 
 
 
Amounts Not Offset in Consolidated Balance Sheet
 
 
December 31, 2015
 
Fair Value
 
Derivative Instruments
 
Cash Collateral (Received)/Pledged
 
Net Fair Value
 
 
(In millions)
Derivative Assets
 
 
 
 
 
 
 
 
Commodity contracts
 
$
228

 
$
(125
)
 
$
—

 
$
103

FTRs
 
8

 
(8
)
 
—

 
—

NUG contracts
 
1

 
—

 
—

 
1

 
 
$
237

 
$
(133
)
 
$
—

 
$
104

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
 
 
 
 
 
 
Commodity contracts
 
$
(131
)
 
$
125

 
$
3

 
$
(3
)
FTRs
 
(13
)
 
8

 
5

 
—

NUG contracts
 
(137
)
 
—

 
—

 
(137
)
 
 
$
(281
)
 
$
133

 
$
8

 
$
(140
)


The following table summarizes the volumes associated with FirstEnergy’s outstanding derivative transactions as of September 30, 2016:

 
Purchases
 
Sales
 
Net
 
Units
 
(In millions)
Power Contracts
9

 
49

 
(40
)
 
MWH
FTRs
42

 
—

 
42

 
MWH
NUGs
3

 
—

 
3

 
MWH
Natural Gas
49

 
—

 
49

 
mmBTU

The effect of active derivative instruments not in a hedging relationship on the Consolidated Statements of Income (Loss) during the three months and nine months ended September 30, 2016 and 2015, are summarized in the following tables:
 
For the Three Months Ended September 30
 
Commodity Contracts
 
FTRs
 
Total
 
(In millions)
2016
 

 
 

 
 

Unrealized Gain (Loss) Recognized in:
 

 
 

 
 

Other Operating Expense(1)
$
19

 
$
(3
)
 
$
16

 
 
 
 
 
 
Realized Gain (Loss) Reclassified to:
 

 
 

 
 

Revenues(1)
$
32

 
$
1

 
$
33

Purchased Power Expense(1)
(22
)
 
—

 
(22
)
Other Operating Expense(1)
—

 
(6
)
 
(6
)
Fuel Expense
(2
)
 
—

 
(2
)
 
 
 
 
 
 
(1) All amounts are associated with FES.
 
 
 
 
 
 
 
For the Three Months Ended September 30
 
Commodity Contracts
 
FTRs
 
Total
 
(In millions)
2015
 

 
 

 
 

Unrealized Gain (Loss) Recognized in:
 

 
 

 
 

Other Operating Expense(2)
$
59

 
$
(2
)
 
$
57

 
 
 
 
 
 
Realized Gain (Loss) Reclassified to:
 

 
 

 
 

Revenues(2)
$
41

 
$
2

 
$
43

Purchased Power Expense(2)
(50
)
 
—

 
(50
)
Other Operating Expense(2)
—

 
(11
)
 
(11
)
Fuel Expense
(5
)
 
—

 
(5
)
 
 
 
 
 
 
(2) All amounts are associated with FES.
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30
 
Commodity
Contracts
 
FTRs
 
 
Total
2016
(In millions)
Unrealized Gain Recognized in:
 

 
 

 
 
 

Other Operating Expense(1)
$
2

 
$
8

 
 
$
10

 
 
 
 
 
 


Realized Gain (Loss) Reclassified to:
 

 
 

 
 
 

Revenues(1)
$
162

 
$
5

 
 
$
167

Purchased Power Expense(1)
(105
)
 
—

 
 
(105
)
Other Operating Expense(1)
—

 
(28
)
 
 
(28
)
Fuel Expense
(9
)
 
—

 
 
(9
)
 
 
 
 
 
 
 
(1) All amounts are associated with FES.
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30
 
Commodity
Contracts
 
FTRs
 
 
Total
 
(In millions)
2015
 

 
 

 
 
 

Unrealized Gain (Loss) Recognized in:
 

 
 

 
 
 

Other Operating Expense(2)
$
81

 
$
(17
)
 
 
$
64

 
 
 
 
 
 
 
Realized Gain (Loss) Reclassified to:
 

 
 

 
 
 

Revenues(3)
$
48

 
$
48

 
 
$
96

Purchased Power Expense(4)
(78
)
 
—

 
 
(78
)
Other Operating Expense(5)
—

 
(38
)
 
 
(38
)
Fuel Expense
(26
)
 
—

 
 
(26
)
 
 
 
 
 
 
 
(2) Includes $81 million for commodity contracts and $(16) million for FTRs associated with FES.
(3) Includes $48 million for commodity contracts and $46 million for FTRs associated with FES.
(4)  All amounts are associated with FES.
(5)  Includes $(37) million for FTRs associated with FES.





























The following table provides a reconciliation of changes in the fair value of FirstEnergy's derivative instruments subject to regulatory accounting during the three and nine months ended September 30, 2016 and 2015. Changes in the value of these instruments are deferred for future recovery from (or credit to) customers:
 
 
For the Three Months Ended September 30
Derivatives Not in a Hedging Relationship with Regulatory Offset
 
NUGs
 
Regulated FTRs
 
Total
 
 
(In millions)
Outstanding net asset (liability) as of July 1, 2016
 
$
(124
)
 
$
4

 
$
(120
)
Unrealized loss
 
(6
)
 
—

 
(6
)
Settlements
 
12

 
—

 
12

Outstanding net asset (liability) as of September 30, 2016
 
$
(118
)
 
$
4

 
$
(114
)
 
 
 
 
 
 
 
Outstanding net asset (liability) as of July 1, 2015
 
$
(140
)
 
$
12

 
$
(128
)
Unrealized loss
 
(20
)
 
(4
)
 
(24
)
Settlements
 
17

 
(3
)
 
14

Outstanding net asset (liability) as of September 30, 2015
 
$
(143
)
 
$
5

 
$
(138
)
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30
Derivatives Not in a Hedging Relationship with Regulatory Offset
 
NUGs
 
Regulated FTRs
 
Total
 
 
(In millions)
Outstanding net asset (liability) as of January 1, 2016
 
$
(136
)
 
$
1

 
$
(135
)
Unrealized loss
 
(17
)
 
(1
)
 
(18
)
Purchases
 
—

 
4

 
4

Settlements
 
35

 
—

 
35

Outstanding net asset (liability) as of September 30, 2016
 
$
(118
)
 
$
4

 
$
(114
)
 
 
 
 
 
 
 
Outstanding net asset (liability) as of January 1, 2015
 
$
(151
)
 
$
11

 
$
(140
)
Unrealized loss
 
(36
)
 
(3
)
 
(39
)
Purchases
 
—

 
12

 
12

Settlements
 
44

 
(15
)
 
29

Outstanding net asset (liability) as of September 30, 2015
 
$
(143
)
 
$
5

 
$
(138
)