PENSIONS AND OTHER POSTEMPLOYMENT BENEFITS

FirstEnergy provides noncontributory qualified defined benefit pension plans that cover substantially all of its employees and non-qualified pension plans that cover certain employees. The plans provide defined benefits based on years of service and compensation levels. In addition, FirstEnergy provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee contributions, deductibles and co-payments, are also available upon retirement to certain employees, their dependents and, under certain circumstances, their survivors. FirstEnergy recognizes the expected cost of providing pensions and OPEB to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. FirstEnergy also has obligations to former or inactive employees after employment, but before retirement, for disability-related benefits. On July 25, 2013, FirstEnergy announced that non-bargaining employees hired on or after January 1, 2014 will participate in a cash-balance defined benefit pension plan. The plan for existing employees will remain unchanged. Under the cash-balance pension plan, FirstEnergy will make contributions to eligible employee retirement accounts based on employee age and years of service. The balance of these accounts will be provided to employees when they leave the company.

FirstEnergy’s pensions and OPEB funding policy is based on actuarial computations using the projected unit credit method. During the year ended December 31, 2013, FirstEnergy did not make any contributions to its qualified pension plan. Pension and OPEB costs are affected by employee demographics (including age, compensation levels and employment periods), the level of contributions made to the plans and earnings on plan assets. Pension and OPEB costs may also be affected by changes in key assumptions, including anticipated rates of return on plan assets, the discount rates and health care trend rates used in determining the projected benefit obligations for pension and OPEB costs. FirstEnergy uses a December 31 measurement date for its pension and OPEB plans. The fair value of the plan assets represents the actual market value as of the measurement date.



	Pensions						OPEB
Obligations and Funded Status	2013			2012			2013			2012
	(In millions)
Change in benefit obligation:
Benefit obligation as of January 1	$	8,975		$	7,977		$	1,076		$	1,037

Service cost	197			161			13			12
Interest cost	372			389			37			47
Plan participants’ contributions	—			—			15			17
Plan amendments	2			8			(37		)	(85		)
Medicare retiree drug subsidy	—			—			5			—
Actuarial (gain) loss	(846		)	861			(107		)	152
Benefits paid	(437		)	(421		)	(123		)	(104		)
Benefit obligation as of December 31	$	8,263		$	8,975		$	879		$	1,076

Change in fair value of plan assets:
Fair value of plan assets as of January 1	$	6,671		$	5,867		$	508		$	528
Actual return on plan assets	(77		)	611			56			48
Company contributions	14			614			39			19
Plan participants’ contributions	—			—			15			17
Benefits paid	(437		)	(421		)	(123		)	(104		)
Fair value of plan assets as of December 31	$	6,171		$	6,671		$	495		$	508

Funded Status:
Qualified plan	$	(1,782	)	$	(1,967	)
Non-qualified plans	(310		)	(336		)
Funded Status	$	(2,092	)	$	(2,303	)	$	(384	)	$	(566	)

Accumulated benefit obligation	$	7,800		$	8,355		$	—		$	—

Amounts Recognized on the Balance Sheet:
Current liabilities	$	(15	)	$	(14	)	$	—		$	—
Noncurrent liabilities	(2,077		)	(2,289		)	(384		)	(566		)
Net liability as of December 31	$	(2,092	)	$	(2,303	)	$	(384	)	$	(566	)

Amounts Recognized in AOCI:
Prior service cost (credit)	$	48		$	58		$	(558	)	$	(728	)

Assumptions Used to Determine Benefit Obligations
(as of December 31)
Discount rate	5.00		%	4.25		%	4.75		%	4.00		%
Rate of compensation increase	4.20		%	4.70		%	N/A			N/A

Assumed Health Care Cost Trend Rates
(as of December 31)
Health care cost trend rate assumed (pre/post-Medicare)	N/A			N/A			7.25-7.75%			7.5-8.0%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	N/A			N/A			5		%	5		%
Year that the rate reaches the ultimate trend rate (pre/post-Medicare)	N/A			N/A			2020			2020

Allocation of Plan Assets (as of December 31)
Equity securities	18		%	15		%	47		%	39		%
Bonds	40		%	47		%	40		%	40		%
Absolute return strategies	23		%	22		%	3		%	4		%
Real estate	6		%	5		%	1		%	1		%
Private equities	—		%	1		%	—		%	—		%
Cash and short-term securities	13		%	10		%	9		%	16		%
Total	100		%	100		%	100		%	100		%

The estimated 2014 amortization of pensions and OPEB prior service costs (credits) from AOCI into net periodic pensions and OPEB costs (credits) is approximately $8 million and $(176) million, respectively.



	Pensions									OPEB
Components of Net Periodic Benefit Costs	2013			2012			2011			2013			2012			2011
	(In millions)
Service cost	$	197		$	161		$	130		$	13		$	12		$	13
Interest cost	372			389			374			37			47			48
Expected return on plan assets	(501		)	(486		)	(446		)	(34		)	(37		)	(40		)
Amortization of prior service cost (credit)	12			12			14			(207		)	(203		)	(203		)
Other adjustments (settlements, curtailments, etc.)	—			—			6			—			—			—
Pensions & OPEB mark-to-market adjustment	(267		)	735			729			(129		)	140			36
Net periodic cost	$	(187	)	$	811		$	807		$	(320	)	$	(41	)	$	(146	)



Assumptions Used to Determine Net Periodic Benefit Cost for Years Ended December 31⁽¹⁾	Pensions						OPEB
	2013		2012		2011		2013		2012		2011
Weighted-average discount rate	4.25	%	5.00	%	5.50	%	4.00	%	4.75	%	5.00	%
Expected long-term return on plan assets	7.75	%	7.75	%	8.25	%	7.75	%	7.75	%	8.50	%
Rate of compensation increase	4.70	%	5.20	%	5.20	%	N/A		N/A		N/A

⁽¹⁾Excludes Pensions & OPEB mark-to-market adjustment.

In selecting an assumed discount rate, FirstEnergy considers currently available rates of return on high-quality fixed income investments expected to be available during the period to maturity of the pensions and OPEB obligations. The assumed rates of return on plan assets consider historical market returns and economic forecasts for the types of investments held by FirstEnergy’s pension trusts. The long-term rate of return is developed considering the portfolio’s asset allocation strategy.

The following tables set forth pension financial assets that are accounted for at fair value by level within the fair value hierarchy. See Note 9, Fair Value Measurements, for a description of each level of the fair value hierarchy. There were no significant transfers between levels during 2013 and 2012.



	December 31, 2013								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	782	$	—	$	782	13	%
Equity investments
Domestic	701		3		—		704		11	%
International	304		118		—		422		7	%
Fixed income
Government bonds	—		314		—		314		5	%
Corporate bonds	—		2,128		—		2,128		34	%
Mortgaged-backed securities (non-government)	—		87		—		87		1	%
Alternatives
Hedge funds	—		1,395		—		1,395		23	%
Derivatives	—		14		—		14		—	%
Private equity funds	—		—		27		27		—	%
Real estate funds	—		—		385		385		6	%
Total ⁽¹⁾	$	1,005	$	4,841	$	412	$	6,258	100	%



	December 31, 2012								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	652	$	—	$	652	10	%
Equity investments
Domestic	547		8		—		555		8	%
International	275		153		—		428		7	%
Fixed income
Government bonds	4		564		—		568		8	%
Corporate bonds	—		1,899		—		1,899		28	%
High yield debt	—		369		—		369		6	%
Mortgaged-backed securities (non-government)	—		330		—		330		5	%
Alternatives
Hedge funds	—		1,498		—		1,498		22	%
Derivatives	—		18		—		18		—	%
Private equity funds	—		—		33		33		1	%
Real estate funds	—		—		357		357		5	%
Total ⁽¹⁾	$	826	$	5,491	$	390	$	6,707	100	%


⁽¹⁾	Excludes ($87) million and ($36) million as of December 31, 2013 and December 31, 2012, respectively, of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table.

The following table provides a reconciliation of changes in the fair value of pension investments classified as Level 3 in the fair value hierarchy during 2013 and 2012:



	Private Equity Funds			Real Estate Funds			Derivatives
	(In millions)
Balance as of January 1, 2012	$	135		$	327		$	70
Actual return on plan assets:
Unrealized gains	(14		)	29			—
Realized gains	(10		)	4			—
Purchases, sales and settlements	—			—			(70		)
Transfers in (out)	(78		)	(3		)	—
Balance as of December 31, 2012	$	33		$	357		$	—
Actual return on plan assets:
Unrealized gains	1			17			—
Realized gains	5			13			—
Purchases, sales and settlements	—			—			—
Transfers out	(12		)	(2		)	—
Balance as of December 31, 2013	$	27		$	385		$	—

As of December 31, 2013 and 2012, the OPEB trust investments measured at fair value were as follows:



	December 31, 2013								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	47	$	—	$	47	9	%
Equity investment
Domestic	227		—		—		227		45	%
International	4		2		—		6		1	%
Mutual funds	5		—		—		5		1	%
Fixed income
U.S. treasuries	—		44		—		44		9	%
Government bonds	—		91		—		91		18	%
Corporate bonds	—		59		—		59		12	%
High yield debt	—		—		—		—		—	%
Mortgage-backed securities (non-government)	—		3		—		3		1	%
Alternatives
Hedge funds	—		17		—		17		3	%
Private equity funds	—		—		—		—		—	%
Real estate funds	—		—		5		5		1	%
Total ⁽¹⁾	$	236	$	263	$	5	$	504	100	%



	December 31, 2012								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	83	$	—	$	83	16	%
Equity investment
Domestic	183		—		—		183		36	%
International	4		2		—		6		1	%
Mutual funds	8		3		—		11		2	%
Fixed income
U.S. treasuries	—		48		—		48		9	%
Government bonds	—		88		—		88		17	%
Corporate bonds	—		59		—		59		11	%
High yield debt	—		5		—		5		1	%
Mortgage-backed securities (non-government)	—		9		—		9		2	%
Alternatives
Hedge funds	—		21		—		21		4	%
Private equity funds	—		—		—		—		—	%
Real estate funds	—		—		5		5		1	%
Total ⁽¹⁾	$	195	$	318	$	5	$	518	100	%


⁽¹⁾	Excludes ($9) million and ($10) million as of December 31, 2013 and December 31, 2012, respectively, of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table.

The following table provides a reconciliation of changes in the fair value of OPEB trust investments classified as Level 3 in the fair value hierarchy during 2013 and 2012:



	Private Equity Funds			Real Estate Funds
	(in millions)
Balance as of January 1, 2012	$	3		$	7
Actual return on plan assets:
Unrealized losses	(1		)	—
Realized gains (losses)	—			—
Purchases, sales and settlements	—			—
Transfers out	(2		)	(2		)
Balance as of December 31, 2012	$	—		$	5
Balance as of December 31, 2013	$	—		$	5

FirstEnergy follows a total return investment approach using a mix of equities, fixed income and other available investments while taking into account the pension plan liabilities to optimize the long-term return on plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments. Equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalization funds. Other assets such as real estate and private equity are used to enhance long-term returns while improving portfolio diversification. Derivatives may be used to gain market exposure in an efficient and timely manner; however, derivatives are not used to leverage the portfolio beyond the market value of the underlying investments. Investment risk is measured and monitored on a continuing basis through periodic investment portfolio reviews, annual liability measurements and periodic asset/liability studies.

FirstEnergy’s target asset allocations for its pensions and OPEB trust portfolios for 2013 and 2012 are shown in the following table:



	Target Asset Allocations
	2013		2012
Equities	26	%	20	%
Fixed income	40	%	51	%
Absolute return strategies	22	%	21	%
Real estate	5	%	5	%
Private equity	1	%	—	%
Cash	6	%	3	%
	100	%	100	%

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:



	1-Percentage-Point Increase		1-Percentage-Point Decrease
	(in millions)
Effect on total of service and interest cost	$	1	$	(1	)
Effect on accumulated benefit obligation	$	26	$	(23	)

Taking into account estimated employee future service, FirstEnergy expects to make the following benefit payments from plan assets and other payments, net of participant contributions:



			OPEB
	Pensions		Benefit Payments		Subsidy Receipts
	(in millions)
2014	$	449	$	129	$	(4	)
2015	466		67		(4		)
2016	484		67		(4		)
2017	500		67		(4		)
2018	524		65		(4		)
Years 2019-2023	2,867		382		(17		)

FES’ share of the net pensions and OPEB liability as of December 31, 2013 and 2012, was as follows:



	Pensions						OPEB
	2013			2012			2013			2012
	(In millions)
Net Liability	$	(149	)	$	(180	)	$	(8	)	$	(36	)

FES’ share of the net periodic pensions and OPEB costs for the three years ended December 31, 2013 was as follows:



	Pensions							OPEB
	2013			2012		2011		2013			2012			2011
	(In millions)
Net Periodic Costs	$	(30	)	$	78	$	80	$	(40	)	$	(11	)	$	(21	)