| PENSIONS AND OTHER POSTEMPLOYMENT BENEFITS |
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 | | | | (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 | | | | (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 | | | | (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 | | | | (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 | ) |
|