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Pension and Other Postemployment Benefits
 12 Months Ended
Dec. 31, 2014
Compensation and Retirement Disclosure [Abstract]  
PENSIONS AND OTHER POSTEMPLOYMENT BENEFITS
PENSION 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 pension 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 August 25, 2014, the qualified pension plan was amended authorizing a voluntary cashout window program for certain eligible terminated participants with vested benefits. Eligible terminated participants were able to elect an immediate lump sum cash payment of their vested benefits. Additionally, annuity options were offered and could be elected instead of the lump sum cash payment. The election period was September 15, 2014 to October 31, 2014. Payment of benefits for participants that elected an immediate lump sum cash payment or an annuity commenced on December 1, 2014 which resulted in a $40 million reduction to the underfunded status of the pension plan. Additionally, during 2014, certain unions ratified their labor agreements that ended subsidized retiree health care resulting in a reduction to the OPEB benefit obligation by approximately $97 million.
FirstEnergy recognizes as a pension and OPEB mark-to-market adjustment the change in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement. The remaining components of pension and OPEB expense, primarily service costs, interest on obligations, assumed return on assets and prior service costs, are recorded on a monthly basis. The pension and OPEB mark-to-market adjustment for the years ended December 31, 2014, 2013, and 2012 were $1,243 million ($835 million net of amounts capitalized), $(396) million ($(256) million net of amounts capitalized), and $875 million ($609 million net of amounts capitalized), respectively. In 2014, the pension and OPEB mark-to-market adjustment primarily reflects a 75 basis point decline in the discount rate, revisions to mortality assumptions extending the expected life in key demographics as further described below, lower than expected asset returns, and changes in other demographic assumptions.
FirstEnergy’s pension and OPEB funding policy is based on actuarial computations using the projected unit credit method. During the year ended December 31, 2014, FirstEnergy did not make any contributions to its qualified pension plan. FirstEnergy expects to contribute $143 million to its qualified pension plan in 2015. 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.

FirstEnergy’s assumed rate of return on pension plan assets considers historical market returns and economic forecasts for the types of investments held by the pension trusts. In 2014, FirstEnergy’s qualified pension and OPEB plan assets earned $387 million or 6.2% compared to losses of $(22) million, or (0.3)% in 2013 and assumed a 7.75% rate of return for both years on plan assets which generated $496 million and $535 million of expected returns on plan assets, respectively. The expected return on pension and OPEB assets is based on the trusts’ asset allocation targets and the historical performance of risk-based and fixed income securities. The gains or losses generated as a result of the difference between expected and actual returns on plan assets will increase or decrease future net periodic pension and OPEB cost as the difference is recognized annually in the fourth quarter of each fiscal year or whenever a plan is determined to qualify for remeasurement.

During 2014, the Society of Actuaries published new mortality tables and improvement scales reflecting improved life expectancies and an expectation that the trend will continue. An analysis of FirstEnergy pension and OPEB plan mortality data indicated the use of the RP2000 mortality table with projection scale BB2D was most appropriate. As such, the RP2000 mortality table with projection scale BB2D was utilized to determine the 2014 benefit cost and obligation as of December 31, 2014 for the FirstEnergy pension and OPEB plans. The impact of using the RP2000 mortality table with projection scale BB2D resulted in an increase in the projected benefit obligation of $373 million and $21 million for the pension and OPEB plans, respectively, and was included in the 2014 pension and OPEB mark-to-market adjustment.



 
 
Pension
 
OPEB
Obligations and Funded Status
 
2014
 
2013
 
2014
 
2013
 
 
(In millions)
Change in benefit obligation:
 
 
 
 
 
 
 
 
Benefit obligation as of January 1
 
$
8,263

 
$
8,975

 
$
879

 
$
1,076

 
 
 
 
 
 
 
 
 
Service cost
 
167

 
197

 
9

 
13

Interest cost
 
402

 
372

 
39

 
37

Plan participants’ contributions
 
—

 
—

 
16

 
15

Plan amendments
 
5

 
2

 
(97
)
 
(37
)
Medicare retiree drug subsidy
 
—

 
—

 
—

 
5

Actuarial (gain) loss
 
1,123

 
(846
)
 
13

 
(107
)
Benefits paid
 
(711
)
 
(437
)
 
(102
)
 
(123
)
Benefit obligation as of December 31
 
$
9,249

 
$
8,263

 
$
757

 
$
879

 
 
 
 
 
 
 
 
 
Change in fair value of plan assets:
 
 
 
 
 
 
 
 
Fair value of plan assets as of January 1
 
$
6,171

 
$
6,671

 
$
495

 
$
508

Actual return on plan assets
 
349

 
(77
)
 
38

 
56

Company contributions
 
15

 
14

 
17

 
39

Plan participants’ contributions
 
—

 
—

 
16

 
15

Benefits paid
 
(711
)
 
(437
)
 
(102
)
 
(123
)
Fair value of plan assets as of December 31
 
$
5,824

 
$
6,171

 
$
464

 
$
495

 
 
 
 
 
 
 
 
 
Funded Status:
 
 
 
 
 
 
 
 
Qualified plan
 
$
(3,064
)
 
$
(1,782
)
 
 
 
 
Non-qualified plans
 
(361
)
 
(310
)
 
 
 
 
Funded Status
 
$
(3,425
)
 
$
(2,092
)
 
$
(293
)
 
$
(384
)
 
 
 
 
 
 
 
 
 
Accumulated benefit obligation
 
$
8,744

 
$
7,800

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
Amounts Recognized on the Balance Sheet:
 
 
 
 
 
 
 
 
Current liabilities
 
$
(17
)
 
$
(15
)
 
$
—

 
$
—

Noncurrent liabilities
 
(3,408
)
 
(2,077
)
 
(293
)
 
(384
)
Net liability as of December 31
 
$
(3,425
)
 
$
(2,092
)
 
$
(293
)
 
$
(384
)
 
 
 
 
 
 
 
 
 
Amounts Recognized in AOCI:
 
 
 
 
 
 
 
 
Prior service cost (credit)
 
$
45

 
$
48

 
$
(479
)
 
$
(558
)
 
 
 
 
 
 
 
 
 
Assumptions Used to Determine Benefit Obligations
 
 
 
 
 
 
 
 
(as of December 31)
 
 
 
 
 
 
 
 
Discount rate
 
4.25
%
 
5.00
%
 
4.00
%
 
4.75
%
Rate of compensation increase
 
4.20
%
 
4.20
%
 
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

 
7.0-7.5%

 
7.25-7.75%

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
 
N/A

 
N/A

 
4.5
%
 
5
%
Year that the rate reaches the ultimate trend rate (pre/post-Medicare)
 
N/A

 
N/A

 
2026

 
2020

 
 
 
 
 
 
 
 
 
Allocation of Plan Assets (as of December 31)
 
 
 
 
 
 
 
 
Equity securities
 
36
%
 
18
%
 
49
%
 
47
%
Bonds
 
33
%
 
40
%
 
40
%
 
40
%
Absolute return strategies
 
14
%
 
23
%
 
1
%
 
3
%
Real estate
 
7
%
 
6
%
 
1
%
 
1
%
Derivatives
 
1
%
 
—
%
 
—
%
 
—
%
Cash and short-term securities
 
9
%
 
13
%
 
9
%
 
9
%
Total
 
100
%
 
100
%
 
100
%
 
100
%


The estimated 2015 amortization of pension and OPEB prior service costs (credits) from AOCI into net periodic pension and OPEB costs (credits) is approximately $9 million and $(134) million, respectively.

 
 
Pension
 
OPEB
Components of Net Periodic Benefit Costs
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
 
 
(In millions)
Service cost
 
$
167

 
$
197

 
$
161

 
$
9

 
$
13

 
$
12

Interest cost
 
402

 
372

 
389

 
39

 
37

 
47

Expected return on plan assets
 
(462
)
 
(501
)
 
(486
)
 
(34
)
 
(34
)
 
(37
)
Amortization of prior service cost (credit)
 
8

 
12

 
12

 
(176
)
 
(207
)
 
(203
)
Pension & OPEB mark-to-market adjustment
 
1,235

 
(267
)
 
735

 
8

 
(129
)
 
140

Net periodic cost
 
$
1,350

 
$
(187
)
 
$
811

 
$
(154
)
 
$
(320
)
 
$
(41
)


Assumptions Used to Determine Net Periodic Benefit Cost
for Years Ended December 31
 
Pension
 
OPEB
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
Weighted-average discount rate
 
5.00
%
 
4.25
%
 
5.00
%
 
4.75
%
 
4.00
%
 
4.75
%
Expected long-term return on plan assets
 
7.75
%
 
7.75
%
 
7.75
%
 
7.75
%
 
7.75
%
 
7.75
%
Rate of compensation increase
 
4.20
%
 
4.70
%
 
5.20
%
 
N/A

 
N/A

 
N/A


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 pension 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 2014 and 2013.
 
 
December 31, 2014
 
Asset Allocation
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
(In millions)
 
 
Cash and short-term securities
 
$
—

 
$
517

 
$
—

 
$
517

 
9
%
Equity investments
 
 
 
 
 
 
 
 
 
 
Domestic
 
1,266

 
8

 
—

 
1,274

 
22
%
International
 
355

 
414

 
—

 
769

 
14
%
Fixed income
 
 
 
 
 
 
 
 
 
 
Government bonds
 
—

 
159

 
—

 
159

 
3
%
Corporate bonds
 
—

 
1,386

 
—

 
1,386

 
24
%
High yield debt
 
—

 
300

 
—

 
300

 
5
%
Mortgage-backed securities (non-government)
 
—

 
37

 
—

 
37

 
1
%
Alternatives
 
 
 
 
 
 
 


 
 
Hedge funds (Absolute return)
 
—

 
809

 
—

 
809

 
14
%
Derivatives
 
—

 
35

 
—

 
35

 
1
%
Private equity funds
 
—

 
—

 
25

 
25

 
—
%
Real estate funds
 
—

 
—

 
421

 
421

 
7
%
Total (1)
 
$
1,621


$
3,665


$
446

 
$
5,732

 
100
%

(1) 
Excludes $92 million as of December 31, 2014 of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table.

 
 
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
%
Mortgage-backed securities (non-government)
 
—

 
87

 
—

 
87

 
1
%
Alternatives
 


 


 


 
 
 
 
Hedge funds (Absolute return)
 
—

 
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
%


(1)
Excludes $(87) million as of December 31, 2013 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 2014 and 2013:
 
 
Private Equity Funds
 
Real Estate Funds
 
 
(In millions)
Balance as of January 1, 2013
 
$
33

 
$
357

Actual return on plan assets:
 


 


Unrealized gains
 
1

 
17

Realized gains
 
5

 
13

Transfers out
 
(12
)
 
(2
)
Balance as of December 31, 2013
 
$
27

 
$
385

Actual return on plan assets:
 
 
 
 
Unrealized gains (losses)
 
(2
)
 
17

Realized gains
 
1

 
14

Transfers in (out)
 
(1
)
 
5

Balance as of December 31, 2014
 
$
25

 
$
421


As of December 31, 2014 and 2013, the OPEB trust investments measured at fair value were as follows:
 
 
December 31, 2014
 
Asset Allocation
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
(In millions)
 
 
Cash and short-term securities
 
$
—

 
$
41

 
$
—

 
$
41

 
9
%
Equity investment
 
 
 
 
 
 
 
 
 
 
Domestic
 
230

 
—

 
—

 
230

 
48
%
International
 
3

 
3

 
—

 
6

 
1
%
Fixed income
 
 
 
 
 
 
 
 
 
 
U.S. treasuries
 
—

 
41

 
—

 
41

 
9
%
Government bonds
 
—

 
110

 
—

 
110

 
23
%
Corporate bonds
 
—

 
32

 
—

 
32

 
7
%
High yield debt
 
—

 
2

 
—

 
2

 
—
%
Mortgage-backed securities (non-government)
 
—

 
3

 
—

 
3

 
1
%
Alternatives
 
 
 
 
 
 
 
 
 
 
Hedge funds
 
—

 
5

 
—

 
5

 
1
%
Real estate funds
 
—

 
—

 
3

 
3

 
1
%
Total (1)
 
$
233

 
$
237

 
$
3

 
$
473

 
100
%

(1) 
Excludes $(9) million as of December 31, 2014 of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table.
 
 
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
%
Mortgage-backed securities (non-government)
 
—

 
3

 
—

 
3

 
1
%
Alternatives
 
 
 
 
 
 
 
 
 
 
Hedge funds
 
—

 
17

 
—

 
17

 
3
%
Real estate funds
 
—

 
—

 
5

 
5

 
1
%
Total (1)
 
$
236

 
$
263

 
$
5

 
$
504

 
100
%

(1)
Excludes $(9) million as of December 31, 2013, 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 2014 and 2013:
 
 
Real Estate Funds
 
 
 
Balance as of January 1, 2013
 
$
5

Balance as of December 31, 2013
 
5

Transfers out
 
(2
)
Balance as of December 31, 2014
 
$
3

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 pension and OPEB trust portfolios for 2014 and 2013 are shown in the following table:
 
 
Target Asset Allocations
 
 
2014
 
2013
Equities
 
42
%
 
26
%
Fixed income
 
32
%
 
40
%
Absolute return strategies
 
14
%
 
22
%
Real estate
 
5
%
 
5
%
Alternative investments
 
1
%
 
1
%
Cash
 
6
%
 
6
%
 
 
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
 
$
2

 
$
(1
)
Effect on accumulated benefit obligation
 
$
23

 
$
(22
)
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
 
 
Pension
 
Benefit Payments
 
Subsidy Receipts
 
 
(in millions)
2015
 
$
467

 
$
59

 
$
(3
)
2016
 
476

 
59

 
(3
)
2017
 
491

 
58

 
(3
)
2018
 
513

 
56

 
(3
)
2019
 
529

 
55

 
(3
)
Years 2020-2024
 
2,887

 
260

 
(10
)
FES’ share of the pension and OPEB net (liability) asset as of December 31, 2014 and 2013, was as follows:
 
 
Pension
 
OPEB
 
 
2014

2013
 
2014

2013
 
 
(In millions)
Net (Liability) Asset
 
$
(295
)
 
$
(149
)
 
$
10

 
$
(8
)
FES’ share of the net periodic pension and OPEB costs (credits) for the three years ended December 31, 2014 was as follows:
 
 
Pension
 
OPEB
 
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
 
 
(In millions)
Net Periodic Costs (Credits)
 
$
150

 
$
(30
)
 
$
78

 
$
(24
)
 
$
(40
)
 
$
(11
)