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. In 2014, the qualified pension plan was amended authorizing a voluntary cashout window program for certain eligible terminated participants with vested benefits. Payment of benefits for participants that elected an immediate lump sum cash payment or an annuity resulted in a $40 million reduction to the underfunded status of the pension plan. Additionally, during 2016 and 2015, certain unions ratified their labor agreements that ended subsidized retiree health care resulting in a reduction to the OPEB benefit obligation by approximately $13 million and $10 million, respectively.

FirstEnergy recognizes a pension and OPEB mark-to-market adjustment for 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, 2016, 2015, and 2014 were $194 million ($147 million net of amounts capitalized), $369 million ($242 million net of amounts capitalized), and $1,243 million ($835 million net of amounts capitalized), respectively. In 2016, the pension and OPEB mark-to-market adjustment primarily reflects a 25 basis point decline in the discount rate, partially offset by changes in actuarial assumptions, including mortality assumptions and higher than expected asset returns.

FirstEnergy’s pension and OPEB funding policy is based on actuarial computations using the projected unit credit method. In 2016, FirstEnergy satisfied its minimum required funding obligations of $382 million and addressed funding obligations for future years to its qualified pension plan with total contributions of $882 million (of which $138 million was cash contributions from FES), including $500 million of FE common stock contributed to the qualified pension plan on December 13, 2016.

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 2016, FirstEnergy’s qualified pension and OPEB plan assets experienced gains of $472 million, or 8.2% compared to losses of $(172) million, or (2.7)% in 2015 and earnings of $387 million, or 6.2% in 2014, and assumed a 7.50% rate of return for 2016 and a 7.75% rate of return for 2015 and 2014 on plan assets which generated $429 million, $476 million and $496 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 2016, the Society of Actuaries released its updated mortality improvement scale for pension plans, MP-2016, incorporating three additional years of SSA data on U.S. population mortality. MP-2016 incorporates SSA mortality data from 2012 to 2014 and a slight modification of two input values designed to improve the model’s year-over-year stability. The updated improvement scale indicates a slight decline in life expectancy as a result of the slower average rate of mortality improvement. Due to the additional years of data on population mortality, the RP2014 mortality table with the projection scale MP-2016 was utilized to determine the 2016 benefit cost and obligation as of December 31, 2016 for the FirstEnergy pension and OPEB plans. The impact of using the projection scale MP-2016 resulted in a decrease in the projected benefit obligation of $141 million and $8 million for the pension and OPEB plans, respectively, and was included in the 2016 pension and OPEB mark-to-market adjustment.



	Pension						OPEB
Obligations and Funded Status - Qualified and Non-Qualified Plans	2016			2015			2016			2015
	(In millions)
Change in benefit obligation:
Benefit obligation as of January 1	$	9,079		$	9,249		$	724		$	757

Service cost	191			193			5			5
Interest cost	398			383			30			29
Plan participants’ contributions	—			—			5			6
Plan amendments	—			—			(13		)	(10		)
Medicare retiree drug subsidy	—			—			1			1
Actuarial (gain) loss	224			(277		)	14			(2		)
Benefits paid	(466		)	(469		)	(55		)	(62		)
Benefit obligation as of December 31	$	9,426		$	9,079		$	711		$	724

Change in fair value of plan assets:
Fair value of plan assets as of January 1	$	5,338		$	5,824		$	431		$	464
Actual return (losses) on plan assets	442			(178		)	30			6
Company contributions	899			161			9			17
Plan participants’ contributions	—			—			5			6
Benefits paid	(466		)	(469		)	(55		)	(62		)
Fair value of plan assets as of December 31	$	6,213		$	5,338		$	420		$	431

Funded Status:
Qualified plan	$	(2,821	)	$	(3,366	)
Non-qualified plans	(392		)	(375		)
Funded Status	$	(3,213	)	$	(3,741	)	$	(291	)	$	(293	)

Accumulated benefit obligation	$	8,913		$	8,579		$	—		$	—

Amounts Recognized on the Balance Sheet:
Noncurrent assets	$	9		$	—		$	—		$	—
Current liabilities	(19		)	(18		)	—			—
Noncurrent liabilities	(3,203		)	(3,723		)	(291		)	(293		)
Net liability as of December 31	$	(3,213	)	$	(3,741	)	$	(291	)	$	(293	)

Amounts Recognized in AOCI:
Prior service cost (credit)	$	28		$	37		$	(288	)	$	(355	)

Assumptions Used to Determine Benefit Obligations
(as of December 31)
Discount rate	4.25		%	4.50		%	4.00		%	4.25		%
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			6.0-5.5%			6.0-5.5%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	N/A			N/A			4.5		%	4.5		%
Year that the rate reaches the ultimate trend rate	N/A			N/A			2027			2026

Allocation of Plan Assets (as of December 31)
Equity securities	44		%	40		%	53		%	51		%
Bonds	30		%	34		%	41		%	43		%
Absolute return strategies	8		%	7		%	—		%	—		%
Real estate	10		%	11		%	—		%	—		%
Cash and short-term securities	8		%	8		%	6		%	6		%
Total	100		%	100		%	100		%	100		%

The estimated 2017 amortization of pension and OPEB prior service costs (credits) from AOCI into net periodic pension and OPEB costs (credits) is approximately $8 million and $(81) million, respectively.



	Pension									OPEB
Components of Net Periodic Benefit Costs	2016			2015			2014			2016			2015			2014
	(In millions)
Service cost	$	191		$	193		$	167		$	5		$	5		$	9
Interest cost	398			383			402			30			29			39
Expected return on plan assets	(399		)	(443		)	(462		)	(30		)	(33		)	(34		)
Amortization of prior service cost (credit)	8			8			8			(80		)	(134		)	(176		)
Pension & OPEB mark-to-market adjustment	179			344			1,235			15			25			8
Net periodic benefit cost (credit)	$	377		$	485		$	1,350		$	(60	)	$	(108	)	$	(154	)



Assumptions Used to Determine Net Periodic Benefit Cost * for Years Ended December 31	Pension						OPEB
	2016		2015		2014		2016		2015		2014
Weighted-average discount rate	4.50	%	4.25	%	5.00	%	4.25	%	4.00	%	4.75	%
Expected long-term return on plan assets	7.50	%	7.75	%	7.75	%	7.50	%	7.75	%	7.75	%
Rate of compensation increase	4.20	%	4.20	%	4.20	%	N/A		N/A		N/A

^*Excludes impact of pension and 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 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 10, Fair Value Measurements, for a description of each level of the fair value hierarchy. There were no significant transfers between levels during 2016 and 2015.



	December 31, 2016										Asset Allocation
	Level 1		Level 2			Level 3		Total			Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	464		$	—	$	464		8	%
Equity investments
Domestic ⁽²⁾	1,048		13			—		1,061			17	%
International	422		1,269			—		1,691			27	%
Fixed income
Government bonds	—		106			—		106			2	%
Corporate bonds	—		1,245			—		1,245			20	%
High yield debt	—		372			—		372			6	%
Mortgage-backed securities (non-government)	—		112			—		112			2	%
Alternatives
Hedge funds (Absolute return)	—		500			—		500			8	%
Derivatives	—		(1		)	—		(1		)	—	%
Private equity funds	—		—			33		33			—	%
Real estate funds	—		—			615		615			10	%
Total ⁽¹⁾	$	1,470	$	4,080		$	648	$	6,198		100	%


⁽¹⁾	Excludes $16 million as of December 31, 2016 of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table.


⁽²⁾	As a result of the $500 million equity contribution on December 13, 2016, there was $293 million of FE Stock included in the pension plan assets as of December 31, 2016.



	December 31, 2015								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	427	$	—	$	427	8	%
Equity investments
Domestic	869		75		—		944		18	%
International	395		794		—		1,189		22	%
Fixed income
Government bonds	—		232		—		232		4	%
Corporate bonds	—		1,115		—		1,115		21	%
High yield debt	—		438		—		438		8	%
Mortgage-backed securities (non-government)	—		31		—		31		1	%
Alternatives
Hedge funds (Absolute return)	—		343		—		343		7	%
Derivatives	—		15		—		15		—	%
Private equity funds	—		—		24		24		—	%
Real estate funds	—		—		587		587		11	%
Total ⁽¹⁾	$	1,264	$	3,470	$	611	$	5,345	100	%


⁽¹⁾	Excludes $(7) million as of December 31, 2015 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 2016 and 2015:



	Private Equity Funds			Real Estate Funds
	(In millions)
Balance as of January 1, 2015	$	25		$	421
Actual return on plan assets:
Unrealized gains	—			42
Realized gains (losses)	(1		)	16
Transfers in	—			108
Balance as of December 31, 2015	$	24		$	587
Actual return on plan assets:
Unrealized gains	1			29
Realized gains	1			14
Transfers in (out)	7			(15		)
Balance as of December 31, 2016	$	33		$	615

As of December 31, 2016 and 2015, the OPEB trust investments measured at fair value were as follows:



	December 31, 2016								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	27	$	—	$	27	6	%
Equity investment
Domestic	223		—		—		223		53	%
International	—		—		—		—		—	%
Fixed income
U.S. treasuries	—		40		—		40		9	%
Government bonds	—		108		—		108		26	%
Corporate bonds	—		24		—		24		6	%
High yield debt	—		—		—		—		—	%
Mortgage-backed securities (non-government)	—		2		—		2		—	%
Alternatives
Hedge funds	—		—		—		—		—	%
Real estate funds	—		—		—		—		—	%
Total ⁽¹⁾	$	223	$	201	$	—	$	424	100	%


⁽¹⁾	Excludes $(4) million as of December 31, 2016 of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table.



	December 31, 2015								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	25	$	—	$	25	6	%
Equity investment
Domestic	219		—		—		219		50	%
International	1		3		—		4		1	%
Fixed income
U.S. treasuries	—		42		—		42		10	%
Government bonds	—		114		—		114		26	%
Corporate bonds	—		27		—		27		6	%
High yield debt	—		1		—		1		—	%
Mortgage-backed securities (non-government)	—		3		—		3		1	%
Alternatives
Hedge funds	—		1		—		1		—	%
Real estate funds	—		—		2		2		—	%
Total ⁽¹⁾	$	220	$	216	$	2	$	438	100	%


⁽¹⁾	Excludes $(7) million as of December 31, 2015, 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 2016 and 2015:



	Real Estate Funds
	(in millions)
Balance as of January 1, 2015	$	3
Transfers out	(1		)
Balance as of December 31, 2015	$	2
Transfers out	(2		)
Balance as of December 31, 2016	$	—

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 2016 and 2015 are shown in the following table:



Target Asset Allocations

Equities	38	%
Fixed income	30	%
Absolute return strategies	8	%
Real estate	10	%
Alternative investments	8	%
Cash	6	%
	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	$	23	$	(20	)

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)
2016	$	505	$	52	$	(3	)
2017	523		52		(3		)
2018	534		53		(3		)
2019	552		53		(3		)
2020	566		53		(3		)
Years 2021-2025	2,999		251		(7		)

FES’ share of the pension and OPEB net (liability) asset as of December 31, 2016 and 2015, was as follows:



	Pension						OPEB
	2016			2015			2016		2015
	(In millions)
Net (Liability) Asset⁽¹⁾	$	(158	)	$	(303	)	$	36	$	25

⁽¹⁾ Excludes $866 million and $785 million as of December 31, 2016 and 2015, respectively, of affiliated non-current liabilities related to pension and OPEB mark-to-market costs allocated to FES of which $570 million and $518 million, respectively, are from FENOC.

FES’ share of the net periodic benefit cost (credit), including the pension and OPEB mark-to-market adjustment, for the three years ended December 31, 2016 was as follows:



	Pension							OPEB
	2016			2015		2014		2016			2015			2014
	(In millions)
Net Periodic Cost (Credit)	$	(5	)	$	10	$	150	$	(26	)	$	(22	)	$	(24	)