FAIR VALUE MEASUREMENTS

RECURRING FAIR VALUE MEASUREMENTS

Authoritative accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements. The three levels of the fair value hierarchy and a description of the valuation techniques are as follows:



Level 1	-	Quoted prices for identical instruments in active market

Level 2	-	Quoted prices for similar instruments in active market
	-	Quoted prices for identical or similar instruments in markets that are not active
	-	Model-derived valuations for which all significant inputs are observable market data

Models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.



Level 3	-	Valuation inputs are unobservable and significant to the fair value measurement

FirstEnergy produces a long-term power and capacity price forecast annually with periodic updates as market conditions change. When underlying prices are not observable, prices from the long-term price forecast, which has been reviewed and approved by FirstEnergy's Risk Policy Committee, are used to measure fair value. A more detailed description of FirstEnergy's valuation process for FTRs and NUGs follows:

FTRs are financial instruments that entitle the holder to a stream of revenues (or charges) based on the hourly day-ahead congestion price differences across transmission paths. FTRs are acquired by FirstEnergy in the annual, monthly and long-term PJM auctions and are initially recorded using the auction clearing price less cost. After initial recognition, FTRs' carrying values are periodically adjusted to fair value using a mark-to-model methodology, which approximates market. The primary inputs into the model, which are generally less observable than objective sources, are the most recent PJM auction clearing prices and the FTRs' remaining hours. The model calculates the fair value by multiplying the most recent auction clearing price by the remaining FTR hours less the prorated FTR cost. Generally, significant increases or decreases in inputs in isolation could result in a higher or lower fair value measurement. See "Note 11, Derivative Instruments", for additional information regarding FirstEnergy's FTRs.

NUG contracts represent PPAs with third-party non-utility generators that are transacted to satisfy certain obligations under PURPA. NUG contract carrying values are recorded at fair value and adjusted periodically using a mark-to-model methodology, which approximates market. The primary unobservable inputs into the model are regional power prices and generation MWH. Pricing for the NUG contracts is a combination of market prices for the current year and the subsequent two years based on observable data and internal models using historical trends and market data for the remaining years under contract. The internal models use forecasted energy purchase prices as an input when prices are not defined by the contract. Forecasted market prices are based on ICE quotes and management assumptions. Generation MWH reflects data provided by contractual arrangements and historical trends. The model calculates the fair value by multiplying the prices by the generation MWH. Generally, significant increases or decreases in inputs in isolation could result in a higher or lower fair value measurement.

FirstEnergy primarily applies the market approach for recurring fair value measurements using the best information available. Accordingly, FirstEnergy maximizes the use of observable inputs and minimizes the use of unobservable inputs. There were no changes in valuation methodologies used as of December 31, 2016, from those used as of December 31, 2015. The determination of the fair value measures takes into consideration various factors, including but not limited to, nonperformance risk, counterparty credit risk and the impact of credit enhancements (such as cash deposits, LOCs and priority interests). The impact of these forms of risk was not significant to the fair value measurements.

Transfers between levels are recognized at the end of the reporting period. There were no transfers between levels during the years ended December 31, 2016 and 2015. The following tables set forth the recurring assets and liabilities that are accounted for at fair value by level within the fair value hierarchy:



FirstEnergy

Recurring Fair Value Measurements	December 31, 2016												December 31, 2015
	Level 1			Level 2			Level 3			Total			Level 1			Level 2			Level 3			Total
Assets	(In millions)
Corporate debt securities	$	—		$	1,247		$	—		$	1,247		$	—		$	1,245		$	—		$	1,245
Derivative assets - commodity contracts	10			200			—			210			4			224			—			228
Derivative assets - FTRs	—			—			7			7			—			—			8			8
Derivative assets - NUG contracts⁽¹⁾	—			—			1			1			—			—			1			1
Equity securities⁽²⁾	925			—			—			925			576			—			—			576
Foreign government debt securities	—			78			—			78			—			75			—			75
U.S. government debt securities	—			161			—			161			—			180			—			180
U.S. state debt securities	—			246			—			246			—			246			—			246
Other⁽³⁾	199			123			—			322			105			212			—			317
Total assets	$	1,134		$	2,055		$	8		$	3,197		$	685		$	2,182		$	9		$	2,876

Liabilities
Derivative liabilities - commodity contracts	$	(6	)	$	(118	)	$	—		$	(124	)	$	(9	)	$	(122	)	$	—		$	(131	)
Derivative liabilities - FTRs	—			—			(6		)	(6		)	—			—			(13		)	(13		)
Derivative liabilities - NUG contracts⁽¹⁾	—			—			(108		)	(108		)	—			—			(137		)	(137		)
Total liabilities	$	(6	)	$	(118	)	$	(114	)	$	(238	)	$	(9	)	$	(122	)	$	(150	)	$	(281	)

Net assets (liabilities)⁽⁴⁾	$	1,128		$	1,937		$	(106	)	$	2,959		$	676		$	2,060		$	(141	)	$	2,595


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


⁽²⁾	NDT funds hold equity portfolios whose performance is benchmarked against the Alerian MLP Index or the Wells Fargo Hybrid and Preferred Securities REIT index.


⁽³⁾	Primarily consists of cash and short-term cash investments.


⁽⁴⁾	Excludes $(3) million and $7 million as of December 31, 2016 and December 31, 2015, respectively, of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table.

Rollforward of Level 3 Measurements

The following table provides a reconciliation of changes in the fair value of NUG contracts and FTRs that are classified as Level 3 in the fair value hierarchy for the periods ended December 31, 2016 and December 31, 2015:



	NUG Contracts⁽¹⁾									FTRs
	Derivative Assets			Derivative Liabilities			Net			Derivative Assets			Derivative Liabilities			Net
	(In millions)
January 1, 2015 Balance	$	2		$	(153	)	$	(151	)	$	39		$	(14	)	$	25
Unrealized gain (loss)	2			(49		)	(47		)	(5		)	(7		)	(12		)
Purchases	—			—			—			22			(11		)	11
Settlements	(3		)	65			62			(48		)	19			(29		)
December 31, 2015 Balance	$	1		$	(137	)	$	(136	)	$	8		$	(13	)	$	(5	)
Unrealized gain (loss)	2			(17		)	(15		)	(6		)	(4		)	(10		)
Purchases	—			—			—			16			(7		)	9
Settlements	(2		)	46			44			(11		)	18			7
December 31, 2016 Balance	$	1		$	(108	)	$	(107	)	$	7		$	(6	)	$	1

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

Level 3 Quantitative Information

The following table provides quantitative information for FTRs and NUG contracts that are classified as Level 3 in the fair value hierarchy for the period ended December 31, 2016:

Fair Value, Net (In millions)

Valuation
Technique

Significant Input

Range

Weighted Average

Units

FTRs

Model

RTO auction clearing prices

($4.20) to $6.10

$0.80

Dollars/MWH

NUG Contracts

(107

)

Model

Generation
Regional electricity prices

400 to 2,984,000

$32.60 to $33.40

754,000 $32.80

MWH
Dollars/MWH



FES

Recurring Fair Value Measurements	December 31, 2016												December 31, 2015
	Level 1			Level 2			Level 3			Total			Level 1			Level 2			Level 3			Total
Assets	(In millions)
Corporate debt securities	$	—		$	726		$	—		$	726		$	—		$	678		$	—		$	678
Derivative assets - commodity contracts	10			200			—			210			4			224			—			228
Derivative assets - FTRs	—			—			4			4			—			—			5			5
Equity securities⁽¹⁾	634			—			—			634			378			—			—			378
Foreign government debt securities	—			58			—			58			—			59			—			59
U.S. government debt securities	—			48			—			48			—			23			—			23
U.S. state debt securities	—			3			—			3			—			4			—			4
Other⁽²⁾	2			81			—			83			—			184			—			184
Total assets	$	646		$	1,116		$	4		$	1,766		$	382		$	1,172		$	5		$	1,559

Liabilities
Derivative liabilities - commodity contracts	$	(6	)	$	(118	)	$	—		$	(124	)	$	(9	)	$	(122	)	$	—		$	(131	)
Derivative liabilities - FTRs	—			—			(5		)	(5		)	—			—			(11		)	(11		)
Total liabilities	$	(6	)	$	(118	)	$	(5	)	$	(129	)	$	(9	)	$	(122	)	$	(11	)	$	(142	)

Net assets (liabilities)⁽³⁾	$	640		$	998		$	(1	)	$	1,637		$	373		$	1,050		$	(6	)	$	1,417


⁽¹⁾	NDT funds hold equity portfolios whose performance is benchmarked against the Alerian MLP Index or the Wells Fargo Hybrid and Preferred Securities REIT index.


⁽²⁾	Primarily consists of short-term cash investments.


⁽³⁾	Excludes $2 million and $1 million as of December 31, 2016 and December 31, 2015, respectively, of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table.

Rollforward of Level 3 Measurements

The following table provides a reconciliation of changes in the fair value of FTRs held by FES and classified as Level 3 in the fair value hierarchy for the periods ended December 31, 2016 and December 31, 2015:



	Derivative Asset			Derivative Liability			Net Asset/(Liability)
	(In millions)
January 1, 2015 Balance	$	27		$	(13	)	$	14
Unrealized gain (loss)	2			(5		)	(3		)
Purchases	9			(10		)	(1		)
Settlements	(33		)	17			(16		)
December 31, 2015 Balance	$	5		$	(11	)	$	(6	)
Unrealized loss	(4		)	(3		)	(7		)
Purchases	10			(5		)	5
Settlements	(7		)	14			7
December 31, 2016 Balance	$	4		$	(5	)	$	(1	)

Level 3 Quantitative Information

The following table provides quantitative information for FTRs held by FES that are classified as Level 3 in the fair value hierarchy for the period ended December 31, 2016:

Fair Value, Net (In millions)

Valuation
Technique

Significant Input

Range

Weighted Average

Units

FTRs

)

Model

RTO auction clearing prices

($4.20) to $5.30

$0.60

Dollars/MWH

INVESTMENTS

All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets at cost, which approximates their fair market value. Investments other than cash and cash equivalents include held-to-maturity securities and AFS securities.

At the end of each reporting period, FirstEnergy evaluates its investments for OTTI. Investments classified as AFS securities are evaluated to determine whether a decline in fair value below the cost basis is other than temporary. FirstEnergy considers its intent and ability to hold an equity security until recovery and then considers, among other factors, the duration and the extent to which the security's fair value has been less than its cost and the near-term financial prospects of the security issuer when evaluating an investment for impairment. For debt securities, FirstEnergy considers its intent to hold the securities, the likelihood that it will be required to sell the securities before recovery of its cost basis and the likelihood of recovery of the securities' entire amortized cost basis. If the decline in fair value is determined to be other than temporary, the cost basis of the securities is written down to fair value.

Unrealized gains and losses on AFS securities are recognized in AOCI. However, unrealized losses held in the NDTs of FES, OE and TE are recognized in earnings since the trust arrangements, as they are currently defined, do not meet the required ability and intent to hold criteria in consideration of OTTI. The NDTs of JCP&L, ME and PN are subject to regulatory accounting with unrealized gains and losses offset against regulatory assets.

The investment policy for the NDT funds restricts or limits the trusts' ability to hold certain types of assets including private or direct placements, warrants, securities of FirstEnergy, investments in companies owning nuclear power plants, financial derivatives, securities convertible into common stock and securities of the trust funds' custodian or managers and their parents or subsidiaries.

AFS Securities

FirstEnergy holds debt and equity securities within its NDT and nuclear fuel disposal trusts. These trust investments are considered AFS securities, recognized at fair market value. FirstEnergy has no securities held for trading purposes.

The following table summarizes the amortized cost basis, unrealized gains (there were no unrealized losses) and fair values of investments held in NDT and nuclear fuel disposal trusts as of December 31, 2016 and December 31, 2015:



	December 31, 2016⁽¹⁾						December 31, 2015⁽²⁾
	Cost Basis		Unrealized Gains		Fair Value		Cost Basis		Unrealized Gains		Fair Value
	(In millions)
Debt securities
FirstEnergy	$	1,735	$	38	$	1,773	$	1,778	$	16	$	1,794
FES	847		27		874		801		9		810

Equity securities
FirstEnergy	$	822	$	103	$	925	$	542	$	34	$	576
FES	564		70		634		354		24		378


⁽¹⁾	Excludes short-term cash investments: FirstEnergy - $61 million; FES - $44 million.


⁽²⁾	Excludes short-term cash investments: FirstEnergy - $157 million; FES - $139 million.

Proceeds from the sale of investments in AFS securities, realized gains and losses on those sales, OTTI and interest and dividend income for the three years ended December 31, 2016, 2015 and 2014 were as follows:



December 31, 2016	Sale Proceeds		Realized Gains		Realized Losses			OTTI			Interest and Dividend Income
	(In millions)
FirstEnergy	$	1,678	$	170	$	(121	)	$	(21	)	$	100
FES	717		117		(69		)	(19		)	56

December 31, 2015	Sale Proceeds		Realized Gains		Realized Losses			OTTI			Interest and Dividend Income
	(In millions)
FirstEnergy	$	1,534	$	209	$	(191	)	$	(102	)	$	101
FES	733		158		(134		)	(90		)	57

December 31, 2014	Sale Proceeds		Realized Gains		Realized Losses			OTTI			Interest and Dividend Income
	(In millions)
FirstEnergy	$	2,133	$	146	$	(75	)	$	(37	)	$	96
FES	1,163		113		(54		)	(33		)	56

Held-To-Maturity Securities

Unrealized gains (there were no unrealized losses) and approximate fair values of investments in held-to-maturity securities as of December 31, 2016 and December 31, 2015 are immaterial to FirstEnergy. Investments in employee benefit trusts and equity method investments totaling $266 million as of December 31, 2016 and $255 million as of December 31, 2015, are excluded from the amounts reported above.

LONG-TERM DEBT AND OTHER LONG-TERM OBLIGATIONS

All borrowings with initial maturities of less than one year are defined as short-term financial instruments under GAAP and are reported as Short-term borrowings on the Consolidated Balance Sheets at cost. Since these borrowings are short-term in nature, FirstEnergy believes that their costs approximate their fair market value. The following table provides the approximate fair value and related carrying amounts of long-term debt, which excludes capital lease obligations and net unamortized debt issuance costs, premiums and discounts:



	December 31, 2016				December 31, 2015
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(In millions)
FirstEnergy	$	19,885	$	19,829	$	20,244	$	21,519
FES	3,000		1,555		3,027		3,121

The fair values of long-term debt and other long-term obligations reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective period. The yields assumed were based on securities with similar characteristics offered by corporations with credit ratings similar to those of FirstEnergy. FirstEnergy classified short-term borrowings, long-term debt and other long-term obligations as Level 2 in the fair value hierarchy as of December 31, 2016 and December 31, 2015.