FAIR VALUE MEASUREMENTS

RECURRING AND NONRECURRING FAIR VALUE MEASUREMENTS

On January 1, 2012, FirstEnergy adopted an amendment to the authoritative accounting guidance regarding fair value measurements. The amendment was applied prospectively and expanded disclosure requirements for fair value measurements, particularly for Level 3 measurements, among other changes.

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, NUGs and LCAPPs are as 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 RTO 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 from objective sources, are the most recent RTO 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 9, Derivative Instruments, for additional information regarding FirstEnergy's FTRs.

NUG contracts represent purchased power agreements 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 next three 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.

LCAPP contracts are financially settled agreements that allow eligible generators to receive payments from, or make payments to, JCP&L pursuant to an annually calculated load-ratio share of the capacity produced by the generator based upon the annual forecasted peak demand as determined by PJM. LCAPP contracts are recorded at fair value and adjusted periodically using a mark-to-model methodology, which approximates market. The primary unobservable input into the model is forecasted regional capacity prices. Pricing for the LCAPP contracts is a combination of PJM RPM capacity auction prices for the 2015/2016 delivery year and internal models using historical trends and market data for the remaining years under contract. Capacity prices beyond the 2015/2016 delivery year are developed through a simulation of future PJM RPM auctions. The capacity price forecast assumes a continuation of the current PJM RPM market design and is reflective of the regional peak demand growth and generation fleet additions and retirements that underlie FirstEnergy’s long-term energy price forecast. 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, 2012, from those used as of December 31, 2011. 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 year ended December 31, 2012. 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, 2012												December 31, 2011
	Level 1			Level 2			Level 3			Total			Level 1		Level 2			Level 3			Total
Assets	(In millions)
Corporate debt securities	$	—		$	1,259		$	—		$	1,259		$	—	$	1,544		$	—		$	1,544
Derivative assets - commodity contracts	—			252			—			252			—		264			—			264
Derivative assets - FTRs	—			—			8			8			—		—			1			1
Derivative assets - NUG contracts⁽¹⁾	—			—			36			36			—		—			56			56
Equity securities⁽²⁾	310			—			—			310			259		—			—			259
Foreign government debt securities	—			126			—			126			—		3			—			3
U.S. government debt securities	—			179			—			179			—		148			—			148
U.S. state debt securities	—			299			—			299			—		314			—			314
Other⁽³⁾	126			227			—			353			49		225			—			274
Total assets	$	436		$	2,342		$	44		$	2,822		$	308	$	2,498		$	57		$	2,863

Liabilities
Derivative liabilities - commodity contracts	$	(3	)	$	(151	)	$	—		$	(154	)	$	—	$	(247	)	$	—		$	(247	)
Derivative liabilities - FTRs	—			—			(9		)	(9		)	—		—			(23		)	(23		)
Derivative liabilities - NUG contracts⁽¹⁾	—			—			(290		)	(290		)	—		—			(349		)	(349		)
Derivative liabilities - LCAPP contracts⁽¹⁾	—			—			(144		)	(144		)	—		—			—			—
Total liabilities	$	(3	)	$	(151	)	$	(443	)	$	(597	)	$	—	$	(247	)	$	(372	)	$	(619	)

Net assets (liabilities)⁽⁴⁾	$	433		$	2,191		$	(399	)	$	2,225		$	308	$	2,251		$	(315	)	$	2,244


⁽¹⁾	NUG and LCAPP contracts are generally 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.


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


⁽⁴⁾	Excludes $110 million and $(52) million as of December 31, 2012 and December 31, 2011, 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 and LCAPP contracts and FTRs that are classified as Level 3 in the fair value hierarchy for the periods ended December 31, 2012 and December 31, 2011:



	NUG Contracts⁽¹⁾									LCAPP Contracts⁽¹⁾								FTRs
	Derivative Assets			Derivative Liabilities			Net			Derivative Assets		Derivative Liabilities			Net			Derivative Assets			Derivative Liabilities			Net
	(in millions)
January 1, 2011 Balance	$	122		$	(466	)	$	(344	)	$	—	$	—		$	—		$	—		$	—		$	—
Unrealized gain (loss)	(58		)	(144		)	(202		)	—		—			—			2			(27		)	(25		)
Purchases	—			—			—			—		—			—			13			(4		)	9
Settlements	(7		)	261			254			—		—			—			(14		)	20			6
Transfers out of Level 3	—			—			—			—		—			—			—			(12		)	(12		)
December 31, 2011 Balance	$	57		$	(349	)	$	(292	)	$	—	$	—		$	—		$	1		$	(23	)	$	(22	)
Unrealized gain (loss)	(20		)	(180		)	(200		)	—		1			1			6			(6		)	—
Purchases	—			—			—			—		(145		)	(145		)	13			(10		)	3
Settlements	(1		)	239			238			—		—			—			(12		)	30			18
December 31, 2012 Balance	$	36		$	(290	)	$	(254	)	$	—	$	(144	)	$	(144	)	$	8		$	(9	)	$	(1	)


⁽¹⁾	Changes in the fair value of NUG and LCAPP contracts are generally subject to regulatory accounting treatment and do not impact earnings.

Level 3 Quantitative Information

The following table provides quantitative information for FTRs, NUG contracts and LCAPP contracts that are classified as Level 3 in the fair value hierarchy for the period ended December 31, 2012:

Fair Value as of December 31, 2012 (In millions)

Valuation

Technique

Significant Input

Range

Weighted Average

Units

FTRs

)

Model

RTO auction clearing prices

($3.20) to $6.30

0.50

Dollars/MWH

NUG Contracts

(254

)

Model

Generation

Electricity regional prices

700 to 6,525,000

$50.00 to $57.30

1,920,000

$53.90

MWH

Dollars/MWH

LCAPP Contracts

(144

)

Model

Regional capacity prices

$158.60 to $197.30

$174.50

Dollars/MW-Day



FES

Recurring Fair Value Measurements	December 31, 2012												December 31, 2011
	Level 1			Level 2			Level 3			Total			Level 1		Level 2			Level 3			Total
Assets	(In millions)
Corporate debt securities	$	—		$	703		$	—		$	703		$	—	$	1,010		$	—		$	1,010
Derivative assets - commodity contracts	—			252			—			252			—		248			—			248
Derivative assets - FTRs	—			—			6			6			—		—			1			1
Equity securities⁽¹⁾	294			—			—			294			124		—			—			124
Foreign government debt securities	—			61			—			61			—		3			—			3
U.S. government debt securities	—			27			—			27			—		7			—			7
U.S. state debt securities	—			—			—			—			—		5			—			5
Other⁽²⁾	—			104			—			104			—		132			—			132
Total assets	$	294		$	1,147		$	6		$	1,447		$	124	$	1,405		$	1		$	1,530

Liabilities
Derivative liabilities - commodity contracts	$	(3	)	$	(151	)	$	—		$	(154	)	$	—	$	(234	)	$	—		$	(234	)
Derivative liabilities - FTRs	—			—			(6		)	(6		)	—		—			(7		)	(7		)
Total liabilities	$	(3	)	$	(151	)	$	(6	)	$	(160	)	$	—	$	(234	)	$	(7	)	$	(241	)

Net assets (liabilities)⁽³⁾	$	291		$	996		$	—		$	1,287		$	124	$	1,171		$	(6	)	$	1,289


⁽¹⁾	NDT funds hold equity portfolios whose performance is benchmarked against the Alerian MLP Index.


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


⁽³⁾	Excludes $94 million and $(58) million as of December 31, 2012 and December 31, 2011, respectively, of receivables, payables, taxes and accrued income associated with the 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, 2012 and December 31, 2011:



	Derivative Asset FTRs			Derivative Liability FTRs			Net FTRs
	(In millions)
January 1, 2011 Balance	$	—		$	—		$	—
Unrealized gain (loss)	4			(8		)	(4		)
Purchases	2			(1		)	1
Settlements	(5		)	2			(3		)
December 31, 2011 Balance	$	1		$	(7	)	$	(6	)
Unrealized gain (loss)	4			(4		)	—
Purchases	9			(7		)	2
Settlements	(8		)	12			4
December 31, 2012 Balance	$	6		$	(6	)	$	—

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, 2012:

Fair Value as of December 31, 2012 (In millions)

Valuation

Technique

Significant Input

Range

Weighted Average

Units

FTRs

—

Model

RTO auction clearing prices

($3.20) to $6.30

$0.30

Dollars/MWH



OE

Recurring Fair Value Measurements	December 31, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets	(In millions)
Corporate debt securities	$	—	$	—	$	—	$	—	$	—	$	3	$	—	$	3
U.S. government debt securities	—		137		—		137		—		132		—		132
Other⁽¹⁾	—		4		—		4		—		2		—		2
Total assets⁽²⁾	$	—	$	141	$	—	$	141	$	—	$	137	$	—	$	137


⁽¹⁾	Primarily consists of short-term cash investments.


⁽²⁾	Excludes $1 million as of December 31, 2012 and 2011, of receivables, payables, taxes and accrued income associated with the financial instruments reflected within the fair value table.



JCP&L

Recurring Fair Value Measurements	December 31, 2012										December 31, 2011
	Level 1		Level 2		Level 3			Total			Level 1		Level 2		Level 3			Total
Assets	(In millions)
Corporate debt securities	$	—	$	142	$	—		$	142		$	—	$	144	$	—		$	144
Derivative assets - NUG contracts⁽¹⁾	—		—		1			1			—		—		4			4
Equity securities⁽²⁾	—		—		—			—			30		—		—			30
Foreign government debt securities	—		17		—			17			—		—		—			—
U.S. government debt securities	—		5		—			5			—		2		—			2
U.S. state debt securities	—		232		—			232			—		219		—			219
Other⁽³⁾	—		32		—			32			—		15		—			15
Total assets	—		428		1			429			30		380		4			414

Liabilities
Derivative liabilities - NUG contracts⁽¹⁾	—		—		(121		)	(121		)	—		—		(147		)	(147		)
Derivative liabilities - LCAPP contracts⁽¹⁾	—		—		(144		)	(144		)	—		—		—			—
Total liabilities	—		—		(265		)	(265		)	—		—		(147		)	(147		)

Net assets (liabilities)⁽⁴⁾	$	—	$	428	$	(264	)	$	164		$	30	$	380	$	(143	)	$	267


⁽¹⁾	NUG and LCAPP 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.


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


⁽⁴⁾	Excludes $3 million and $2 million as of December 31, 2012 and December 31, 2011, respectively, of receivables, payables, taxes and accrued income associated with the 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 and LCAPP contracts held by JCP&L and classified as Level 3 in the fair value hierarchy for the periods ended December 31, 2012 and December 31, 2011:



	NUG Contracts⁽¹⁾									LCAPP Contracts⁽¹⁾
	Derivative Assets			Derivative Liabilities			Net			Derivative Assets		Derivative Liabilities			Net
	(in millions)
January 1, 2011 Balance	$	6		$	(233	)	$	(227	)	$	—	$	—		$	—
Unrealized loss	(2		)	(11		)	(13		)	—		—			—
Settlements	—			97			97			—		—			—
December 31, 2011 Balance	$	4		$	(147	)	$	(143	)	$	—	$	—		$	—
Unrealized gain (loss)	(3		)	(27		)	(30		)	—		1			1
Purchases	—			—			—			—		(145		)	(145		)
Settlements	—			53			53			—		—			—
December 31, 2012 Balance	$	1		$	(121	)	$	(120	)	$	—	$	(144	)	$	(144	)


⁽¹⁾	Changes in the fair value of NUG and LCAPP contracts are subject to regulatory accounting treatment and do not impact earnings.

Level 3 Quantitative Information

The following table provides quantitative information for NUG and LCAPP contracts held by JCP&L that are classified as Level 3 in the fair value hierarchy for the period ended December 31, 2012:

Fair Value as of December 31, 2012 (In millions)

Valuation

Technique

Significant Input

Range

Weighted Average

Units

NUG Contracts

(120

)

Model

Generation
Electricity regional prices

76,000 to 1,417,000

$52.20 to $59.50

257,000

$56.10

MWH

Dollars/MWH

LCAPP Contracts

(144

)

Model

Regional capacity prices

$158.60 to $197.30

$174.50

Dollars/MW-Day

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, available-for-sale securities and notes receivable.

At the end of each reporting period, FirstEnergy evaluates its investments for OTTI. Investments classified as available-for-sale securities are evaluated to determine whether a decline in fair value below the cost basis is other than temporary. FirstEnergy first 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 available-for-sale securities are recognized in OCI. However, unrealized losses held in the NDTs of FES and OE 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 are subject to regulatory accounting, and therefore, net unrealized gains and losses are recorded as regulatory assets or liabilities because the difference between investments held in the trust and the decommissioning liabilities is expected to be recovered from or refunded to customers.

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, preferred stocks, securities convertible into common stock and securities of the trust funds' custodian or managers and their parents or subsidiaries.

Available-For-Sale Securities

FES, OE and JCP&L hold debt and equity securities within their NDT, nuclear fuel disposal and NUG trusts. These trust investments are considered available-for-sale securities, recognized at fair market value. FES, OE and JCP&L have 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, nuclear fuel disposal and NUG trusts as of December 31, 2012 and December 31, 2011:



	December 31, 2012⁽¹⁾						December 31, 2011⁽²⁾
	Cost Basis		Unrealized Gains		Fair Value		Cost Basis		Unrealized Gains		Fair Value
	(In millions)
Debt securities
FirstEnergy	$	1,827	$	34	$	1,861	$	1,980	$	25	$	2,005
FES	778		14		792		1,012		13		1,025
OE	137		—		137		134		—		134
JCP&L	382		11		393		356		7		363

Equity securities
FirstEnergy	$	293	$	16	$	309	$	222	$	36	$	258
FES	281		13		294		104		20		124
JCP&L	—		—		—		27		3		30


⁽¹⁾	Excludes short-term cash investments: FE Consolidated - $326 million; FES - $196 million; OE - $4 million; JCP&L - $38 million.


⁽²⁾	Excludes short-term cash investments: FE Consolidated - $164 million; FES - $74 million; OE - $2 million; JCP&L - $19 million.

Proceeds from the sale of investments in available-for-sale securities, realized gains and losses on those sales and interest and dividend income for the three years ended December 31, 2012 , 2011 and 2010 were as follows:




2012	Sale Proceeds		Realized Gains		Realized Losses			Interest and Dividend Income
	(In millions)
FirstEnergy	$	2,980	$	179	$	(99	)	$	70
FES	1,464		124		(73		)	39
OE	105		—		—			3
JCP&L	516		12		(5		)	14
2011	Sale Proceeds		Realized Gains		Realized Losses			Interest and Dividend Income
	(In millions)
FirstEnergy	$	4,207	$	229	$	(90	)	$	82
FES	1,843		80		(46		)	47
OE	154		6		—			3
JCP&L	779		39		(11		)	15
2010	Sale Proceeds		Realized Gains		Realized Losses			Interest and Dividend Income
	(In millions)
FirstEnergy	$	3,172	$	126	$	(107	)	$	79
FES	1,927		92		(75		)	47
OE	83		2		—			3
JCP&L	411		10		(10		)	14

Held-To-Maturity Securities

The following table provides the amortized cost basis, unrealized gains (there were no unrealized losses) and approximate fair values of investments in held-to-maturity securities as of December 31, 2012 and December 31, 2011:



	December 31, 2012						December 31, 2011
	Cost Basis		Unrealized Gains		Fair Value		Cost Basis		Unrealized Gains		Fair Value
	(In millions)
Debt Securities
FirstEnergy	$	54	$	30	$	84	$	402	$	50	$	452
OE	132		16		148		163		21		184

Investments in emission allowances, employee benefit trusts and cost and equity method investments totaling $644 million as of December 31, 2012, and $693 million as of December 31, 2011, are excluded from the amounts reported above.

During 2012, FE increased its ownership interest in a cost method investment. The increased investment triggered a change in the investment accounting from the cost method to the equity method. As a result of this change, FE recorded a reduction of $9 million to retained earnings in 2012 to reflect the investment as if it had been historically accounted for under the equity method.

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 and other long-term obligations, excluding capital lease obligations and net unamortized premiums and discounts:



	December 31, 2012				December 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(In millions)
FirstEnergy	$	16,957	$	19,460	$	17,165	$	19,320
FES	4,194		4,524		3,675		3,931
OE	1,157		1,500		1,157		1,434
JCP&L	1,743		2,059		1,777		2,080

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 and its subsidiaries. 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, 2012 and December 31, 2011.