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. During 2012, FirstEnergy amended its OPEB plan to reduce the limit of life insurance benefits for active employees and retirees resulting in a reduction to OPEB liabilities of approximately $85 million.

FirstEnergy’s pensions and OPEB funding policy is based on actuarial computations using the projected unit credit method. During the year ended December 31, 2012, FirstEnergy made a voluntary $600 million contribution 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.

As a result of the merger with AE, FirstEnergy assumed Allegheny's pension and OPEB plans. Subsequent to the merger date, FirstEnergy became the sponsor and Plan Administrator of the Allegheny Pension Plan. Effective January 1, 2012, most eligible participants in the Allegheny Pension Plan became eligible to participate in the FirstEnergy Corp. Pension Plan. The net assets of the Allegheny Pension Plan in the amount of $1.1 billion were merged into the FirstEnergy Corp. Pension Plan as of June 30, 2012.



Obligations and Funded Status	Pensions						OPEB
	2012			2011			2012			2011
	(In millions)
Change in benefit obligation:
Benefit obligation as of January 1	$	7,977		$	5,858		$	1,037		$	861
Liabilities assumed with Allegheny Merger	—			1,341			—			272
Service cost	161			130			12			13
Interest cost	389			374			47			48
Plan participants’ contributions	—			—			17			39
Plan amendments	8			—			(85		)	(98		)
Special termination benefits	—			6			—			—
Medicare retiree drug subsidy	—			—			—			9
Actuarial (gain) loss	861			647			152			19
Benefits paid	(421		)	(379		)	(104		)	(126		)
Benefit obligation as of December 31	$	8,975		$	7,977		$	1,076		$	1,037

Change in fair value of plan assets:
Fair value of plan assets as of January 1	$	5,867		$	4,544		$	528		$	498
Assets assumed with Allegheny Merger	—			954			—			75
Actual return on plan assets	611			364			48			23
Company contributions	614			384			19			19
Plan participants’ contributions	—			—			17			39
Benefits paid	(421		)	(379		)	(104		)	(126		)
Fair value of plan assets as of December 31	$	6,671		$	5,867		$	508		$	528

Funded Status:
Qualified plan	$	(1,967	)	$	(1,820	)
Non-qualified plans	(336		)	(290		)
Funded Status	$	(2,303	)	$	(2,110	)	$	(566	)	$	(509	)

Accumulated benefit obligation	$	8,355		$	7,409		$	—		$	—

Amounts Recognized on the Balance Sheet:
Current liabilities	$	(14	)	$	(13	)	$	45		$	—
Noncurrent liabilities	(2,289		)	(2,097		)	(611		)	(509		)
Net liability as of December 31	$	(2,303	)	$	(2,110	)	$	(566	)	$	(509	)

Amounts Recognized in AOCI:
Prior service cost (credit)	$	58		$	67		$	(728	)	$	(847	)

Assumptions Used to Determine Benefit Obligations
(as of December 31)
Discount rate	4.25		%	5.00		%	4.00		%	4.75		%
Rate of compensation increase	4.70		%	5.20		%	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			7.5-8.0%			7.5-8.5%
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			2016-2018

Allocation of Plan Assets (as of December 31)
Equity securities	15		%	19		%	39		%	38		%
Bonds	47			48			40			44
Absolute return strategies	22			21			4			13
Real estate	5			6			1			1
Private equities	1			2			—			—
Cash and short-term securities	10			4			16			4
Total	100		%	100		%	100		%	100		%

The estimated 2013 amortization of pensions and OPEB prior service costs (credits) from AOCI into net periodic pensions and OPEB costs (credits) is approximately $12 million and $(201) million, respectively.



	Pensions									OPEB
Components of Net Periodic Benefit Costs	2012			2011			2010			2012			2011			2010
	(In millions)
Service cost	$	161		$	130		$	99		$	12		$	13		$	10
Interest cost	389			374			314			47			48			45
Expected return on plan assets	(486		)	(446		)	(361		)	(37		)	(40		)	(36		)
Amortization of prior service cost (credit)	12			14			13			(203		)	(203		)	(193		)
Other adjustments (settlements, curtailments, etc.)	—			6			—			—			—			—
Pensions & OPEB mark-to-market adjustment	735			729			264			140			36			22
Net periodic cost	$	811		$	807		$	329		$	(41	)	$	(146	)	$	(152	)



Assumptions Used to Determine Net Periodic Benefit Cost for Years Ended December 31	Pensions						OPEB
	2012		2011		2010		2012		2011		2010
Weighted-average discount rate	5.00	%	5.50	%	6.00	%	4.75	%	5.00	%	5.75	%
Expected long-term return on plan assets	7.75	%	8.25	%	8.50	%	7.75	%	8.50	%	8.50	%
Rate of compensation increase	5.20	%	5.20	%	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 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 8, Fair Value Measurements, for a description of each level of the fair value hierarchy. There were no significant transfers between levels during 2012 and 2011.



	December 31, 2012								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(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	%
	$	826	$	5,491	$	390	$	6,707	100	%



	December 31, 2011								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	198	$	—	$	198	4	%
Equity investments
Domestic	223		323		—		546		9	%
International	198		379		—		577		10	%
Fixed income
Government bonds	348		430		—		778		13	%
Corporate bonds	—		1,998		—		1,998		34	%
High yield debt	—		—		—		—		—	%
Mortgaged-backed securities (non-government)	—		48		—		48		1	%
Alternatives
Hedge funds	—		1,131		—		1,131		19	%
Derivatives	—		75		70		145		2	%
Private equity funds	—		—		135		135		2	%
Real estate funds	—		—		327		327		6	%
	$	769	$	4,582	$	532	$	5,883	100	%

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 2012 and 2011:



	Private Equity Funds			Real Estate Funds			Derivatives
	(In millions)
Balance as of January 1, 2011	$	119		$	282		$	—
Actual return on plan assets:
Unrealized gains	11			28			7
Realized gains	5			17			—
Purchases, sales and settlements	—			—			63
Transfers in (out)	—			—			—
Balance as of December 31, 2011	135			327			70
Actual return on plan assets:
Unrealized gains (losses)	(14		)	29			—
Realized gains (losses)	(10		)	4			—
Purchases, sales and settlements	—			—			(70		)
Transfers out	(78		)	(3		)	—
Balance as of December 31, 2012	$	33		$	357		$	—

As of December 31, 2012 and 2011, the OPEB trust investments measured at fair value were as follows:



	December 31, 2012								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(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	%
	$	195	$	318	$	5	$	518	100	%



	December 31, 2011								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	19	$	—	$	19	4	%
Equity investment
Domestic	164		25		—		189		35	%
International	15		3		—		18		3	%
Mutual funds	7		2		—		9		2	%
Fixed income
U.S. treasuries	—		30		—		30		6	%
Government bonds	8		136		—		144		27	%
Corporate bonds	—		89		—		89		17	%
Mortgage-backed securities (non-government)	—		5		—		5		—	%
Alternatives
Hedge funds	—		25		—		25		5	%
Private equity funds	—		—		3		3		—	%
Real estate funds	—		—		7		7		1	%
	$	194	$	334	$	10	$	538	100	%

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 2012 and 2011:



	Private Equity Funds			Real Estate Funds
	(in millions)
Balance as of January 1, 2011	$	3		$	9
Actual return on plan assets:
Unrealized gains (losses)	—			1
Transfers out	—			(3		)
Balance as of December 31, 2011	3			7
Actual return on plan assets:
Unrealized gains	(1		)	—
Realized gains (losses)	—			—
Purchases, sales and settlements	—			—
Transfers in (out)	(2		)	(2		)
Balance as of December 31, 2012	$	—		$	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 2012 and 2011 are shown in the following table:



	Target Asset Allocations
	2012		2011
Equities	20	%	23	%
Fixed income	51		50
Absolute return strategies	21		19
Real estate	5		6
Private equity	—		2
Cash	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	$	3	$	(3	)
Effect on accumulated benefit obligation	$	34	$	(30	)

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)
2013	$	439	$	157	$	(3	)
2014	473		127		(3		)
2015	486		68		(3		)
2016	496		68		(3		)
2017	505		68		(3		)
Years 2018-2022	2,687		337		(13		)

FES’, OE's and JCP&L's shares of the net pensions and OPEB liability as of December 31, 2012 and 2011, were as follows:



	Pensions						OPEB
Net Liability	2012			2011			2012			2011
	(In millions)
FES	$	(180	)	$	(313	)	$	(36	)	$	(18	)
OE	(182		)	(108		)	(78		)	(75		)
JCP&L	(130		)	(75		)	(111		)	(94		)

FES’ OE's and JCP&L's shares of the net periodic pensions and OPEB costs for the three years ended December 31, 2012 were as follows:



	Pensions						OPEB
Net Periodic Costs	2012		2011		2010		2012			2011			2010
	(In millions)
FES	$	78	$	80	$	80	$	(11	)	$	(21	)	$	—
OE	84		79		21		(20		)	(34		)	(26		)
JCP&L	57		70		31		4			2			(10		)