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.

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, 2017, 2016, and 2015 were $141 million, $147 million, and $242 million, respectively. In 2017, the pension and OPEB mark-to-market adjustment primarily reflects a 50 bps decrease in the discount rate used to measure benefit obligations, partially offset by 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 2017 funding obligations 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. In January 2018, FirstEnergy satisfied its minimum required funding obligations of $500 million and addressed funding obligations for future years to its qualified pension plan with additional contributions of $750 million.

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 2017, FirstEnergy’s qualified pension and OPEB plan assets experienced gains of $999 million, or 15.1%, compared to gains of $472 million, or 8.2%, in 2016 and losses of $(172) million, or (2.7)%, in 2015, and assumed a 7.50% rate of return for 2017 and 2016 and a 7.75% rate of return for 2015 on plan assets which generated $478 million, $429 million and $476 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 2017, the Society of Actuaries released its updated mortality improvement scale for pension plans, MP-2017, incorporating three additional years of SSA data on U.S. population mortality. MP-2017 incorporates SSA mortality data from 2013 to 2015 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. Due to the additional years of data on population mortality, the RP2014 mortality table with the projection scale MP-2017 was utilized to determine the 2017 benefit cost and obligation as of December 31, 2017 for the FirstEnergy pension and OPEB plans. The impact of using the projection scale MP-2017 resulted in a decrease in the projected pension benefit obligation of $62 million and was included in the 2017 pension and OPEB mark-to-market adjustment.



	Pension						OPEB
Obligations and Funded Status - Qualified and Non-Qualified Plans	2017			2016			2017			2016
	(In millions)
Change in benefit obligation:
Benefit obligation as of January 1	$	9,426		$	9,079		$	711		$	724

Service cost	208			191			5			5
Interest cost	390			398			27			30
Plan participants’ contributions	—			—			4			5
Plan amendments	11			—			—			(13		)
Medicare retiree drug subsidy	—			—			1			1
Actuarial loss	610			224			32			14
Benefits paid	(478		)	(466		)	(49		)	(55		)
Benefit obligation as of December 31	$	10,167		$	9,426		$	731		$	711

Change in fair value of plan assets:
Fair value of plan assets as of January 1	$	6,213		$	5,338		$	420		$	431
Actual return on plan assets	950			442			49			30
Company contributions	18			899			16			9
Plan participants’ contributions	—			—			4			5
Benefits paid	(477		)	(466		)	(50		)	(55		)
Fair value of plan assets as of December 31	$	6,704		$	6,213		$	439		$	420

Funded Status:
Qualified plan	$	(3,043	)	$	(2,821	)
Non-qualified plans	(420		)	(392		)
Funded Status	$	(3,463	)	$	(3,213	)	$	(292	)	$	(291	)

Accumulated benefit obligation	$	9,583		$	8,913		$	—		$	—

Amounts Recognized on the Balance Sheet:
Noncurrent assets	$	—		$	9		$	—		$	—
Current liabilities	(19		)	(19		)	—			—
Noncurrent liabilities	(3,444		)	(3,203		)	(292		)	(291		)
Net liability as of December 31	$	(3,463	)	$	(3,213	)	$	(292	)	$	(291	)

Amounts Recognized in AOCI:
Prior service cost (credit)	$	32		$	28		$	(206	)	$	(288	)

Assumptions Used to Determine Benefit Obligations
(as of December 31)
Discount rate	3.75		%	4.25		%	3.50		%	4.00		%
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			2028			2027

Allocation of Plan Assets (as of December 31)
Equity securities	42		%	44		%	50		%	53		%
Bonds	32		%	30		%	33		%	41		%
Absolute return strategies	10		%	8		%	—		%	—		%
Real estate funds	9		%	10		%	—		%	—		%
Private equity funds	1		%	—		%	—		%	—		%
Cash and short-term securities	6		%	8		%	17		%	6		%
Total	100		%	100		%	100		%	100		%



	Pension									OPEB
Components of Net Periodic Benefit Costs	2017			2016			2015			2017			2016			2015
	(In millions)
Service cost	$	208		$	191		$	193		$	5		$	5		$	5
Interest cost	390			398			383			27			30			29
Expected return on plan assets	(448		)	(399		)	(443		)	(30		)	(30		)	(33		)
Amortization of prior service cost (credit)	7			8			8			(81		)	(80		)	(134		)
Pension & OPEB mark-to-market adjustment	108			179			344			13			15			25
Net periodic benefit cost (credit)	$	265		$	377		$	485		$	(66	)	$	(60	)	$	(108	)



Assumptions Used to Determine Net Periodic Benefit Cost * for Years Ended December 31	Pension						OPEB
	2017		2016		2015		2017		2016		2015
Weighted-average discount rate	4.25	%	4.50	%	4.25	%	4.00	%	4.25	%	4.00	%
Expected long-term return on plan assets	7.50	%	7.50	%	7.75	%	7.50	%	7.50	%	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 2017 and 2016.



	December 31, 2017										Asset Allocation
	Level 1		Level 2			Level 3		Total			Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	379		$	—	$	379		6	%
Equity investments
Domestic	695		27			—		722			11	%
International	514		1,569			—		2,083			31	%
Fixed income
Government bonds	—		251			—		251			4	%
Corporate bonds	—		1,237			—		1,237			18	%
High yield debt	—		689			—		689			10	%
Mortgage-backed securities (non-government)	—		31			—		31			—	%
Alternatives
Hedge funds (Absolute return)	—		635			—		635			10	%
Derivatives	—		(1		)	—		(1		)	—	%
Real estate funds	—		—			631		631			9	%
Total ⁽¹⁾	$	1,209	$	4,817		$	631	$	6,657		99	%

Private equity funds ⁽²⁾								57			1	%

Total Investments								$	6,714		100	%


⁽¹⁾	Excludes $(10) million as of December 31, 2017, of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table.


⁽²⁾	Net asset value used as a practical expedient to approximate fair value.



	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 ⁽¹⁾	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		)	—	%
Real estate funds	—		—			615		615			10	%
Total ⁽²⁾	$	1,470	$	4,080		$	615	$	6,165		100	%

Private equity funds ⁽³⁾								33			—	%

Total Investments								$	6,198		100	%


⁽¹⁾	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.


⁽²⁾	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.


⁽³⁾	Net asset value used as a practical expedient to approximate fair value.

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 2017 and 2016:



	Real Estate Funds

Balance as of January 1, 2016	$	587
Actual return on plan assets:
Unrealized gains	29
Realized gains (losses)	14
Transfers in	(15		)
Balance as of December 31, 2016	$	615
Actual return on plan assets:
Unrealized gains	3
Realized gains	10
Transfers in (out)	3
Balance as of December 31, 2017	$	631

As of December 31, 2017 and 2016, the OPEB trust investments measured at fair value were as follows:



	December 31, 2017								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	75	$	—	$	75	17	%
Equity investment
Domestic	220		—		—		220		50	%
Fixed income
Government bonds	—		109		—		109		24	%
Corporate bonds	—		34		—		34		8	%
Mortgage-backed securities (non-government)			3		—		3		1	%
Total ⁽¹⁾	$	220	$	221	$	—	$	441	100	%


⁽¹⁾	Excludes $(2) million as of December 31, 2017, of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table.



	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	%
Fixed income
U.S. treasuries	—		40		—		40		9	%
Government bonds	—		108		—		108		26	%
Corporate bonds	—		24		—		24		6	%
Mortgage-backed securities (non-government)	—		2		—		2		—	%
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.

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 2017 and 2016 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	$	21	$	(18	)

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)
2018	$	518	$	55	$	(1	)
2019	531		54		(1		)
2020	552		53		(1		)
2021	567		53		(1		)
2022	581		52		(1		)
Years 2023-2027	3,056		241		(3		)

FES’ share of the pension and OPEB net (liability) asset as of December 31, 2017 and 2016, was as follows:



	Pension						OPEB
	2017			2016			2017		2016
	(In millions)
Net (Liability) Asset⁽¹⁾	$	(97	)	$	(158	)	$	40	$	36

⁽¹⁾ Excludes $954 million and $866 million as of December 31, 2017 and 2016, respectively, of affiliated non-current liabilities related to pension and OPEB mark-to-market costs allocated to FES of which $626 million and $570 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, 2017, was as follows:



	Pension							OPEB
	2017		2016			2015		2017			2016			2015
	(In millions)
Net Periodic Cost (Credit)	$	60	$	(5	)	$	10	$	(17	)	$	(26	)	$	(22	)