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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2018
Fair Value Disclosures [Abstract] |
FAIR VALUE MEASUREMENTS | 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. 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 10, "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 next 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 September 30, 2018, from those used as of December 31, 2017. 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 nine months ended September 30, 2018. The following tables set forth FirstEnergy's recurring assets and liabilities that are accounted for at fair value by level within the fair value hierarchy:
| September 30, 2018 |  | December 31, 2017
| Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets | (In millions)
Corporate debt securities | $ | — |  |  | $ | 405 |  |  | $ | — |  |  | $ | 405 |  |  | $ | — |  |  | $ | 476 |  |  | $ | — |  |  | $ | 476 |
Derivative assets - FTRs | — |  |  | — |  |  | 10 |  |  | 10 |  |  | — |  |  | — |  |  | 3 |  |  | 3 |
Equity securities(1) | 329 |  |  | — |  |  | — |  |  | 329 |  |  | 297 |  |  | — |  |  | — |  |  | 297 |
Foreign government debt securities | — |  |  | 12 |  |  | — |  |  | 12 |  |  | — |  |  | 23 |  |  | — |  |  | 23 |
U.S. government debt securities | — |  |  | 22 |  |  | — |  |  | 22 |  |  | — |  |  | 21 |  |  | — |  |  | 21 |
U.S. state debt securities | — |  |  | 251 |  |  | — |  |  | 251 |  |  | — |  |  | 247 |  |  | — |  |  | 247 |
Other(2) | 436 |  |  | 106 |  |  | — |  |  | 542 |  |  | 588 |  |  | 38 |  |  | — |  |  | 626 |
Total assets | $ | 765 |  |  | $ | 796 |  |  | $ | 10 |  |  | $ | 1,571 |  |  | $ | 885 |  |  | $ | 805 |  |  | $ | 3 |  |  | $ | 1,693 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities - FTRs | $ | — |  |  | $ | — |  |  | $ | (1 | ) |  | $ | (1 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Derivative liabilities - NUG contracts(3) | — |  |  | — |  |  | (52 | ) |  | (52 | ) |  | — |  |  | — |  |  | (79 | ) |  | (79 | )
Total liabilities | $ | — |  |  | $ | — |  |  | $ | (53 | ) |  | $ | (53 | ) |  | $ | — |  |  | $ | — |  |  | $ | (79 | ) |  | $ | (79 | )
Net assets (liabilities)(4) | $ | 765 |  |  | $ | 796 |  |  | $ | (43 | ) |  | $ | 1,518 |  |  | $ | 885 |  |  | $ | 805 |  |  | $ | (76 | ) |  | $ | 1,614 |
(1) | NDT funds hold equity portfolios whose performance is benchmarked against the S&P 500 Low Volatility High Dividend Index, S&P 500 Index, MSCI World Index and MSCI AC World IMI Index.
(2) | Primarily consists of short-term cash investments.
(3) | NUG contracts are subject to regulatory accounting treatment and changes in market values do not impact earnings.
(4) | Excludes $(33) million and $(11) million as of September 30, 2018 and December 31, 2017, 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 September 30, 2018, and December 31, 2017:
| NUG Contracts(1) |  | FTRs
| Derivative Assets |  | Derivative Liabilities |  | Net |  | Derivative Assets |  | Derivative Liabilities |  | Net
| (In millions)
January 1, 2017 Balance | $ | 1 |  |  | $ | (108 | ) |  | $ | (107 | ) |  | $ | 3 |  |  | $ | (1 | ) |  | $ | 2 |
Unrealized gain (loss) | — |  |  | (10 | ) |  | (10 | ) |  | 1 |  |  | (1 | ) |  | — |
Purchases | — |  |  | — |  |  | — |  |  | 3 |  |  | — |  |  | 3 |
Settlements | (1 | ) |  | 39 |  |  | 38 |  |  | (4 | ) |  | 2 |  |  | (2 | )
December 31, 2017 Balance | $ | — |  |  | $ | (79 | ) |  | $ | (79 | ) |  | $ | 3 |  |  | $ | — |  |  | $ | 3 |
Unrealized gain (loss) | — |  |  | 2 |  |  | 2 |  |  | 7 |  |  | 2 |  |  | 9 |
Purchases | — |  |  | — |  |  | — |  |  | 5 |  |  | (5 | ) |  | — |
Settlements | — |  |  | 25 |  |  | 25 |  |  | (5 | ) |  | 2 |  |  | (3 | )
September 30, 2018 Balance | $ | — |  |  | $ | (52 | ) |  | $ | (52 | ) |  | $ | 10 |  |  | $ | (1 | ) |  | $ | 9 |
(1)NUG contracts are subject to regulatory accounting treatment and changes in market values 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 September 30, 2018:
|  | Fair Value, Net (In millions) |  | Valuation Technique |  | Significant Input |  | Range |  | Weighted Average |  | Units
FTRs |  | $ | 9 |  |  | Model |  | RTO auction clearing prices |  | $(0.40) to $8.60 |  | $1.40 |  | Dollars/MWH
NUG Contracts |  | $ | (52 | ) |  | Model |  | Generation |  | 400 to 1,437,000 |  | 293,000 |  |  | MWH
|  |  | Regional electricity prices |  | $30.60 to $32.70 |  | $31.60 |  | 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 equity securities, AFS debt securities and other investments. FirstEnergy has no debt securities held for trading purposes. Generally, unrealized gains and losses on equity securities are recognized in income whereas unrealized gains and losses on AFS debt securities are recognized in AOCI. However, the NDTs of JCP&L, ME and PN are subject to regulatory accounting with all gains and losses on equity and AFS debt securities 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. Nuclear Decommissioning and Nuclear Fuel Disposal Trusts JCP&L, ME and PN hold debt and equity securities within their respective NDT and nuclear fuel disposal trusts. The debt securities are classified as AFS securities, recognized at fair market value. The following table summarizes the amortized cost basis, unrealized gains, unrealized losses and fair values of investments held in NDT and nuclear fuel disposal trusts as of September 30, 2018, and December 31, 2017:
|  | September 30, 2018(1) |  | December 31, 2017(1)
|  | Cost Basis |  | Unrealized Gains |  | Unrealized Losses |  | Fair Value |  | Cost Basis |  | Unrealized Gains |  | Unrealized Losses |  | Fair Value
|  | (In millions)
Debt securities |  | $ | 712 |  |  | $ | 2 |  |  | $ | (23 | ) |  | $ | 691 |  |  | $ | 774 |  |  | $ | 11 |  |  | $ | (17 | ) |  | $ | 768 |
Equity securities |  | $ | 286 |  |  | $ | 42 |  |  | $ | (1 | ) |  | $ | 327 |  |  | $ | 254 |  |  | $ | 40 |  |  | $ | — |  |  | $ | 294 |
(1) Excludes short-term cash investments of $57 million and $11 million in 2018 and 2017, respectively Proceeds from the sale of investments in equity and AFS debt securities, realized gains and losses on those sales and interest and dividend income for the three and nine months ended September 30, 2018 and 2017, were as follows:
|  | For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
|  | (In millions)
Sale Proceeds |  | $ | 261 |  |  | $ | 269 |  |  | $ | 627 |  |  | $ | 1,089 |
Realized Gains |  | 3 |  |  | 20 |  |  | 31 |  |  | 70 |
Realized Losses |  | (7 | ) |  | (11 | ) |  | (34 | ) |  | (55 | )
Interest and Dividend Income |  | 11 |  |  | 9 |  |  | 31 |  |  | 28 |
Other Investments Other investments include employee benefit trusts, which are primarily invested in corporate-owned life insurance policies, and equity method investments. Other investments were $254 million and $255 million as of September 30, 2018, and December 31, 2017, respectively, and 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 FirstEnergy's long-term debt, which excludes capital lease obligations and net unamortized debt issuance costs, premiums and discounts as of September 30, 2018 and December 31, 2017:
| September 30, 2018 |  | December 31, 2017
| (In millions)
Carrying Value | $ | 17,796 |  |  | $ | 19,296 |
Fair Value | $ | 18,761 |  |  | $ | 21,412 |
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 September 30, 2018, and December 31, 2017.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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