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. Under the cash-balance portion of the Pension Plan (for employees hired on or after January 1, 2014), FirstEnergy makes contributions to eligible employee retirement accounts based on a pay credit and an interest credit. 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, 2018, 2017, and 2016 were $145 million, $141 million, and $147 million, respectively. Of these amounts, approximately $1 million, $39 million, and $45 million, are included in discontinued operations for the years ended December 31, 2018, 2017, and 2016, respectively. In 2018, the pension and OPEB mark-to-market adjustment primarily reflects a 69 bps increase in the discount rate used to measure benefit obligations and lower than expected asset returns.

FirstEnergy’s pension and OPEB funding policy is based on actuarial computations using the projected unit credit method. In January 2018, FirstEnergy satisfied its minimum required funding obligations to its qualified pension plan of $500 million and addressed anticipated required funding obligations through 2020 to its pension plan with an additional contribution of $750 million. On February 1, 2019, FirstEnergy made a $500 million voluntary cash contribution to the qualified pension plan. As a result of this contribution, FirstEnergy expects no required contributions through 2021. 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.

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 2018, FirstEnergy’s pension and OPEB plan assets experienced losses of $371 million, or (4.0)%, compared to gains of $999 million, or 15.1%, in 2017 and losses of $472 million, or 8.2%, in 2016, and assumed a 7.50% rate of return for 2018, 2017 and 2016 which generated $605 million, $478 million and $429 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 2018, the Society of Actuaries released its updated mortality improvement scale for pension plans, MP-2018, incorporating SSA mortality data from 2014-2016. The updated improvement scale indicates a slight decline in life expectancy. Due to the additional data on population mortality, the RP2014 mortality table with the projection scale MP-2018 was utilized to determine the 2018 benefit cost and obligation as of December 31, 2018, for the FirstEnergy pension and OPEB plans. The impact of using the projection scale MP-2018 resulted in a decrease in the projected pension benefit obligation of approximately $16 million and was included in the 2018 pension and OPEB mark-to-market adjustment.

Effective in 2019, FirstEnergy changed the approach utilized to estimate the service cost and interest cost components of net periodic benefit cost for pension and OPEB plans. Historically, FirstEnergy estimated these components utilizing a single, weighted average discount rate derived from the yield curve used to measure the benefit obligation. FirstEnergy has elected to use a spot rate approach in the estimation of the components of benefit cost by applying specific spot rates along the full yield curve to the relevant projected cash flows, as this provides a better estimate of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change did not affect the measurement of total benefit obligations or annual net period benefit cost and the change in service and interest cost is offset in the actuarial mark-to-market adjustment reported. This election is considered a change in estimate and, accordingly, accounted prospectively.

Following adoption of ASU 2017-07, "Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" in 2018, service costs, net of capitalization, continue to be reported within Other operating expenses on the FirstEnergy Consolidated Statements of Income (Loss). Non-service costs are reported within Miscellaneous income, net, within Other Income (Expense). Prior period amounts have been reclassified to conform with current year presentation. See Note 1, "Organization and Basis of Presentation," for additional information.

Also in 2018, the FE Tomorrow cost cutting initiative was implemented to define the corporate services FirstEnergy would need to support its regulated business once the company exited commodity-exposed generation. Through the initiative, FirstEnergy sought to ensure the company has the right talent, organizational and cost structure to efficiently service customers and achieve its earnings growth targets. In support of the FE Tomorrow initiative, more than 80% of eligible employees, totaling nearly 500 people in the shared services, utility services and sustainability organizations, accepted a voluntary enhanced retirement package that included severance compensation and a temporary pension enhancement, with most employees having already retired. Management expects the cost savings resulting from the FE Tomorrow initiative to support the company's growth targets.



	Pension						OPEB
Obligations and Funded Status - Qualified and Non-Qualified Plans	2018			2017			2018			2017
	(In millions)
Change in benefit obligation:
Benefit obligation as of January 1	$	10,167		$	9,426		$	731		$	711

Service cost	224			208			5			5
Interest cost	372			390			25			27
Plan participants’ contributions	—			—			3			4
Plan amendments	5			11			5			—
Special termination benefits	31			—			8			—
Medicare retiree drug subsidy	—			—			1			1
Annuity purchase	(129		)	—			—			—
Actuarial (gain) loss	(710		)	610			(121		)	32
Benefits paid	(498		)	(478		)	(49		)	(49		)
Benefit obligation as of December 31	$	9,462		$	10,167		$	608		$	731

Change in fair value of plan assets:
Fair value of plan assets as of January 1	$	6,704		$	6,213		$	439		$	420
Actual return on plan assets	(363		)	950			(8		)	49
Annuity purchase	(129		)	—			—			—
Company contributions	1,270			18			22			16
Plan participants’ contributions	—			—			3			4
Benefits paid	(498		)	(477		)	(48		)	(50		)
Fair value of plan assets as of December 31	$	6,984		$	6,704		$	408		$	439

Funded Status:
Qualified plan	$	(2,093	)	$	(3,043	)	$	—		$	—
Non-qualified plans	(385		)	(420		)	—			—
Funded Status	$	(2,478	)	$	(3,463	)	$	(200	)	$	(292	)

Accumulated benefit obligation	$	8,951		$	9,583		$	—		$	—

Amounts Recognized on the Balance Sheet:
Noncurrent assets	$	14		$	—		$	—		$	—
Current liabilities	(20		)	(19		)	—			—
Noncurrent liabilities	(2,472		)	(3,444		)	(200		)	(292		)
Net liability as of December 31	$	(2,478	)	$	(3,463	)	$	(200	)	$	(292	)

Amounts Recognized in AOCI:
Prior service cost (credit)	$	30		$	32		$	(121	)	$	(206	)

Assumptions Used to Determine Benefit Obligations
(as of December 31)
Discount rate	4.44		%	3.75		%	4.30		%	3.50		%
Rate of compensation increase	4.10		%	4.20		%	N/A			N/A
Cash balance weighted average interest crediting rate	3.34		%	2.88		%	N/A			N/A

Assumed Health Care Cost Trend Rates
(as of December 31)
Health care cost trend rate assumed (pre/post-Medicare)	6.0-5.5%			6.0-5.5%			6.0-5.5%			6.0-5.5%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	4.5		%	4.5		%	4.5		%	4.5		%
Year that the rate reaches the ultimate trend rate	2028			2027			2028			2027

Allocation of Plan Assets (as of December 31)
Equity securities	36		%	42		%	48		%	50		%
Bonds	34		%	32		%	35		%	33		%
Absolute return strategies	11		%	10		%	—		%	—		%
Real estate funds	10		%	9		%	—		%	—		%
Derivatives	2		%	—		%	—		%	—		%
Private equity funds	2		%	1		%	—		%	—		%
Cash and short-term securities	5		%	6		%	17		%	17		%
Total	100		%	100		%	100		%	100		%



Components of Net Periodic Benefit Costs for Years Ended December 31,	Pension									OPEB
	2018			2017			2016			2018			2017			2016
	(In millions)
Service cost	$	224		$	208		$	191		$	5		$	5		$	5
Interest cost	372			390			398			25			27			30
Expected return on plan assets	(574		)	(448		)	(399		)	(31		)	(30		)	(30		)
Amortization of prior service cost (credit)	7			7			8			(81		)	(81		)	(80		)
Special termination costs	31			—			—			8			—			—
Pension & OPEB mark-to-market adjustment	227			108			179			(82		)	13			15
Net periodic benefit cost (credit)	$	287		$	265		$	377		$	(156	)	$	(66	)	$	(60	)



Assumptions Used to Determine Net Periodic Benefit Cost for the Years Ended December 31,*	Pension						OPEB
	2018		2017		2016		2018		2017		2016
Weighted-average discount rate	3.75	%	4.25	%	4.50	%	3.50	%	4.00	%	4.25	%
Expected long-term return on plan assets	7.50	%	7.50	%	7.50	%	7.50	%	7.50	%	7.50	%
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.

Amounts in the tables above include FES' and FENOC's share of the net periodic pension and OPEB costs (credits) of $64 million and $(25) million, respectively, for the year ended December 31, 2018. FES' and FENOC's share of the net periodic pension and OPEB costs (credits) were $60 million and $(17) million, respectively, for the year ended December 31, 2017. Such amounts are a component of Discontinued Operations in FirstEnergy's Consolidated Statements of Income (Loss). Following FES and FENOC’s voluntary bankruptcy filing, FE has billed FES and FENOC for their share of pension and OPEB service costs of $42 million for the last nine months of 2018.

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 11, "Fair Value Measurements," for a description of each level of the fair value hierarchy. There were no significant transfers between levels during 2018 and 2017.



	December 31, 2018								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	342	$	—	$	342	5	%
Equity investments:
Domestic	723		122		—		845		12	%
International	392		1,232		—		1,624		22	%
Fixed income:
Government bonds	—		59		—		59		1	%
Corporate bonds	—		1,674		—		1,674		23	%
High yield debt	—		667		—		667		10	%
Alternatives:
Hedge funds (absolute return)	—		681		—		681		11	%
Derivatives	108		—		—		108		2	%
Real estate funds	—		—		665		665		10	%
Total ⁽¹⁾	$	1,223	$	4,777	$	665	$	6,665	96	%

Private equity funds ⁽²⁾							143		2	%
Insurance-linked securities ⁽²⁾							108		2	%

Total Investments							$	6,916	100	%


⁽¹⁾	Excludes $68 million as of December 31, 2018, 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, 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.

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 2018 and 2017:



	Real Estate Funds

Balance as of January 1, 2017	$	615
Actual return on plan assets:
Unrealized gains	3
Realized gains	10
Transfers in	3
Balance as of December 31, 2017	$	631
Actual return on plan assets:
Unrealized gains	102
Realized losses	(65		)
Transfers out	(3		)
Balance as of December 31, 2018	$	665

As of December 31, 2018 and 2017, the OPEB trust investments measured at fair value were as follows:



	December 31, 2018								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	71	$	—	$	71	17	%
Equity investment:
Domestic	196		—		—		196		48	%
Fixed income:
Government bonds	—		107		—		107		26	%
Corporate bonds	—		32		—		32		8	%
Mortgage-backed securities (non-government)			4		—		4		1	%
Total ⁽¹⁾	$	196	$	214	$	—	$	410	100	%


⁽¹⁾	Excludes $(2) million as of December 31, 2018, of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table.



	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.

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 2018 and 2017 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	%

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)
2019	$	509	$	57	$	(1	)
2020	533		48		(1		)
2021	554		48		(1		)
2022	566		47		(1		)
2023	580		46		(1		)
Years 2024-2028	3,047		213		(3		)