Pension and Other Postemployment Benefits

12 Months Ended

Dec. 31, 2019

PENSIONS AND OTHER POSTEMPLOYMENT BENEFITS

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, 2019, 2018, and 2017 were $676 million, $145 million, and $141 million, respectively. Of these amounts, approximately $2 million, $1 million, and $39 million, are included in discontinued operations for the years ended December 31, 2019, 2018, and 2017, respectively. In 2019, the pension and OPEB mark-to-market adjustment primarily reflects a 110 bps decrease in the discount rate used to measure benefit obligations and higher 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. FirstEnergy expects no required contributions through 2021.

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 2019, FirstEnergy’s pension and OPEB plan assets experienced gains of $1,492 million, or 20.2%, compared to losses of $371 million, or (4.0)%, in 2018 and gains of $999 million, or 15.1%, in 2017, and assumed a 7.50% rate of return for 2019, 2018 and 2017 which generated $569 million, $605 million and $478 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 decrease or increase 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 2019, the Society of Actuaries published new mortality tables that include more current data than the RP-2014 tables as well as new improvement scales. An analysis of FirstEnergy pension and OPEB plan mortality data indicated the use of the Pri-2012 mortality table with projection scale MP-2019 was most appropriate. As such, the Pri-2012 mortality table with projection scale MP-2019 was utilized to determine the 2019 benefit cost and obligation as of December 31, 2019 for the FirstEnergy pension and OPEB plans. The impact of using the Pri-2012 mortality table with projection scale MP-2019 resulted in a decrease to the projected benefit obligation approximately $29 million and $3 million for the pension and OPEB plans, respectively, and was included in the 2019 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 election is considered a change in estimate and, accordingly, accounted for prospectively, and did not have a material impact on FirstEnergy's financial statements.

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).



	Pension						OPEB
Obligations and Funded Status - Qualified and Non-Qualified Plans	2019			2018			2019			2018
	(In millions)
Change in benefit obligation:
Benefit obligation as of January 1	$	9,462		$	10,167		$	608		$	731

Service cost	193			224			3			5
Interest cost	373			372			22			25
Plan participants’ contributions	—			—			4			3
Plan amendments	2			5			—			5
Special termination benefits	14			31			—			8
Medicare retiree drug subsidy	—			—			1			1
Annuity purchase	—			(129		)	—			—
Actuarial (gain) loss	1,535			(710		)	64			(121		)
Benefits paid	(529		)	(498		)	(48		)	(49		)
Benefit obligation as of December 31	$	11,050		$	9,462		$	654		$	608

Change in fair value of plan assets:
Fair value of plan assets as of January 1	$	6,984		$	6,704		$	408		$	439
Actual return on plan assets	1,419			(363		)	73			(8		)
Annuity purchase	—			(129		)	—			—
Company contributions	521			1,270			21			22
Plan participants’ contributions	—			—			4			3
Benefits paid	(529		)	(498		)	(48		)	(48		)
Fair value of plan assets as of December 31	$	8,395		$	6,984		$	458		$	408

Funded Status:
Qualified plan	$	(2,203	)	$	(2,093	)	$	—		$	—
Non-qualified plans	(452		)	(385		)	—			—
Funded Status (Net liability as of December 31)	$	(2,655	)	$	(2,478	)	$	(196	)	$	(200	)

Accumulated benefit obligation	$	10,439		$	8,951		$	—		$	—

Amounts Recognized in AOCI:
Prior service cost (credit)	$	24		$	30		$	(85	)	$	(121	)

Assumptions Used to Determine Benefit Obligations
(as of December 31)
Discount rate	3.34		%	4.44		%	3.18		%	4.30		%
Rate of compensation increase	4.10		%	4.10		%	N/A			N/A
Cash balance weighted average interest crediting rate	2.57		%	3.34		%	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			2028

Allocation of Plan Assets (as of December 31)
Equity securities	29		%	34		%	54		%	48		%
Fixed Income	36		%	34		%	30		%	35		%
Hedge funds	9		%	11		%	—		%	—		%
Insurance-linked securities	2		%	2		%	—		%	—		%
Real estate funds	7		%	10		%	—		%	—		%
Derivatives	—		%	2		%	—		%	—		%
Private equity funds	4		%	2		%	—		%	—		%
Cash and short-term securities	13		%	5		%	16		%	17		%
Total	100		%	100		%	100		%	100		%



Components of Net Periodic Benefit Costs for the Years Ended December 31,	Pension									OPEB
	2019			2018			2017			2019			2018			2017
	(In millions)
Service cost	$	193		$	224		$	208		$	3		$	5		$	5
Interest cost	373			372			390			22			25			27
Expected return on plan assets	(540		)	(574		)	(448		)	(29		)	(31		)	(30		)
Amortization of prior service costs (credits)	7			7			7			(36		)	(81		)	(81		)
Special termination costs ⁽¹⁾	14			31			—			—			8			—
Pension & OPEB mark-to-market adjustment	656			227			108			20			(82		)	13
Net periodic benefit costs (credits)	$	703		$	287		$	265		$	(20	)	$	(156	)	$	(66	)

⁽¹⁾Subject to a cap, FirstEnergy has agreed to fund a pension enhancement through its pension plan, for voluntary enhanced retirement packages offered to certain FES employees, as well as offer certain other employee benefits (approximately $14 million recognized for the year ended December 31, 2019).



Assumptions Used to Determine Net Periodic Benefit Cost for the Years Ended December 31,*	Pension						OPEB
	2019		2018		2017		2019		2018		2017
Weighted-average discount rate	4.44	%	3.75	%	4.25	%	4.30	%	3.50	%	4.00	%
Expected long-term return on plan assets	7.50	%	7.50	%	7.50	%	7.50	%	7.50	%	7.50	%
Rate of compensation increase	4.10	%	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 Debtors' share of the net periodic pension and OPEB costs (credits) of $242 million and $(19) million, respectively, for the year ended December 31, 2019. The FES Debtors' share of the net periodic pension and OPEB costs (credits) were $64 million and $(25) million, respectively, for the year ended December 31, 2018, and $60 million and $(17) million, respectively, for the year ended December 31, 2017. The 2019 special termination costs associated with FES' voluntary enhanced retirement package are a component of Discontinued operations in FirstEnergy's Consolidated Statements of Income (Loss). Following the FES Debtors’ voluntary bankruptcy filing, FE has billed the FES Debtors approximately $37 million and $42 million for their share of pension and OPEB service costs for the years ended December 31, 2019 and 2018, respectively.

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 2019 and 2018.



	December 31, 2019										Asset Allocation
	Level 1			Level 2		Level 3		Total			Asset Allocation
	(In millions)
Cash and short-term securities	$	—		$	1,069	$	—	$	1,069		13	%
Equities	1,532			828		—		2,360			29	%
Fixed income:
Corporate bonds	—			2,064		—		2,064			25	%
Other⁽³⁾	—			880		—		880			11	%
Alternatives:
Derivatives	(40		)	—		—		(40		)	—	%
Total ⁽¹⁾	$	1,492		$	4,841	$	—	$	6,333		78	%

Private equity funds ⁽²⁾								342			4	%
Insurance-linked securities ⁽²⁾								186			2	%
Hedge funds ⁽²⁾								774			9	%
Real estate funds ⁽²⁾								584			7	%
Total Investments								$	8,219		100	%


⁽¹⁾	Excludes $176 million as of December 31, 2019, 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.


⁽³⁾	Includes insurance annuities, bank loans and emerging markets debt.



	December 31, 2018								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	342	$	—	$	342	5	%
Equities	1,115		1,256		—		2,371		34	%
Fixed income:
Government bonds	—		59		—		59		1	%
Corporate bonds	—		1,674		—		1,674		23	%
Other⁽⁴⁾	—		667		—		667		10	%
Alternatives:
Derivatives	108		—		—		108		2	%
Total ⁽¹⁾	$	1,223	$	3,998	$	—	$	5,221	75	%

Private equity funds ⁽²⁾							143		2	%
Insurance-linked securities ⁽²⁾							108		2	%
Hedge funds ⁽³⁾							779		11	%
Real estate funds ⁽³⁾							665		10	%
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.

⁽³⁾

The classification of Level 2 and 3 assets from the prior year, $779 million and $665 million, respectively, was adjusted in the current year presentation and included outside of the fair value hierarchy table as of December 31, 2018, as investments for which Net Asset Value is used as a practical expedient to approximate fair value in accordance with ASU 2015-07 "Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)".


⁽⁴⁾	Includes insurance annuities, bank loans and emerging markets debt.

As of December 31, 2019 and 2018, the OPEB trust investments measured at fair value were as follows:



	December 31, 2019								Asset Allocation
	Level 1		Level 2		Level 3		Total		Asset Allocation
	(In millions)
Cash and short-term securities	$	—	$	72	$	—	$	72	16	%
Equity investment:
Domestic	246		—		—		246		54	%
Fixed income:
Government bonds	—		100		—		100		22	%
Corporate bonds	—		34		—		34		7	%
Mortgage-backed securities (non-government)			5		—		5		1	%
Total ⁽¹⁾	$	246	$	211	$	—	$	457	100	%

⁽¹⁾ Excludes $1 million as of December 31, 2019, of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table.



	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.

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 2019 and 2018 are shown in the following table:



Target Asset Allocations
	2019		2018
Equities	38	%	38	%
Fixed income	30	%	30	%
Hedge funds	8	%	8	%
Real estate	10	%	10	%
Alternative investments	8	%	8	%
Cash	6	%	6	%
	100	%	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)
2020	$	547	$	52	$	(1	)
2021	564		49		(1		)
2022	573		48		(1		)
2023	586		47		(1		)
2024	593		46		(1		)
Years 2025-2029	3,099		208		(3		)