FAIR VALUE MEASUREMENTS

RECURRING AND NONRECURRING 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. A more detailed description of FirstEnergy's valuation process for FTRs, NUGs and LCAPPs are as follows:

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 RTO 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 RTO 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 8, Derivative Instruments, for additional information regarding FirstEnergy's FTRs.

NUG contracts represent purchased power agreements 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 three 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.

LCAPP contracts are financially settled agreements that allow eligible generators to receive payments from, or make payments to, JCP&L pursuant to an annually calculated load-ratio share of the capacity produced by the generator based upon the annual forecasted peak demand as determined by PJM. LCAPP contracts are recorded at fair value and adjusted periodically using a mark-to-model methodology, which approximates market. The primary unobservable input into the model is forecasted regional capacity prices. Pricing for the LCAPP contracts is a combination of PJM RPM capacity auction prices for the 2015/2016 delivery year and internal models using historical trends and market data for the remaining years under contract. Capacity prices beyond the 2015/2016 delivery year are developed through a simulation of future PJM RPM auctions. The capacity price forecast assumes a continuation of the current PJM RPM market design and is reflective of the regional peak demand growth and generation fleet additions and retirements that underlie FirstEnergy’s long-term energy price forecast. 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 March 31, 2013, from those used as of December 31, 2012. 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 three months ended March 31, 2013. The following tables set forth the recurring assets and liabilities that are accounted for at fair value by level within the fair value hierarchy:



FirstEnergy

Recurring Fair Value Measurements	March 31, 2013											December 31, 2012
	Level 1		Level 2			Level 3			Total			Level 1			Level 2			Level 3			Total
Assets	(In millions)
Corporate debt securities	$	—	$	1,345		$	—		$	1,345		$	—		$	1,259		$	—		$	1,259
Derivative assets - commodity contracts	7		262			—			269			—			252			—			252
Derivative assets - FTRs	—		—			2			2			—			—			8			8
Derivative assets - NUG contracts⁽¹⁾	—		—			34			34			—			—			36			36
Equity securities⁽²⁾	341		—			—			341			310			—			—			310
Foreign government debt securities	—		123			—			123			—			126			—			126
U.S. government debt securities	—		180			—			180			—			179			—			179
U.S. state debt securities	—		267			—			267			—			299			—			299
Other⁽³⁾	36		289			—			325			126			227			—			353
Total assets	$	384	$	2,466		$	36		$	2,886		$	436		$	2,342		$	44		$	2,822

Liabilities
Derivative liabilities - commodity contracts	$	—	$	(175	)	$	—		$	(175	)	$	(3	)	$	(151	)	$	—		$	(154	)
Derivative liabilities - FTRs	—		—			(5		)	(5		)	—			—			(9		)	(9		)
Derivative liabilities - NUG contracts⁽¹⁾	—		—			(247		)	(247		)	—			—			(290		)	(290		)
Derivative liabilities - LCAPP contracts⁽¹⁾	—		—			(146		)	(146		)	—			—			(144		)	(144		)
Total liabilities	$	—	$	(175	)	$	(398	)	$	(573	)	$	(3	)	$	(151	)	$	(443	)	$	(597	)

Net assets (liabilities)⁽⁴⁾	$	384	$	2,291		$	(362	)	$	2,313		$	433		$	2,191		$	(399	)	$	2,225


⁽¹⁾	NUG and LCAPP contracts are generally subject to regulatory accounting treatment and do not impact earnings.


⁽²⁾	NDT funds hold equity portfolios whose performance is benchmarked against the Alerian MLP Index.


⁽³⁾	Primarily consists of short-term cash investments.


⁽⁴⁾	Excludes $(10) million and $110 million as of March 31, 2013 and December 31, 2012, 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 and LCAPP contracts and FTRs that are classified as Level 3 in the fair value hierarchy for the periods ended March 31, 2013 and December 31, 2012:



	NUG Contracts⁽¹⁾									LCAPP Contracts⁽¹⁾								FTRs
	Derivative Assets			Derivative Liabilities			Net			Derivative Assets		Derivative Liabilities			Net			Derivative Assets			Derivative Liabilities			Net
	(in millions)
January 1, 2012 Balance	$	57		$	(349	)	$	(292	)	$	—	$	—		$	—		$	1		$	(23	)	$	(22	)
Unrealized gain (loss)	(20		)	(180		)	(200		)	—		1			1			6			(6		)	—
Purchases	—			—			—			—		(145		)	(145		)	13			(10		)	3
Settlements	(1		)	239			238			—		—			—			(12		)	30			18
December 31, 2012 Balance	$	36		$	(290	)	$	(254	)	$	—	$	(144	)	$	(144	)	$	8		$	(9	)	$	(1	)
Unrealized gain (loss)	—			18			18			—		(2		)	(2		)	—			1			1
Settlements	(2		)	25			23			—		—			—			(6		)	3			(3		)
March 31, 2013 Balance	$	34		$	(247	)	$	(213	)	$	—	$	(146	)	$	(146	)	$	2		$	(5	)	$	(3	)


⁽¹⁾	Changes in the fair value of NUG and LCAPP contracts are generally subject to regulatory accounting treatment and do not impact earnings.

Level 3 Quantitative Information

The following table provides quantitative information for FTRs, NUG contracts and LCAPP contracts that are classified as Level 3 in the fair value hierarchy for the period ended March 31, 2013:

Fair Value, Net as of March 31, 2013 (In millions)

Valuation

Technique

Significant Input

Range

Weighted Average

Units

FTRs

)

Model

RTO auction clearing prices

($2.90) to $3.30

$0.15

Dollars/MWH

NUG Contracts

(213

)

Model

Generation

Electricity regional prices

700 to 6,235,000

$48.80 to $57.30

1,759,000

$53.60

MWH

Dollars/MWH

LCAPP Contracts

(146

)

Model

Regional capacity prices

$158.60 to $197.30

$174.50

Dollars/MW-Day



FES

Recurring Fair Value Measurements	March 31, 2013											December 31, 2012
	Level 1		Level 2			Level 3			Total			Level 1			Level 2			Level 3			Total
Assets	(In millions)
Corporate debt securities	$	—	$	771		$	—		$	771		$	—		$	703		$	—		$	703
Derivative assets - commodity contracts	7		261			—			268			—			252			—			252
Derivative assets - FTRs	—		—			2			2			—			—			6			6
Equity securities⁽¹⁾	320		—			—			320			294			—			—			294
Foreign government debt securities	—		60			—			60			—			61			—			61
U.S. government debt securities	—		19			—			19			—			27			—			27
Other⁽²⁾	—		143			—			143			—			104			—			104
Total assets	$	327	$	1,254		$	2		$	1,583		$	294		$	1,147		$	6		$	1,447

Liabilities
Derivative liabilities - commodity contracts	$	—	$	(174	)	$	—		$	(174	)	$	(3	)	$	(151	)	$	—		$	(154	)
Derivative liabilities - FTRs	—		—			(4		)	(4		)	—			—			(6		)	(6		)
Total liabilities	$	—	$	(174	)	$	(4	)	$	(178	)	$	(3	)	$	(151	)	$	(6	)	$	(160	)

Net assets (liabilities)⁽³⁾	$	327	$	1,080		$	(2	)	$	1,405		$	291		$	996		$	—		$	1,287


⁽¹⁾	NDT funds hold equity portfolios whose performance is benchmarked against the Alerian MLP Index.


⁽²⁾	Primarily consists of short-term cash investments.


⁽³⁾	Excludes $(6) million and $94 million as of March 31, 2013 and December 31, 2012, respectively, of receivables, payables, taxes and accrued income associated with the 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 FTRs held by FES and classified as Level 3 in the fair value hierarchy for the periods ended March 31, 2013 and December 31, 2012:



	Derivative Asset FTRs			Derivative Liability FTRs			Net FTRs
	(In millions)
January 1, 2012 Balance	$	1		$	(7	)	$	(6	)
Unrealized gain (loss)	4			(4		)	—
Purchases	9			(7		)	2
Settlements	(8		)	12			4
December 31, 2012 Balance	$	6		$	(6	)	$	—
Settlements	(4		)	2			(2		)
March 31, 2013 Balance	$	2		$	(4	)	$	(2	)

Level 3 Quantitative Information

The following table provides quantitative information for FTRs held by FES that are classified as Level 3 in the fair value hierarchy for the period ended March 31, 2013:

Fair Value, Net as of March 31, 2013 (In millions)

Valuation

Technique

Significant Input

Range

Weighted Average

Units

FTRs

)

Model

RTO auction clearing prices

($2.90) to $2.70

$0.05

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 held-to-maturity securities, AFS securities and notes receivable.

At the end of each reporting period, FirstEnergy evaluates its investments for OTTI. Investments classified as AFS securities are evaluated to determine whether a decline in fair value below the cost basis is other than temporary. FirstEnergy first considers its intent and ability to hold an equity security until recovery and then considers, among other factors, the duration and the extent to which the security's fair value has been less than its cost and the near-term financial prospects of the security issuer when evaluating an investment for impairment. For debt securities, FirstEnergy considers its intent to hold the securities, the likelihood that it will be required to sell the securities before recovery of its cost basis and the likelihood of recovery of the securities' entire amortized cost basis. If the decline in fair value is determined to be other than temporary, the cost basis of the securities is written down to fair value.

Unrealized gains and losses on AFS securities are recognized in AOCI. However, unrealized losses held in the NDTs of FES are recognized in earnings since the trust arrangements, as they are currently defined, do not meet the required ability and intent to hold criteria in consideration of OTTI.

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, preferred stocks, securities convertible into common stock and securities of the trust funds' custodian or managers and their parents or subsidiaries.

AFS Securities

FirstEnergy holds debt and equity securities within its NDT, nuclear fuel disposal and NUG trusts. These trust investments are considered AFS securities, recognized at fair market value. FirstEnergy has no securities held for trading purposes.

The following table summarizes the amortized cost basis, unrealized gains (there were no unrealized losses) and fair values of investments held in NDT, nuclear fuel disposal and NUG trusts as of March 31, 2013 and December 31, 2012:



	March 31, 2013⁽¹⁾						December 31, 2012⁽²⁾
	Cost Basis		Unrealized Gains		Fair Value		Cost Basis		Unrealized Gains		Fair Value
	(In millions)
Debt securities
FirstEnergy	$	1,881	$	34	$	1,915	$	1,827	$	34	$	1,861
FES	836		14		850		778		14		792

Equity securities
FirstEnergy	$	320	$	21	$	341	$	293	$	16	$	309
FES	301		19		320		281		13		294


⁽¹⁾	Excludes short-term cash investments: FE Consolidated - $266 million; FES - $133 million.


⁽²⁾	Excludes short-term cash investments: FE Consolidated - $326 million; FES - $196 million.

Proceeds from the sale of investments in AFS securities, realized gains and losses on those sales and interest and dividend income for the three months ended March 31, 2013 and 2012 were as follows:




March 31, 2013	Sale Proceeds		Realized Gains		Realized Losses			Interest and Dividend Income
	(In millions)
FirstEnergy	$	539	$	25	$	(13	)	$	26
FES	252		20		(10		)	13
March 31, 2012	Sale Proceeds		Realized Gains		Realized Losses			Interest and Dividend Income
	(In millions)
FirstEnergy	$	251	$	19	$	(17	)	$	15
FES	83		12		(11		)	7

Held-To-Maturity Securities

The following table provides the amortized cost basis, unrealized gains (there were no unrealized losses) and approximate fair values of investments in held-to-maturity securities as of March 31, 2013 and December 31, 2012:



	March 31, 2013						December 31, 2012
	Cost Basis		Unrealized Gains		Fair Value		Cost Basis		Unrealized Gains		Fair Value
	(In millions)
Debt Securities
FirstEnergy	$	54	$	16	$	70	$	54	$	30	$	84

Investments in emission allowances, employee benefit trusts and cost and equity method investments, including our investment in Signal Peak, totaling $640 million as of March 31, 2013, and $644 million as of December 31, 2012, 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 long-term debt and other long-term obligations, excluding capital lease obligations and net unamortized premiums and discounts:



	March 31, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(In millions)
FirstEnergy	$	17,902	$	20,125	$	16,957	$	19,460
FES	3,718		3,984		4,194		4,524

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 and its subsidiaries. FirstEnergy classified short-term borrowings, long-term debt and other long-term obligations as Level 2 in the fair value hierarchy as of March 31, 2013 and December 31, 2012.

During the first quarter, FE issued in aggregate $1.5 billion of senior unsecured notes in two series: $650 million of 2.75% senior notes due March 15, 2018 and $850 million of 4.25% senior notes due March 15, 2023. The stated interest rates are subject to adjustments based upon changes in the credit ratings of FirstEnergy but will not decrease below the issued rates. The proceeds were used to repay short-term borrowings and to invest in the money pool for FES and AE Supply's use in funding a portion of their tender offers.

Also during the first quarter of 2013, pursuant to tender offers launched in February 2013, FES and AE Supply repurchased $369 million and $294 million, respectively, of outstanding senior notes with interest rates ranging from 5.75% to 6.8%. FES and AE Supply paid $67 million and $43 million, respectively, in premiums to repurchase the tendered senior notes. FirstEnergy recorded a loss on debt redemption of $119 million, including such premiums and other related expenses. The premiums paid are included in cash flows from financing activities in the statement of cash flows.

In March 2013, ME issued $300 million of 3.50% senior unsecured notes due March 15, 2023. Proceeds from this offering were used to repay $150 million of ME 4.95% senior unsecured notes that matured in March 2013 and repay short-term debt.

On March 14, 2013, FES issued a redemption notice for $400 million of its 4.80% senior notes due 2015. The redemption was completed on April 15, 2013 and $31 million of premiums were paid in connection with the redemption.