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 and NUGs 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 purchase 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.

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, 2014, from those used as of December 31, 2013. 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, 2014. 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, 2014												December 31, 2013
	Level 1			Level 2			Level 3			Total			Level 1			Level 2			Level 3			Total
Assets	(In millions)
Corporate debt securities	$	—		$	1,168		$	—		$	1,168		$	—		$	1,365		$	—		$	1,365
Derivative assets - commodity contracts	11			293			—			304			7			208			—			215
Derivative assets - FTRs	—			—			7			7			—			—			4			4
Derivative assets - NUG contracts⁽¹⁾	—			—			3			3			—			—			20			20
Equity securities⁽²⁾	464			—			—			464			317			—			—			317
Foreign government debt securities	—			94			—			94			—			109			—			109
U.S. government debt securities	—			167			—			167			—			165			—			165
U.S. state debt securities	—			237			—			237			—			228			—			228
Other⁽³⁾	54			379			—			433			187			255			—			442
Total assets	$	529		$	2,338		$	10		$	2,877		$	511		$	2,330		$	24		$	2,865

Liabilities
Derivative liabilities - commodity contracts	$	(8	)	$	(179	)	$	—		$	(187	)	$	(13	)	$	(100	)	$	—		$	(113	)
Derivative liabilities - FTRs	—			—			(8		)	(8		)	—			—			(12		)	(12		)
Derivative liabilities - NUG contracts⁽¹⁾	—			—			(188		)	(188		)	—			—			(222		)	(222		)
Total liabilities	$	(8	)	$	(179	)	$	(196	)	$	(383	)	$	(13	)	$	(100	)	$	(234	)	$	(347	)

Net assets (liabilities)⁽⁴⁾	$	521		$	2,159		$	(186	)	$	2,494		$	498		$	2,230		$	(210	)	$	2,518


⁽¹⁾	NUG 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 or the Wells Fargo Hybrid and Preferred Securities REIT index.


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


⁽⁴⁾	Excludes $9 million and $10 million as of March 31, 2014 and December 31, 2013, 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, LCAPP contracts and FTRs that are classified as Level 3 in the fair value hierarchy for the periods ended March 31, 2014 and December 31, 2013:



	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, 2013 Balance	$	36		$	(290	)	$	(254	)	$	—	$	(144	)	$	(144	)	$	8		$	(9	)	$	(1	)
Unrealized gain (loss)	(8		)	(17		)	(25		)	—		(22		)	(22		)	3			1			4
Purchases	—			—			—			—		—			—			6			(15		)	(9		)
Terminations⁽²⁾	—			—			—			—		166			166			—			—			—
Settlements	(8		)	85			77			—		—			—			(13		)	11			(2		)
December 31, 2013 Balance	$	20		$	(222	)	$	(202	)	$	—	$	—		$	—		$	4		$	(12	)	$	(8	)
Unrealized gain	—			27			27			—		—			—			6			2			8
Settlements	(17		)	7			(10		)	—		—			—			(3		)	2			(1		)
March 31, 2014 Balance	$	3		$	(188	)	$	(185	)	$	—	$	—		$	—		$	7		$	(8	)	$	(1	)


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


⁽²⁾	See Note 8, Derivative Instruments

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 March 31, 2014:

Fair Value, Net (In millions)

Valuation

Technique

Significant Input

Range

Weighted Average

Units

FTRs

)

Model

RTO auction clearing prices

($4.20) to $7.60

$0.80

Dollars/MWH

NUG Contracts

(185

)

Model

Generation

Electricity regional prices

600 to 5,422,000

$47.90 to $59.00

1,033,000

$53.50

MWH

Dollars/MWH



FES

Recurring Fair Value Measurements	March 31, 2014												December 31, 2013
	Level 1			Level 2			Level 3			Total			Level 1			Level 2			Level 3			Total
Assets	(In millions)
Corporate debt securities	$	—		$	586		$	—		$	586		$	—		$	792		$	—		$	792
Derivative assets - commodity contracts	11			294			—			305			7			208			—			215
Derivative assets - FTRs	—			—			4			4			—			—			3			3
Equity securities⁽¹⁾	327			—			—			327			207			—			—			207
Foreign government debt securities	—			55			—			55			—			65			—			65
U.S. government debt securities	—			25			—			25			—			27			—			27
U.S. state debt securities	—			3			—			3			—			—			—			—
Other⁽²⁾	—			319			—			319			—			176			—			176
Total assets	$	338		$	1,282		$	4		$	1,624		$	214		$	1,268		$	3		$	1,485

Liabilities
Derivative liabilities - commodity contracts	$	(8	)	$	(179	)	$	—		$	(187	)	$	(13	)	$	(100	)	$	—		$	(113	)
Derivative liabilities - FTRs	—			—			(8		)	(8		)	—			—			(11		)	(11		)
Total liabilities	$	(8	)	$	(179	)	$	(8	)	$	(195	)	$	(13	)	$	(100	)	$	(11	)	$	(124	)

Net assets (liabilities)⁽³⁾	$	330		$	1,103		$	(4	)	$	1,429		$	201		$	1,168		$	(8	)	$	1,361


⁽¹⁾	NDT funds hold equity portfolios whose performance is benchmarked against the Alerian MLP Index or the Wells Fargo Hybrid and Preferred Securities REIT index.


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


⁽³⁾	Excludes $8 million and $9 million as of March 31, 2014 and December 31, 2013, 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, 2014 and December 31, 2013:



	Derivative Asset FTRs			Derivative Liability FTRs			Net FTRs
	(In millions)
January 1, 2013 Balance	$	6		$	(6	)	$	—
Unrealized loss	—			(2		)	(2		)
Purchases	5			(12		)	(7		)
Settlements	(8		)	9			1
December 31, 2013 Balance	$	3		$	(11	)	$	(8	)
Unrealized gain	3			1			4
Settlements	(2		)	2			—
March 31, 2014 Balance	$	4		$	(8	)	$	(4	)

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, 2014:

Fair Value, Net (In millions)

Valuation

Technique

Significant Input

Range

Weighted Average

Units

FTRs

)

Model

RTO auction clearing prices

($4.20) to $7.60

$0.60

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 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, OE and TE 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, 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, 2014 and December 31, 2013:



	March 31, 2014⁽¹⁾						December 31, 2013⁽²⁾
	Cost Basis		Unrealized Gains		Fair Value		Cost Basis		Unrealized Gains		Fair Value
	(In millions)
Debt securities
FirstEnergy	$	1,670	$	44	$	1,714	$	1,881	$	33	$	1,914
FES	698		22		720		918		17		935

Equity securities
FirstEnergy	$	433	$	31	$	464	$	308	$	9	$	317
FES	308		19		327		207		—		207


⁽¹⁾	Excludes short-term cash investments: FE Consolidated - $324 million; FES - $276 million.


⁽²⁾	Excludes short-term cash investments: FE Consolidated - $204 million; FES - $135 million.

Proceeds from the sale of investments in AFS securities, realized gains and losses on those sales, OTTI and interest and dividend income for the three months ended March 31, 2014 and 2013 were as follows:



Three Months Ended
March 31, 2014	Sale Proceeds		Realized Gains		Realized Losses			OTTI			Interest and Dividend Income
	(In millions)
FirstEnergy	$	621	$	28	$	(16	)	$	(2	)	$	25
FES	423		19		(5		)	(2		)	15
March 31, 2013	Sale Proceeds		Realized Gains		Realized Losses			OTTI			Interest and Dividend Income
	(In millions)
FirstEnergy	$	539	$	24	$	(6	)	$	(7	)	$	26
FES	252		20		(3		)	(7		)	13

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, 2014 and December 31, 2013:



	March 31, 2014						December 31, 2013
	Cost Basis		Unrealized Gains		Fair Value		Cost Basis		Unrealized Gains		Fair Value
	(In millions)
Debt Securities
FirstEnergy	$	24	$	8	$	32	$	33	$	2	$	35

Investments in employee benefit trusts and cost and equity method investments, including FirstEnergy's investment in Global Holding, totaling $635 million as of March 31, 2014, and $636 million as of December 31, 2013, 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, 2014				December 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(In millions)
FirstEnergy	$	18,034	$	19,321	$	17,049	$	17,957
FES	2,996		3,098		3,001		3,073

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, 2014 and December 31, 2013.

On March 31, 2014, FE, FES, AE Supply, FET and FE's other borrower subsidiaries entered into extensions and amendments to the three existing multi-year syndicated revolving credit facilities. Each facility was extended until March 31, 2019. The FE facility was amended to increase the lending banks' commitments under the facility by $1 billion to a total of $3.5 billion and to increase the individual borrower sublimit for FE by $1 billion to a total of $3.5 billion. The FES/AE Supply facility was amended to decrease the lending banks' commitments by $1 billion to a total of $1.5 billion. The lending banks' commitments under the FET facility remain at $1 billion and that facility was amended to increase ATSI's individual borrower sublimit to $500 million from $100 million and TrAIL's individual borrower sublimit to $400 million from $200 million. FirstEnergy expensed approximately $5 million (FES - $3 million) of unamortized debt expense as a result of the amendments. The amount was included in Loss on Debt Redemptions in the Consolidated Statement of Income in the first quarter of 2014.

On March 31, 2014, FE executed, and fully utilized, a new $1 billion variable rate term loan credit agreement with a maturity date of March 31, 2019. The initial borrowing under the term loan, which took the form of a Eurodollar rate advance, may be converted from time to time, in whole or in part, to alternate base rate advances or other Eurodollar rate advances.

During the first quarter of 2014, FG and NG remarketed approximately $417 million of PCRBs previously held by the companies. Of the total, $182 million was remarketed with a fixed interest rate of 4% per annum with a mandatory put date of June 3, 2019 and $235 million was remarketed with a fixed interest rate of 3.75% per annum with a mandatory put date of December 3, 2018.

In addition, in the first quarter of 2014, FG and NG repurchased approximately $197 million and $16 million of PCRBs, respectively, which were subject to a mandatory tender. The companies are currently holding the PCRB's for remarketing subject to future market and other conditions.

On April 1, 2014, PN and ME repurchased approximately $45 million and $29 million of PCRBs, respectively, which were subject to a mandatory put on such date. The companies are currently holding the PCRB's for remarketing subject to future market and other conditions.