Commodity Price Risk FirstEnergy has limited exposure to financial risks resulting from fluctuating commodity prices, including prices for electricity, coal and energy transmission. FirstEnergy's Risk Management Department and Enterprise Risk Management Committee are responsible for promoting the effective design and implementation of sound risk management programs and overseeing compliance with corporate risk management policies and established risk management practice. The valuation of derivative contracts is based on observable market information. As of December 31, 2022, FirstEnergy has a net asset of $9 million in non-hedge derivative contracts that are related to FTRs at certain of the Utilities. FTRs are subject to regulatory accounting and do not impact earnings. Equity Price Risk As of December 31, 2022, the FirstEnergy pension plan assets were allocated approximately as follows: 33% in public equity securities, 15% in fixed income securities, 9% in hedge funds, 3% in insurance-linked securities, 13% in real estate funds, 17% in private equity and debt funds, a net derivative liability of 1% and 11% in cash and short-term securities. Due to the American Rescue Plan Act of 2021, under current assumptions, including an expected annual return on assets of 8.0% in 2023, FirstEnergy does not currently expect to have a required contribution to the pension plan until 2025. However, a decline in the value of pension plan assets could result in additional funding requirements, and FirstEnergy may elect to contribute to the pension plan voluntarily. As of December 31, 2022, FirstEnergy's OPEB plan assets were allocated approximately 47% in equity securities, 34% in fixed income securities and 19% in cash and short-term securities. See Note 5, "Pension and Other PostEmployment Benefits," of the Notes to Consolidated Financial Statements for additional details on FirstEnergy's pension and OPEB plans. During 2022, FirstEnergy's pension and OPEB plan assets have lost approximately $1,760 million or 19.5%, and $70 million or 13.7%, respectively, as compared to the annual expected return on plan assets of 7.5%. Interest Rate Risk FirstEnergy’s exposure to fluctuations in market interest rates is reduced since all debt has fixed interest rates, as noted in the table below. FirstEnergy is subject to the inherent interest rate risks related to refinancing maturing debt by issuing new debt securities. During 2022, interest rates have increased significantly, which has caused the rate and interest expense on borrowings under the 2021 Credit Facilities and refinanced debt to be significantly higher. Comparison of Carrying Value to Fair Value as of December 31, 2022 Year of Maturity or Notice of Redemption 2023 2024 2025 2026 2027 Thereafter Total Fair Value (In millions) Assets: Investments Other Than Cash and Cash Equivalents: Fixed Income $ — $ — $ — $ — $ — $ 266 $ 266 $ 266 Average interest rate — % — % — % — % — % 1.3 % 1.3 % Liabilities: Long-term Debt: Fixed rate $ 344 $ 1,246 $ 2,023 $ 1,076 $ 2,003 $14,949 $21,641 $ 19,784 Average interest rate 3.7 % 4.7 % 3.8 % 3.5 % 4.2 % 4.4 % 4.3 % FirstEnergy recognizes net actuarial gains or losses for its pension and OPEB plans in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement. A primary factor contributing to these actuarial gains and losses are changes in the discount rates used to value pension and OPEB obligations as of the measurement date and the difference between expected and actual returns on the plans’ assets. The remaining components of pension and OPEB expense, primarily service costs, interest cost on obligations, expected return on plan assets and amortization of prior service costs, are set at the beginning of the calendar year and are recorded on a monthly basis. Changes in asset performance and discount rates will not impact these pension costs during the year, however, future years could be impacted by changes in the market. FirstEnergy’s 2021 Credit Facilities bear interest at fluctuating interest rates, primarily based on LIBOR. LIBOR tends to fluctuate based on general interest rates, rates set by the U.S. Federal Reserve and other central banks, the supply of and demand for credit in the London interbank market and general economic conditions. FirstEnergy has not hedged its interest rate exposure with respect to its floating rate debt. Accordingly, FirstEnergy’s interest expense for any particular period will fluctuate based on 52
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