Allegheny Power 2011 Annual Report Download - page 83

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COMBINED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
FirstEnergy is a diversified energy company that holds, directly or indirectly, all of the outstanding common stock of its principal
subsidiaries: OE, CEI, TE, Penn (a wholly owned subsidiary of OE), ATSI, JCP&L, Met-Ed, Penelec, FENOC, AE and its principal
subsidiaries (AE Supply, AGC, MP, PE, WP, TrAIL and AESC), FES and its principal subsidiaries (FGCO and NGC), and FESC.
AE merged with a subsidiary of FE on February 25, 2011, with AE continuing as the surviving corporation and becoming a wholly
owned subsidiary of FE (See Note 2, Merger).
FirstEnergy follows GAAP and complies with the related regulations, orders, policies and practices prescribed by the SEC, FERC,
and, as applicable, the PUCO, the PPUC, the MDPSC, the NYPSC, the WVPSC, the VSCC and the NJBPU. The preparation of
financial statements in conformity with GAAP requires management to make periodic estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results
could differ from these estimates. The reported results of operations are not indicative of results of operations for any future period.
FE and its subsidiaries have evaluated events and transactions for potential recognition or disclosure through the date the financial
statements were issued.
FE and its subsidiaries consolidate all majority-owned subsidiaries over which they exercise control and, when applicable, entities
for which they have a controlling financial interest. Intercompany transactions and balances are eliminated in consolidation. FE and
its subsidiaries consolidate a VIE when it is determined that it is the primary beneficiary (see Note 8, Variable Interest Entities).
Investments in affiliates over which FE and its subsidiaries have the ability to exercise significant influence, but with respect to
which they are not the primary beneficiary and do not exercise control, follow the equity method of accounting. Under the equity
method, the interest in the entity is reported as an investment in the Consolidated Balance Sheets and the percentage share of the
entity’s earnings is reported in the Consolidated Statements of Income and Comprehensive Income. These Notes to the Consolidated
Financial Statements are combined for FirstEnergy, FES, OE, CEI, TE JCP&L, Met-Ed and Penelec.
Certain prior year amounts have been reclassified to conform to the current year presentation, and the effects of the change in
accounting for pensions and OPEB costs described further below have been retrospectively applied to all periods presented. Unless
otherwise indicated, defined terms used herein have the meanings set forth in the accompanying Glossary of Terms.
ACCOUNTING FOR THE EFFECTS OF REGULATION
FirstEnergy accounts for the effects of regulation through the application of regulatory accounting to its operating utilities since their
rates are established by a third-party regulator with the authority to set rates that bind customers, are cost-based and can be charged
to and collected from customers.
FirstEnergy records regulatory assets and liabilities that result from the regulated rate-making process that would not be recorded
under GAAP for non-regulated entities. These assets and liabilities are amortized in the Consolidated Statements of Income
concurrent with the recovery or refund through customer rates. FirstEnergy believes that it is probable that its regulatory assets
and liabilities will be recovered and settled, respectively, through future rates. FirstEnergy and the Utilities net their regulatory assets
and liabilities based on federal and state jurisdictions.