Exhibit 99.1

ALLEGHENY ENERGY, INC.

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2010 AND 2009, AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2010

Report of Independent Registered Public Accounting Firm		2
Consolidated Statements of Income for each of the three years in the period ended December 31, 2010		3
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2010		4
Consolidated Balance Sheets as of December 31, 2010 and 2009		6
Consolidated Statement of Equity and Comprehensive Income for each of the three years in the period ended December 31, 2010		8
Notes to Consolidated Financial Statements		11

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Allegheny Energy, Inc.

     We have audited the accompanying consolidated balance sheets of Allegheny Energy, Inc. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Allegheny Energy, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP
Pittsburgh, PA
February 23, 2011

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

		Year ended December 31,
(In millions, except per share amounts)		2010				2009				2008
Operating revenues		$	3,902.9			$	3,426.8			$	3,385.9
Operating expenses:
Fuel			1,192.6				886.6				1,080.9
Purchased power and transmission			502.9				502.0				395.6
Deferred energy costs, net			38.1				(64.4	)			(63.7	)
Gain on sale of Virginia distribution business			(44.6	)			0				0
Operations and maintenance			732.9				687.1				674.8
Depreciation and amortization			323.5				282.1				273.9
Taxes other than income taxes			226.0				213.6				214.9
Total operating expenses			2,971.4				2,507.0				2,576.4
Operating income			931.5				919.8				809.5
Other income (expense), net			13.3				7.0				22.3
Interest expense			316.4				291.1				231.9
Income before income taxes			628.4				635.7				599.9
Income tax expense			216.7				241.6				204.1
Net income			411.7				394.1				395.8
Net income attributable to noncontrolling interests			0				(1.3	)			(0.4	)
Net income attributable to Allegheny Energy, Inc		$	411.7			$	392.8			$	395.4
Earnings per common share attributable to Allegheny Energy, Inc.:
Basic		$	2.42			$	2.32			$	2.35
Diluted		$	2.42			$	2.31			$	2.33
Average common shares outstanding:
Basic			169.8				169.5				168.5
Diluted			170.3				170.0				170.0

See accompanying Notes to Consolidated Financial Statements.

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Year ended December 31,
(In millions)		2010				2009				2008
Cash Flows From Operating Activities:
Net income		$	411.7			$	394.1			$	395.8
Adjustments for non-cash items included in income:
Depreciation and amortization			323.5				282.1				273.9
Amortization of debt related costs			25.6				15.4				10.9
Amortization of Pennsylvania transition assets and liabilities			(17.9	)			(17.5	)			(8.1	)
Gain on sale of Virginia distribution business			(44.6	)			0				0
Gain relating to the purchase of hydroelectric generation facilities			0				(17.3	)			0
Provision for uncollectible accounts			16.8				16.4				16.5
Deferred income taxes and investment tax credit, net			239.3				235.3				156.2
Deferred energy costs, net			38.1				(64.4	)			(63.7	)
Unrealized losses (gains) on derivative contracts, net			23.1				(23.4	)			(18.8	)
Employee benefit expenses			73.3				55.7				45.2
Contributions to pension and other postretirement plans			(82.3	)			(48.6	)			(49.3	)
Deferred revenue-Fort Martin scrubber project			(4.0	)			11.0				10.8
Deferred revenue-Virginia			0				(28.3	)			28.3
Deferred revenue-energy efficiency programs			16.5				0				0
Unbilled transmission expansion revenue			(33.2	)			(16.0	)			(8.1	)
Other, net			(21.2	)			8.0				17.3
Changes in certain assets and liabilities:
Accounts receivable, net			(64.7	)			(42.9	)			(26.2	)
Materials, supplies and fuel			60.8				(75.2	)			(62.8	)
Collateral deposits			(37.1	)			37.7				23.1
Accounts payable			(40.2	)			29.5				(36.7	)
Accrued taxes			(32.2	)			(29.2	)			43.1
Regulatory assets and liabilities			(32.4	)			32.9				111.7
Assets and liabilities related to the sale of ACC fiber			0				21.3				0
Other operating assets and liabilities			(2.9	)			23.0				2.3
Net cash provided by operating activities			816.0				799.6				861.4
Cash Flows From Investing Activities:
Capital expenditures			(950.5	)			(1,166.2	)			(994.1	)
Purchase of WV distribution business			(14.5	)			0				0
Purchase of hydroelectric generation facilities			0				(2.0	)			0
Proceeds from sale of Virginia distribution business			317.2				0				0
Proceeds from asset sales			0.2				3.0				1.1
Purchase of Merrill Lynch interest in subsidiary			0				0				(50.0	)
Decrease in restricted funds			31.3				84.1				224.4
Deconsolidation of PATH-WV			(3.4	)			0				0
Other			(5.9	)			(3.7	)			(3.7	)
Net cash used in investing activities			(625.6	)			(1,084.8	)			(822.3	)

See accompanying Notes to Consolidated Financial Statements.

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

		Year ended December 31,
(In millions)		2010				2009				2008
Cash Flows From Financing Activities:
Issuance of long-term debt			1,186.5				1,508.3				647.6
Repayment of long-term debt			(1,061.4	)			(1,177.2	)			(493.1	)
Costs associated with the AE Supply revolving credit facility refinancing			(0.1	)			(22.2	)			0
Repayment of note payable			0				0				(10.0	)
Equity contribution to PATH, LLC by a joint venture partner			0				8.7				4.5
Payments on capital lease obligations			(11.2	)			(8.5	)			(9.0	)
Proceeds from exercise of employee stock options			1.3				2.3				25.3
Cash dividends paid on common stock			(101.8	)			(101.7	)			(101.1	)
Other			(0.1	)			0				0
Net cash provided by financing activities			13.2				209.7				64.2
Net increase (decrease) in cash and cash equivalents			203.6				(75.5	)			103.3
Cash and cash equivalents at beginning of period			286.6				362.1				258.8
Cash and cash equivalents at end of period		$	490.2			$	286.6			$	362.1
Supplemental Cash Flow Information:
Cash paid during the year for interest (net of amounts capitalized)		$	286.9			$	264.8			$	228.2
Cash paid during the year for income taxes, net		$	15.1			$	41.3			$	10.8
Accounts payable at December 31 relating to capital expenditures		$	137.9			$	132.5			$	91.8
Non-cash investing activity relating to the purchase of hydroelectric generation facilities		$	0			$	17.3			$	0
Non-cash financing activity — AE common stock dividends accrued but not paid		$	25.5			$	0			$	0

See accompanying Notes to Consolidated Financial Statements.

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

		As of December 31,
(In millions)		2010				2009
ASSETS
Current Assets:
Cash and cash equivalents		$	490.2			$	286.6
Accounts receivable:
Customer			245.9				188.2
Unbilled utility revenue			124.1				116.4
Wholesale and other			53.7				64.4
Allowance for uncollectible accounts			(15.7	)			(14.0	)
Materials and supplies			108.4				110.6
Fuel			151.3				206.4
Deferred income taxes			0				81.5
Prepaid taxes			48.9				48.4
Collateral deposits			30.7				20.8
Derivative assets			24.5				4.6
Restricted funds			46.9				25.9
Regulatory assets			177.5				132.7
Assets held for sale			0				32.4
Other			29.2				40.4
Total current assets			1,515.6				1,345.3
Property, Plant and Equipment:
Generation			7,623.2				7,469.4
Transmission			1,421.1				1,313.2
Distribution			3,937.5				3,784.4
Other			515.0				440.7
Accumulated depreciation			(5,362.9	)			(5,104.9	)
Subtotal			8,133.9				7,902.8
Construction work in progress			1,168.0				800.6
Property, plant and equipment held for sale, net			0				253.7
Total property, plant and equipment, net			9,301.9				8,957.1
Other Noncurrent Assets:
Regulatory assets			706.1				717.3
Goodwill			367.3				367.3
Restricted funds			29.4				60.2
Investments in unconsolidated affiliates			49.8				26.7
Other			105.7				115.2
Total other noncurrent assets			1,258.3				1,286.7
Total Assets		$	12,075.8			$	11,589.1

See accompanying Notes to Consolidated Financial Statements.

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)

		As of December 31,
(In millions)		2010				2009
LIABILITIES AND EQUITY
Current Liabilities:
Long-term debt due within one year		$	15.5			$	140.8
Accounts payable			383.4				411.4
Accrued taxes			99.5				87.3
Payable to PJM for FTRs, excluding portion netted against derivative assets			0				31.7
Derivative liabilities			6.0				24.4
Regulatory liabilities			9.8				37.4
Accrued interest			72.2				68.3
Security deposits			55.6				51.0
Liabilities associated with assets held for sale			0				10.1
Deferred income taxes			26.1				0
Other			122.8				123.2
Total current liabilities			790.9				985.6
Long-term Debt:
Securitized debt-Environmental Control Bonds			481.0				496.5
Other long-term debt			4,205.0				3,920.5
Total long-term debt			4,686.0				4,417.0
Deferred Credits and Other Liabilities:
Derivative liabilities			7.4				6.7
Income taxes payable			43.4				85.7
Investment tax credit			58.3				61.6
Deferred income taxes			1,653.6				1,501.3
Regulatory liabilities			512.8				461.2
Pension and other postretirement employee benefit plan liabilities			596.8				597.4
Adverse power purchase commitment			96.3				114.4
Liabilities associated with assets held for sale			0				53.1
Other			188.6				177.0
Total deferred credits and other liabilities			3,157.2				3,058.4
Commitments and Contingencies (Note 25) Equity:
Common stock—$1.25 par value per share, 260,000,000 shares authorized and 170,028,499 and 169,620,917 shares issued at December 31, 2010 and 2009, respectively			212.5				212.0
Other paid-in capital			1,987.8				1,970.2
Retained earnings			1,307.0				1,022.7
Treasury stock at cost—54,955 and 51,313 shares at December 31, 2010 and 2009, respectively			(1.9	)			(1.8	)
Accumulated other comprehensive loss			(63.7	)			(89.9	)
Total Allegheny Energy, Inc. common stockholders’ equity			3,441.7				3,113.2
Noncontrolling interest			0				14.9
Total equity			3,441.7				3,128.1
Total Liabilities and Equity		$	12,075.8			$	11,589.1

See accompanying Notes to Consolidated Financial Statements.

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME

																										Total
																										Allegheny
																						Accumulated				Energy, Inc.
										Other												other				common
		Shares				Common				paid-in				Retained				Treasury				comprehensive				stockholders’				Noncontrolling				Total				Comprehensive
(In millions, except shares)		outstanding				stock				capital				earnings				stock				loss				equity				interests				equity				income
Balance at December 31, 2007			167,223,576			$	209.1			$	1,924.1			$	444.2			$	(1.8	)		$	(40.2	)		$	2,535.4			$	13.2			$	2,548.6				—
Net income			—				—				—				395.4				—				—				395.4				0.4				395.8			$	395.8
Defined benefit pension and other benefit plans:
Net loss during the period, net of tax of $26.9			—				—				—				—				—				(39.5	)			(39.5	)			—				(39.5	)			(39.5	)
Amortization, net of tax of $1.1			—				—				—				—				—				1.7				1.7				—				1.7				1.7
Cash flow hedges, net of tax of $20.5			—				—				—				—				—				32.4				32.4				—				32.4				32.4
Comprehensive income			—				—				—				—				—				—				—				—							390.4
Comprehensive income attributable to noncontrolling interests			—				—				—				—				—				—				—				—				—			(0.4		)
Comprehensive income attributable to Allegheny Energy, Inc.			—				—				—				—				—				—				—				—				—			$	390.0
Purchase of noncontrolling interest in AE Supply			—				—				—				—				—				—				—				(13.2	)			(13.2	)			—
Equity contribution to PATH, LLC by the joint venture partner			—				—				—				—				—				—				—				4.5				4.5				—
Adoption of measurement date provisions for pension and other benefit plans:
Service cost, interest cost and expected return on plan assets, net of tax of $3.0			—				—				—				(4.4	)			—				—				(4.4	)			—				(4.4	)			—
Amortizations:
Net actuarial loss, net of tax of $0.7			—				—				—				(1.0	)			—				1.0				—				—				—				—
Net transition obligation, net of tax of $0.6			—				—				—				(0.9	)			—				0.9				—				—				—				—
Net prior service cost, net of tax of $0.3			—				—				—				(0.5	)			—				0.5				—				—				—				—
Dividends on common stock			—				—				—				(101.1	)			—				—				(101.1	)			—				(101.1	)			—
Stock-based compensation expense:
Stock units			—				—				0.6				—				—				—				0.6				—				0.6				—
Non-employee director stock awards			20,869				—				1.1				—				—				—				1.1				—				1.1				—
Stock options			—				—				9.3				—				—				—				9.3				—				9.3				—
Performance shares			—				—				2.9				—				—				—				2.9				—				2.9				—
Exercise of stock options			1,849,316				2.3				23.0				—				—				—				25.3				—				25.3				—
Settlement of stock units			270,633				0.4				(8.5	)			—				—				—				(8.1	)			—				(8.1	)			—
Dividends on stock units			—				—				—				(0.1	)			—				—				(0.1	)			—				(0.1	)			—
Other			—				—				—				—				—				(0.1	)			(0.1	)			—				(0.1	)			—
Balance at December 31, 2008			169,364,394			$	211.8			$	1,952.5			$	731.6			$	(1.8	)		$	(43.3	)		$	2,850.8			$	4.9			$	2,855.7				—

See accompanying Notes to Consolidated Financial Statements.

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME (Continued)

																										Total
																										Allegheny
																						Accumulated				Energy, Inc.
										Other												other				common
		Shares				Common				paid-in				Retained				Treasury				comprehensive				stockholders’				Noncontrolling				Total				Comprehensive
(In millions, except shares)		outstanding				stock				capital				earnings				stock				loss				equity				interests				equity				income
Balance at December 31, 2008			169,364,394			$	211.8			$	1,952.5			$	731.6			$	(1.8	)		$	(43.3	)		$	2,850.8			$	4.9			$	2,855.7				—
Net income			—				—				—				392.8				—				—				392.8				1.3				394.1			$	394.1
Defined benefit pension and other benefit plans:
Net loss during the period, net of tax of $3.1			—				—				—				—				—				(5.3	)			(5.3	)			—				(5.3	)			(5.3	)
Amortization, net of tax of $2.1			—				—				—				—				—				3.5				3.5				—				3.5				3.5
Cash flow hedges, net of tax of $28.5			—				—				—				—				—				(44.8	)			(44.8	)			—				(44.8	)			(44.8	)
Comprehensive income			—				—				—				—				—				—				—				—				—				347.5
Comprehensive income attributable to noncontrolling interest			—				—				—				—				—				—				—				—				—				(1.3	)
Comprehensive income attributable to Allegheny Energy, Inc.			—				—				—				—				—				—				—				—				—			$	346.2
Equity contribution to PATH, LLC by the joint venture partner			—				—				—				—				—				—				—				8.7				8.7				—
Dividends on common stock			—				—				—				(101.7	)			—				—				(101.7	)			—				(101.7	)			—
Stock-based compensation expense:
Non-employee director stock awards			21,907				—				0.9				—				—				—				0.9				—				0.9				—
Stock options			—				—				7.4				—				—				—				7.4				—				7.4				—
Performance shares			—				—				7.2				—				—				—				7.2				—				7.2				—
Restricted shares			17,850				—				0.1				—				—				—				0.1				—				0.1				—
Exercise of stock options			163,700				0.2				2.1				—				—				—				2.3				—				2.3				—
Settlement of stock units			3,573				—				—				—				—				—				—				—				—				—
Purchase of treasury shares			(1,820	)			—				—				—				—				—				—				—				—				—
Balance at December 31, 2009			169,569,604			$	212.0			$	1,970.2			$	1,022.7			$	(1.8	)		$	(89.9	)		$	3,113.2			$	14.9			$	3,128.1				—
Balance at December 31, 2009			169,569,604			$	212.0			$	1,970.2			$	1,022.7			$	(1.8	)		$	(89.9	)		$	3,113.2			$	14.9			$	3,128.1				—
Net income			—				—				—				411.7				—				—				411.7				—				411.7			$	411.7
Defined benefit pension and other benefit plans:
Amortization and other, net of tax of $2.9 million			—				—				—				—				—				2.8				2.8				—				2.8				2.8
Net loss during the period, net of tax of $(7.7)			—				—				—				—				—				(11.6	)			(11.6	)			—				(11.6	)			(11.6	)
Adjustment to unamortized OPEB plan actuarial loss, net of tax of $5.2 million			—				—				—				—				—				7.8				7.8				—				7.8				7.8
Cash flow hedges, net of tax of $17.2			—				—				—				—				—				27.2				27.2				—				27.2				27.2
Comprehensive income			—				—				—				—				—				—				—				—				—			$	437.9
Deconsolidation of PATH- WV			—				—				—				—				—				—				—				(14.9	)			(14.9	)			—
Dividends on common stock			—				—				—				(127.3	)			—				—				(127.3	)			—				(127.3	)			—
Stock-based compensation expense:
Non-employee director stock awards			12,000				—				0.9				(0.1	)			—				—				0.8				—				0.8				—
Stock options			—				—				6.5				—				—				—				6.5				—				6.5				—
Performance shares			—				—				13.1				—				—				—				13.1				—				13.1				—
Restricted shares			—				—				0.3				—				(0.1	)			—				0.2				—				0.2				—
Exercise of stock options			85,784				0.1				1.2				—				—				—				1.3				—				1.3				—
Issuance of performance shares			309,798				0.4				(4.4	)			—				—				—				(4.0	)			—				(4.0	)			—
Purchase of treasury shares			(3,642	)			—				—				—				—				—				—				—				—				—
Balance at December 31, 2010			169,973,544			$	212.5			$	1,987.8			$	1,307.0			$	(1.9	)		$	(63.7	)		$	3,441.7			$	—			$	3,441.7				—

See accompanying Notes to Consolidated Financial Statements.

ALLEGHENY ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Note		Number
1 Business, Basis of Presentation and Significant Accounting Policies			11
2 Merger Agreement			17
3 Recently Adopted and Recently Issued Accounting Standards			18
4 Sale of Virginia Distribution Business			18
5 Rates and Regulation			19
6 Transmission Expansion			22
7 Regulatory Assets and Liabilities			25
8 Income Taxes			27
9 Capitalization and Debt			30
10 Earnings per Share			35
11 Stock-Based Compensation			36
12 Pension Benefits and Postretirement Benefits Other Than Pensions			41
13 Segment Information			47
14 Fair Value Measurements, Derivative Instruments and Hedging Activities			49
15 Purchase of Hydroelectric Generation Facilities			55
16 Jointly Owned Bath County Generation Facility			56
17 Fair Value of Financial Instruments			56
18 Goodwill and Intangible Assets			56
19 Asset Retirement Obligations (“ARO”)			57
20 Adverse Power Purchase Commitment Liability			57
21 Other Income (Expense), Net			58
22 Guarantees and Letters of Credit			58
23 Variable Interest Entities			58
24 Acquisition of Noncontrolling Interest in AE Supply			60
25 Commitments and Contingencies			60
26 Quarterly Financial Information (Unaudited)			68

ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 1: BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Merger Agreement

     On February 10, 2010, Allegheny Energy, Inc. (“AE”) entered into an Agreement and Plan of Merger (as amended on June 4, 2010, the “Merger Agreement”) with FirstEnergy Corp. (“FirstEnergy”) and Element Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of FirstEnergy. The accompanying financial statements do not reflect potential impacts or changes in accounting policies, basis of accounting, carrying values of assets and liabilities or other matters that may result from the completion of AE’s anticipated merger with FirstEnergy. See Note 2, “Merger Agreement” for additional information.

Business Description

     AE (and together with its subsidiaries, “Allegheny”) is an integrated energy business. Allegheny owns and operates electric generation facilities primarily in Pennsylvania, West Virginia and Maryland. Additionally, Allegheny owns transmission assets in Pennsylvania, West Virginia, Maryland and Virginia and provides distribution services to customers in Pennsylvania, West Virginia and Maryland. Allegheny manages its operations through two business segments: Merchant Generation and Regulated Operations. These business segments are also referred to as reportable segments.

     The Merchant Generation segment includes Allegheny’s unregulated electric generation operations including Allegheny Energy Supply Company, LLC (“AE Supply”) and AE Supply’s interest in Allegheny Generating Company (“AGC”). AE Supply owns, operates and controls electric generation capacity and supplies and trades energy and energy-related commodities. AGC owns and sells generation capacity to AE Supply and Monongahela Power Company (“Monongahela”), which own approximately 59% and 41% of AGC, respectively. The Merchant Generation segment is subject to various federal and state regulations but, unlike the Regulated Operations segment, is not generally subject to state regulation of rates.

     The Regulated Operations segment includes the operations of Monongahela, The Potomac Edison Company (“Potomac Edison”) and West Penn Power Company (“West Penn” and, together with Monongahela and Potomac Edison, the “Distribution Companies”), which primarily operate electric transmission and distribution (“T&D”) systems in Pennsylvania, West Virginia and Maryland, as well as transmission in Virginia. Monongahela also owns and operates electric generation facilities in West Virginia and has a 41% interest in AGC. The Distribution Companies are subject to various federal and state regulations, including state regulation of rates.

     The Regulated Operations segment also includes the operations of Trans-Allegheny Interstate Line Company (“TrAIL Company”) and Allegheny’s interests in Potomac-Appalachian Transmission Highline, LLC (“PATH, LLC”). These entities were created to construct or facilitate the construction of high voltage transmission lines and other transmission facilities, including the Trans-Allegheny Interstate Line (“TrAIL”) and the Potomac-Appalachian Transmission Highline (“PATH”). PATH, LLC is a series limited liability company that is comprised of multiple series, each of which has separate rights, powers and duties regarding specified property and the series profits and losses associated with such property. A subsidiary of AE owns 100% of the Allegheny Series and 50% of the West Virginia Series (“PATH-WV”), which is a joint venture with a subsidiary of American Electric Power Company, Inc. (“AEP”). Allegheny accounts for its interest in PATH-WV using the equity method of accounting, effective January 1, 2010. TrAIL Company, PATH-Allegheny and PATH-WV are subject to regulation by the Federal Energy Regulatory Commission (“FERC”). See Note 3, “Recently Adopted and Recently Issued Accounting Standards” for additional information.

     Allegheny Energy Service Corporation (“AESC”) is a wholly owned subsidiary of AE that employs substantially all of Allegheny’s personnel. As of December 31, 2010, AESC employed 4,211 employees, 1,197 of whom were subject to collective bargaining arrangements.

Basis of Presentation

     The accompanying consolidated financial statements include the accounts of AE and its subsidiaries, as well as certain variable interest entities (See Note 23, “Variable Interest Entities,” for additional information). These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates include, but are not limited to, inventory valuation, allowance for doubtful accounts, goodwill, intangible and long-lived asset impairment, unbilled electricity revenue, valuation of derivative and energy contracts, asset retirement obligations, the effects of regulation, long-lived asset recovery, the effects of contingencies and certain assumptions made in accounting for pension and postretirement benefits. The estimates and

ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

assumptions used are based upon management’s evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results could ultimately differ from those estimates.

Regulatory Assets and Liabilities

     Under cost-based regulation, regulated utility enterprises generally are permitted to recover their operating expenses and earn a reasonable return on their utility investment.

     Allegheny accounts for its regulated utility operations under regulated utility operations industry specific accounting provisions. The economic effects of regulation can result in a regulated company deferring costs or revenues that have been, or are expected to be, allowed in the rate-setting process in a period different from the period in which the costs, revenues or other comprehensive income would be recognized by an unregulated enterprise. Accordingly, Allegheny records assets and liabilities that result from the regulated rate-making process that would not be recorded under GAAP for non-regulated entities. These regulatory assets and liabilities are classified in the Consolidated Balance Sheets as current and non-current “Regulatory assets” and “Regulatory liabilities.” Allegheny periodically evaluates the applicability of regulated industry specific accounting provisions and considers factors such as regulatory changes and the impact of competition. If regulated industry specific accounting provisions would no longer apply to some portion of Allegheny’s operations, Allegheny would eliminate the related regulatory assets and liabilities and record the impact as an extraordinary item in the statement of income. See Note 7, “Regulatory Assets and Liabilities,” for additional information.

Revenues and Receivables

     Revenues from the sale of generation are recorded in the period in which the electricity is delivered.

     PJM Interconnection, LLC (“PJM”) is a regional transmission organization that operates a competitive wholesale energy market. To facilitate the economic dispatch of Allegheny’s generation, AE Supply and Monongahela sell the power they generate into the PJM market and purchase from the PJM market the power needed to meet their contractual obligations to supply power. PJM power purchases and sales are reported on a net basis.

     Revenues from the sale of electricity to customers of the regulated utility subsidiaries are recognized in the period that the electricity is delivered and consumed by customers, including an estimate for unbilled revenues. Energy billings to individual customers are based on meter readings, which are performed periodically on a systematic basis. At the end of each month, the amount of energy delivered to each customer is estimated based in part on the most recent reading of the customer’s meter, and the Distribution Companies recognize unbilled revenues that reflect these estimates. The unbilled revenue estimates are based on daily generation, purchases of electricity, estimated customer usage by customer type, weather effects, electric line losses and the most recent consumer rates.

     A provision for uncollectible accounts, which is determined based upon Allegheny’s collection experience with its customers, is recorded as a component of operations and maintenance expense.

Fair Value Measurements, Derivative Instruments and Hedging Activities

     Derivative contracts are recorded in Allegheny’s Consolidated Balance Sheets at fair value. Changes in the fair value of the derivative contract are included in revenues on the Consolidated Statements of Income unless the derivative falls within the “normal purchases and normal sales” scope exception or is designated as a cash flow hedge for accounting purposes. The normal purchases and normal sales scope exception requires, among other things, physical delivery in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that are designated as normal purchases and normal sales are accounted for under accrual accounting and, therefore, are not recorded on the balance sheet at fair value. For certain transactions that are designed to hedge the cash flows of a forecasted transaction and that are designated in a hedging relationship, the effective portion of the changes in fair value of the derivative contract is recorded as a separate component of equity under the caption “Accumulated other comprehensive loss” and subsequently reclassified into earnings when the forecasted transaction is settled and impacts earnings. The ineffective portion of the hedge is immediately recognized in earnings.

     Fair values for exchange-traded instruments, principally futures, are based on actively quoted market prices. Fair values are subject to change in the near term and reflect management’s best estimate based on various factors. In establishing the fair value of commodity contracts that do not have quoted prices, such as physical contracts, financial transmission rights (“FTRs”) and swaps, management uses available market data and pricing models to estimate fair values. Estimating the fair values of instruments that do not have quoted market prices requires management’s judgment in determining amounts that could reasonably be expected to be received from, or paid to, a third party in settlement of the instruments. These amounts could be materially different from amounts that might be realized in an actual sale transaction.

ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Allegheny has netting agreements with various counterparties. These agreements provide the right to set off amounts due from or to the counterparty. In cases in which these netting agreements are in place, Allegheny records the fair value of derivative assets, liabilities and cash collateral and accounts receivable and accounts payable with each counterparty on a net basis. Cash flows associated with derivative contracts are recorded in cash flows from operating activities. See Note 14, “Fair Value Measurements, Derivative Instruments and Hedging Activities,” for additional details regarding energy transacting activities.

Deferred Energy Costs

     Deferred energy costs represent the deferral of certain energy costs from the period in which they were incurred to the period in which such costs are recovered in rates. Allegheny records deferred energy costs relating to the following items:

Expanded Net Energy Cost (“ENEC”)

     In May 2007, the Public Service Commission of West Virginia (the “West Virginia PSC”) issued an order that re-established an annual ENEC method of recovering net power supply costs, including fuel costs, purchased power costs, including purchased power costs associated with the Grant Town PURPA generation facility and other related expenses, net of related revenue and interest earnings on the Fort Martin Scrubber project escrow fund. Under the ENEC, actual costs and revenues are tracked for under and/or over recoveries, and revised ENEC rate filings are made on an annual basis. Any under and/or over recovery of costs, net of related revenues, is deferred, for subsequent recovery or refund, as a regulatory asset or regulatory liability, with the corresponding impact on the Consolidated Statements of Income reflected within “Deferred energy costs, net.” See Note 5, “Rates and Regulation,” and Note 7, “Regulatory Assets and Liabilities,” for additional information.

Market-based Generation Costs

     Potomac Edison is authorized by the Public Service Commission of Maryland (the “Maryland PSC”) to recover the costs of the generation component of power sold to certain residential, commercial and industrial customers who did not choose a third-party alternative generation provider. A regulatory asset or liability is recorded on Potomac Edison’s balance sheet for any under-recovery or over-recovery of the generation component of costs charged to these customers.

AES Warrior Run PURPA Generation Facility

     To satisfy certain of its obligations under the Public Utility Regulatory Policies Act of 1978 (“PURPA”), Potomac Edison entered into a long-term contract beginning July 1, 2000 to purchase capacity and energy from the AES Warrior Run PURPA generation facility through the beginning of 2030. Potomac Edison is authorized by the Maryland PSC to recover all contract costs from the AES Warrior Run PURPA generation facility, net of any revenues received from the sale of AES Warrior Run output into the wholesale energy market, by means of a retail revenue surcharge (the “AES Warrior Run Surcharge”). Any under-recovery or over-recovery of net costs is being deferred pending subsequent recovery from, or return to, customers through adjustments to the AES Warrior Run Surcharge.

Debt Issuance Costs

     Costs incurred to issue debt are recorded as deferred charges on the Consolidated Balance Sheets. These costs are amortized over the term of the related debt instrument primarily using the effective interest method.

Common Services and Intercompany Transactions

     Common Services. Substantially all of Allegheny’s personnel are employed by AESC, which performs services at cost for other Allegheny entities and makes payments on behalf of Allegheny entities. Each entity is responsible for its share of the cost of services provided by AESC and payments made by AESC on behalf of the entities.

     Income Taxes. AE and its subsidiaries file a consolidated federal income tax return. Federal income tax expense (benefit) and tax assets and liabilities are allocated among AE and its subsidiaries generally in proportion to the taxable income of each participant, except that no subsidiary pays tax in excess of its separate return income tax liability.

     Power Sales and Purchases. AE Supply provides power to Potomac Edison and West Penn to satisfy a portion of the power necessary to meet their respective retail load. AE Supply and Monongahela purchase all of AGC’s capacity in the Bath County generation facility under a “cost-of-service formula” wholesale rate schedule approved by FERC on a proportionate basis, based on their respective equity ownership of AGC. Additionally, Monongahela sells Potomac Edison the power necessary to service its West Virginia customers.

ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Leases. West Penn and Monongahela own property, including buildings and software, that they lease primarily to AESC for its use in providing services to AE and its affiliates.

Long-Lived Assets

Property, Plant and Equipment

     Property, plant and equipment (“property”) is recorded at original cost. This cost includes direct labor, materials and indirect costs, such as operation, maintenance and depreciation of transportation and construction equipment, taxes, postretirement benefits and other benefits related to employees to the extent they are engaged in construction. In addition, property subject to rate regulation includes an allowance for funds used during construction on property for which construction work in progress is not included in rate base. Property not subject to rate regulation includes capitalized interest during the construction period.

     Upon retirement of property, no gain or loss is generally recognized and the original cost of the property less salvage is charged to accumulated depreciation. The cost of removal of regulated property is charged to the related regulatory liability or regulatory asset, and the cost of removal of unregulated property, for which no asset retirement obligation (“ARO”) has been recorded, is expensed as incurred.

     Allegheny capitalizes the cost of software developed for internal use. These costs are amortized on a straight-line basis over the expected useful life of the software.

Depreciation and Maintenance

     Depreciation expense is determined generally on a straight-line group method over the estimated service lives of depreciable assets for unregulated operations. For regulated utility operations, depreciation expense is determined using a straight-line group method in accordance with currently enacted regulatory rates. Under the straight-line group method, plant components are categorized as “retirement units” or “minor items of property.” As retirement units are replaced, the cost of the replacement is capitalized and the original component is retired. Replacements of minor items of property are expensed as maintenance. Depreciation expense was approximately 2.5% of average depreciable property in 2010 and 2.3% of average depreciable property in 2009 and 2008. Estimated service lives for generation, T&D and other property at December 31, 2010 were as follows:

		Years
Generation property:
Steam scrubbers and equipment			43-65
Steam generator units			45-80
Internal combustion units			40-44
Hydroelectric dams and facilities			50-152
Transmission and distribution property:
Electric equipment			10-100
Easements			70-100
Other property:
Office buildings and improvements			42-60
General office and other equipment			10-25
Vehicles and transportation			7-25
Computers, software and information systems			5-20

     The cost of repairs, maintenance including planned major maintenance activities, and minor replacements of property are charged to maintenance expense as incurred.

Capitalized Interest and Allowance for Funds Used During Construction (“AFUDC”)

     For non-regulated companies, Allegheny capitalizes interest costs associated with construction activities. The average interest capitalization rates in 2010, 2009, and 2008 were 6.9%, 6.0% and 6.6%, respectively. Allegheny capitalized $2.7 million, $25.9 million, and $34.6 million of interest during 2010, 2009, and 2008, respectively.

     AFUDC is a component of the construction of Property, Plant and Equipment defined in the applicable regulatory uniform system of accounts as representing “the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used.” AFUDC is capitalized in those instances in which the related construction work in progress is not included in rate base in the rate setting process and is reflected in the Consolidated Statements of Income as a reduction to Interest expense and Other income (expense), net to the extent it relates to borrowed funds and other funds used in construction, respectively. Rates used by the regulated subsidiaries in computing AFUDC in 2010, 2009 and 2008 averaged 8.3%, 7.3% and 7.2%, respectively. Allegheny recorded AFUDC of $9.6 million in 2010, $8.3 million in 2009 and $6.6 million in 2008, of which $6.3

ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

million, $5.0 million and $3.7 million was reflected in “Other income (expense), net” and $3.3 million, $3.3 million and $2.9 million was reflected as a reduction to “Interest expense” in 2010, 2009 and 2008, respectively.

Asset Impairment

     Allegheny’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through operations. If the carrying amount of the asset exceeds the expected undiscounted future cash flows to be generated by the asset, an impairment loss is recognized, and the asset is written down to its fair value. Allegheny did not record any impairment charges during 2010, 2009 or 2008.

Asset Retirement Obligations and Cost of Removal

     A liability for the fair value of an asset retirement obligation (“ARO”) is recognized in the period in which it is incurred if it can be reasonably estimated, with the offsetting associated asset retirement costs capitalized as a part of the carrying amount of the long-lived assets. The asset retirement cost is subsequently charged to expense over its useful life. Changes in the ARO resulting from the passage of time are recognized as an increase in the carrying amount of the liability and as accretion expense, or as an adjustment to the related regulatory asset or regulatory liability. Changes resulting from revisions to the timing or amount of the original estimate of cash flows are recognized as an increase or decrease in the asset retirement cost and ARO. When settled, actual costs to retire the asset are charged against the recorded ARO liability.

     In addition, the Distribution Companies and TrAIL Company recover cost of removal (“COR”) for property, plant and equipment in their rates. In some jurisdictions, the recovery is provided prior to the time of asset retirement, in which case, the amounts collected are recorded as a regulatory liability. When incurred, COR costs are charged to the regulatory liability. In other jurisdictions, the amounts are recovered only after being incurred, in which case, the COR costs incurred are recorded as a regulatory asset until recovered.

Goodwill and Intangible Assets

     Goodwill represents the acquisition cost of a business combination in excess of fair value of tangible and intangible assets acquired, less liabilities assumed. Recorded goodwill is not amortized, but is tested for impairment at least annually. Other intangible assets with finite lives are amortized over their useful lives and tested for impairment when events or circumstances warrant. See Note 18, “Goodwill and Intangible Assets” for additional information.

Investments in Unconsolidated Affiliates

     Investments in unconsolidated affiliates are typically accounted for under the equity method of accounting. The income or loss on such investments is recorded in “Other income (expense), net” in the Consolidated Statements of Income. Investments in unconsolidated affiliates at December 31, 2010 primarily consisted of $23.6 million relating to PATH-WV, which Allegheny consolidated until January 1, 2010, and Allegheny’s investment of $23.7 million, through AE Supply, in Buchanan Generation LLC. Investments in unconsolidated affiliates at December 31, 2009, primarily consisted of Allegheny’s investment, through AE Supply, in Buchanan Generation LLC of $24.1 million. See Note 23, “Variable Interest Entities” for information relating to variable interest entities.

Cash Equivalents

     For purposes of the Consolidated Statements of Cash Flows and Consolidated Balance Sheets, investments in money market funds and highly liquid investments purchased with original maturities of three months or less are considered to be the equivalent of cash.

Restricted Funds

     At December 31, 2010 and 2009, Allegheny had current restricted funds of $46.9 million and $25.9 million, respectively. Current restricted funds at December 31, 2010 included $25.0 million of funds collected from West Virginia customers that will be used to service the environmental control bonds issued in connection with the construction of the flue gas desulfurization equipment (“Scrubbers”) at Fort Martin, $19.3 million of medical benefit trust assets and $2.6 million of contractually restricted bid assurances. Current restricted funds at December 31, 2009 included $20.6 million of funds collected from West Virginia customers that will be used to service the environmental control bonds issued in connection with the construction of Scrubbers at the Fort Martin generating facility and $5.3 million of intangible transition charges collected from West Penn customers related to Pennsylvania transition costs. In addition, at December 31, 2010 and 2009, Allegheny had long-term restricted funds of $29.4 million and $60.2 million, respectively. Long-term restricted funds at December 31, 2010 included $29.4 million of funds relating to proceeds from the issuance of ratepayer obligation bonds issued in connection with the construction of Scrubbers at the Fort Martin generating facility. Long-term restricted funds at December 31, 2009 included $10.3 million of funds remaining from the $235 million Pennsylvania Development

ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Financing Authority bond issued in connection with the construction and installation of Scrubbers at the Hatfield’s Ferry generating facility, $49.6 million of funds relating to proceeds from the issuance of ratepayer obligation bonds issued in connection with the construction of Scrubbers at the Fort Martin generating facility and $0.3 million of escrow funds related to the Scrubber construction projects.

Collateral Deposits

     Allegheny posts collateral with counterparties, including PJM, for certain transactions and transmission and transportation tariffs. Approximately $30.7 million and $20.8 million of cash collateral deposits were included in current assets at December 31, 2010 and 2009, respectively. Approximately $6.5 million and $3.1 million of cash collateral deposits were netted against derivative liabilities on the Consolidated Balance Sheets at December 31, 2010 and 2009, respectively.

     In addition, no collateral deposits were netted against derivative assets on the Consolidated Balance Sheets at December 31, 2010, and approximately $27.5 million of counterparty collateral deposits were netted against derivative assets on the Consolidated Balance Sheets at December 31, 2009.

Inventory

     Allegheny records materials, supplies and fuel inventory, including emission allowances, using the average cost method.

Income Taxes

     Allegheny computes income taxes under the liability method. Deferred income tax balances are generally determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Tax benefits are recognized in the financial statements when it is more likely than not that a tax position will be sustained upon examination by the tax authorities based on the technical merits of the position. Such tax positions are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts.

     Deferred income tax assets have also been recorded on the tax effects of net operating losses that are more likely than not to be realized through future operations and through the reversal of existing temporary differences. Allegheny has deferred investment tax credits associated with its regulated business and assets previously held by its regulated business. These investment tax credits are amortized to income on a straight-line basis over the life of the assets. See Note 8, “Income Taxes” for additional information.

Taxes Collected from Customers and Remitted to Governmental Authorities

     Allegheny records taxes collected from customers, which are directly imposed on a transaction with that customer, on a net basis. That is, in instances in which Allegheny acts as a collection agent for a taxing authority by collecting taxes that are the responsibility of the customer, Allegheny records the amount collected as a liability and relieves such liability upon remittance to the taxing authority without impacting revenues or expenses.

Pension and Other Postretirement Benefits

     Allegheny sponsors a noncontributory, defined benefit pension plan covering substantially all employees, including officers. Benefits are based on each employee’s years-of-service and compensation. Allegheny also maintains a Supplemental Executive Retirement Plan for certain senior executives. Allegheny also provides subsidies for medical and life insurance plans for eligible retirees and dependents. Eligible retirees are charged premiums for medical coverage based on plan provisions, including age and years-of-service.

     Pension and other postretirement benefit expense is determined by an actuarial valuation, based on assumptions that are evaluated annually.

     See Note 12, “Pension Benefits and Postretirement Benefits Other Than Pensions” for additional information.

Stock-Based Compensation

     Share-based payments are generally measured at fair value on the date of grant and are expensed over the requisite service period. For options, Allegheny is entitled to income tax deductions in an amount equal to the fair value of shares on the date of the option exercise less the option exercise price. To the extent that the income tax deduction exceeds the cumulative compensation expense recorded for book purposes, the tax effect of the excess (referred to as a windfall tax benefit) is recorded as a credit to stockholders’ equity when the tax benefit is realized. See Note 11, “Stock-Based Compensation” for additional information.

ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accumulated Other Comprehensive Loss

     The components of accumulated other comprehensive loss, included in the shareholders’ equity section of the Consolidated Balance Sheets, were as follows:

		December 31,
(In millions)		2010				2009
Cash flow hedges, net of tax of $6.4 million and $(10.8) million, respectively		$	10.4			$	(16.8	)
Net unrecognized pension and other benefit plan costs, net of tax of $(49.3) million and $(49.7) million, respectively			(74.1	)			(73.1	)
Total		$	(63.7	)		$	(89.9	)

NOTE 2: MERGER AGREEMENT

     Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into AE (the “Merger”), with AE continuing as the surviving corporation and becoming a wholly owned subsidiary of FirstEnergy. The Merger is intended to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended, and be tax-free to AE stockholders. Pursuant to the Merger Agreement, upon completion of the Merger, each issued and outstanding share of AE’s common stock, including grants of restricted stock, would automatically be converted into the right to receive 0.667 of a share of common stock of FirstEnergy. This ratio is fixed, and the Merger Agreement does not provide for any adjustment to reflect stock price changes prior to completion of the Merger.

     Pursuant to the Merger Agreement, completion of the Merger is subject to various customary conditions, including (i) approvals by shareholders of both companies; (ii) the SEC’s clearance of a registration statement registering the FirstEnergy common stock to be issued in connection with the merger; (iii) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976; (iv) receipt of all required regulatory approvals, including approvals by FERC and state public service and utility commissions in Virginia, Maryland, Pennsylvania and West Virginia; (v) the absence of any governmental action challenging or seeking to prohibit the Merger and (vi) the absence of any material adverse effect with respect to either Allegheny or FirstEnergy.

     Shareholder Approvals. On July 16, 2010, FirstEnergy’s registration statement on Form S-4 containing a joint proxy statement/prospectus relating to the proposed Merger was declared effective by the SEC, and AE stockholders and FirstEnergy shareholders approved the various proposals related to the Merger in separate shareholder meetings on September 14, 2010.

     Hart-Scott-Rodino. On January 7, 2011, the U.S. Department of Justice (the “DOJ”) notified AE and FirstEnergy that it had completed its review of the proposed Merger pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and closed its investigation.

     FERC. On December 16, 2010, FERC approved the proposed Merger.

     Virginia SCC. The Virginia SCC issued a decision approving the proposed Merger on September 9, 2010.

     West Virginia PSC. On November 3, 2010, AE and FirstEnergy filed a comprehensive settlement with the West Virginia PSC that resolved all issues raised by the parties in the merger proceedings in West Virginia. The settlement includes certain commitments that will apply if the proposed Merger is completed, including: a commitment to maintain a regional headquarters for Allegheny’s West Virginia utility operations within Monongahela’s service territory; $7.5 million in rate reductions over a two-year period for Allegheny’s West Virginia customers; a commitment to maintain customer call center operations in Fairmont, West Virginia for at least five years; additional funding totaling $500,000 over a four-year period for Dollar Energy Fund in West Virginia and an agreement that certain merger-related costs will not be recoverable in customer rates. The West Virginia PSC approved the settlement and the proposed Merger on December 16, 2010.

     Maryland PSC. On December 1, 2010, AE and FirstEnergy filed a comprehensive settlement with the Maryland PSC that addressed the issues raised by 10 parties to the merger proceedings in Maryland. The settlement includes certain commitments that will apply if the proposed Merger is completed, including a commitment to maintain a regional headquarters for Potomac Edison’s Maryland service territory, $6.5 million in rate reductions over a four-year period for Potomac Edison’s Maryland customers and an agreement that certain merger-related costs will not be recoverable in customer rates. The Maryland PSC approved the settlement and the proposed Merger on January 18, 2011, subject to certain conditions, including crediting residential customers for the $6.5 million rate reduction within the first three months following the Merger.

ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Pennsylvania PUC. On October 22, 2010, AE and FirstEnergy filed a comprehensive settlement with the Pennsylvania PUC that addresses the issues raised by 18 parties to the merger proceedings in Pennsylvania. The settlement includes certain commitments that will apply if the proposed Merger is completed, including commitments related to employment levels, including a five-year commitment to maintain certain minimum employment levels in Greensburg and Westmoreland County, an approximately $11 million in distribution rate credits for West Penn customers, a $6.19 million credit for certain West Penn customers for costs related to energy-efficiency and conservation programs due to recently proposed changes in West Penn’s smart meter implementation plan and an agreement that certain merger-related costs will not be recoverable in customer rates. The settlement is subject to approval by the Pennsylvania PUC and does not resolve issues raised by certain parties who did not join in the settlement.

     AE and FirstEnergy currently anticipate completing the proposed Merger in the first quarter of 2011.

NOTE 3: RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

Consolidations and Variable Interest Entities

     Allegheny adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2009-17 (Consolidations Topic 810), “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” on January 1, 2010. Under this new guidance, consolidation of a variable interest entity (“VIE”) is required by an enterprise (the “primary beneficiary”), if any, that is determined qualitatively to have both the power to direct the activities that most significantly impact the VIE’s economic success and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the prior guidance, the primary beneficiary (consolidator) of a VIE was the party that absorbed a majority of the expected losses or the majority of the expected residual returns of the VIE using a quantitative analysis.

     Through December 31, 2009, Allegheny consolidated PATH-WV for financial statement purposes, because Allegheny determined that PATH-WV was a VIE and that Allegheny was its primary beneficiary under the prior accounting standard. Under the new accounting standard, Allegheny determined that it is not the primary beneficiary of PATH-WV, and therefore deconsolidated PATH-WV for financial statement purposes, effective January 1, 2010. Allegheny did not retrospectively apply this new guidance by deconsolidating PATH-WV in its financial statements for periods prior to January 1, 2010. The deconsolidation of PATH-WV did not impact retained earnings or net income attributable to AE. See Note 23, “Variable Interest Entities,” for additional information.

Fair Value Measurements and Disclosures

     Allegheny adopted the FASB’s ASU No. 2010-06, “Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements” in January 2010. The ASU added new requirements for disclosures about transfers into and out of fair value Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The ASU also clarified existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. Allegheny’s adoption of this ASU did not affect its results of operations or financial position.

NOTE 4: SALE OF VIRGINIA DISTRIBUTION BUSINESS

     On June 1, 2010, Potomac Edison sold its electric distribution business in Virginia (the “Virginia distribution business”) to Rappahannock Electric Cooperative and Shenandoah Valley Electric Cooperative. Cash proceeds from the sale were approximately $317 million, resulting in a pre-tax gain of approximately $45 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The Virginia distribution business was included in the Regulated Operations segment. Assets and liabilities relating to the Virginia distribution business were classified as “held for sale” in Allegheny’s consolidated balance sheet, and depreciation expense on those assets ceased, as of May 1, 2009. The operating results of the Virginia distribution business have not been reported as discontinued operations, because AE Supply will continue to provide the majority of the power to serve the customers of this business through June 30, 2011 under a power sales agreement. Assets held for sale and liabilities associated with assets held for sale at December 31, 2009 were as follows:

		December 31,
(In millions)		2009
Current Assets:
Accounts receivable		$	31.2
Materials and supplies			0.7
Regulatory assets			0.5
Total current assets			32.4
Property, Plant and Equipment:
Distribution property, plant and equipment			344.9
Accumulated depreciation			(91.2	)
Property, plant and equipment, net			253.7
Total assets held for sale		$	286.1
Current Liabilities:
Customer deposits		$	5.5
Regulatory liabilities			3.7
Other			0.9
Total current liabilities			10.1
Deferred Credits and Other Liabilities:
Regulatory liabilities			51.8
Other			1.3
Total deferred credits and other liabilities			53.1
Total liabilities associated with assets held for sale		$	63.2

     In connection with the sale, Potomac Edison agreed to contribute $27.5 million between July 1, 2011 and July 1, 2014 to reduce the impact of any future rate increases and the obligation for such contributions was included in the calculation of the gain on the sale of this business. On December 31, 2010, Potomac Edison purchased Shenandoah Valley Electric Cooperative’s West Virginia distribution business for approximately $14.5 million, subject to certain post-closing adjustments.

NOTE 5: RATES AND REGULATION

Pennsylvania

     Rates. Rate caps on transmission services in Pennsylvania expired on December 31, 2005. Distribution rate caps were also scheduled to expire on December 31, 2005 and generation rate caps were scheduled to expire on December 31, 2008. By order entered May 11, 2005, the Pennsylvania Public Utility Commission (the “Pennsylvania PUC”) approved an extension of generation rate caps for West Penn customers from 2008 to 2010 and provided for increases in generation rates in 2007, 2009 and 2010, in addition to previously approved rate cap increases for 2006 and 2008. The order also extended distribution rate caps from 2005 to 2007, with an additional rate cap in place for 2009 at the rate in effect on January 1, 2009. The intent of this transition plan was to gradually move generation rates closer to market prices. T&D rates for all customers are subject to traditional regulated utility ratemaking (i.e., cost-based rates). West Penn’s transition period ended for the majority of its customers on December 31, 2010, when its generation rate caps expired.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Advanced Metering and Demand-Side Management Initiatives. In October 2008, Pennsylvania adopted Act 129, which includes a number of measures relating to conservation, demand-side management and power procurement processes. Act 129 requires each electric distribution company (“EDC”) with more than 100,000 customers to adopt a plan, approved by the Pennsylvania PUC, to reduce, by May 31, 2011, electric consumption by at least one percent of its expected consumption for June 1, 2009 through May 31, 2010. By May 31, 2013, the total annual weather-normalized consumption is to be reduced by a minimum of three percent, and peak demand is to be reduced by a minimum of four and one-half percent of the EDC’s annual system peak demand. Act 129 also:

	•		directed the Pennsylvania PUC to adopt an energy conservation and efficiency program to require EDCs to develop and file, by July 1, 2009, plans to reduce energy demand and consumption; and
	•		required EDCs to file a plan for “smart meter” technology procurement and installation in August 2009.

     West Penn expects to incur significant capital expenditures to comply with these requirements.

     Act 129 also requires EDCs to obtain energy through a prudent mix of contracts, with an emphasis on competitive procurement. The Act includes a “grandfather” provision for West Penn’s procurement and rate mitigation plan, which was previously approved by the Pennsylvania PUC.

     In June 2009, West Penn filed its Energy Efficiency and Conservation (“EE&C”) Plan containing 22 programs to meet its Act 129 demand and consumption reduction obligations. The proposed programs cover most energy-consuming devices of residential, commercial and industrial customers. The EE&C Plan also proposed a reconcilable surcharge mechanism to obtain full and current cost recovery of the EE&C Plan costs as provided in Act 129. The EE&C Plan projected an aggregated cost of the energy efficiency measures in the amount of approximately $94.3 million through mid 2013. A hearing concerning West Penn’s EE&C Plan was held August 19, 2009.

     The Pennsylvania PUC approved West Penn’s EE&C Plan, in large part, by Opinion and Order entered October 23, 2009. The new programs approved by the Pennsylvania PUC include: rebates for customers who purchase high efficiency appliances, lighting and heating and cooling systems; residential home audits and rebates toward implementing audit recommendations; home audit, weatherization and air conditioner replacement programs for low-income customers; new rate options that will provide financial incentives for customers to lower their demand for electricity or shift their usage to lower-priced times; incentives for customers who install in-home devices that reduce electric usage when demand is highest; and various programs for commercial, industrial, government and non-profit customers to increase energy efficiency and conservation. The Pennsylvania PUC also approved West Penn’s proposal to recover its EE&C Plan costs on a full and current basis via an automatic surcharge to customers’ bills, subject to an annual reconciliation mechanism.

     The Pennsylvania PUC declined to approve West Penn’s proposed distributed generation program and West Penn’s proposed contract demand response program and encouraged West Penn to submit revisions to both programs. On December 21, 2009, West Penn filed an Amended EE&C Plan as directed by the Pennsylvania PUC, in which it added a new customer resources demand response program intended to replace the previously proposed distributed generation and contract demand programs. The Pennsylvania PUC reviewed West Penn’s amended Plan at its public meeting on February 11, 2010 and ordered West Penn to file an amended plan within 60 days to include additional detail on the costs associated with the previously approved customer load response program and the new customer resources demand response program.

     On August 14, 2009, West Penn filed its Smart Meter Technology Procurement and Installation Plan. The Plan provided for extensive deployment of smart meter infrastructure with replacement of all of West Penn’s approximately 725,000 meters by the end of 2014. On December 18, 2009, West Penn filed a motion to reopen the evidentiary record to submit an alternative smart meter plan proposing, among other things, a less rapid deployment of smart meters. On January 13, 2010, the Pennsylvania PUC granted the motion to reopen the record and remanded the proceeding to the ALJ. The Pennsylvania PUC also waived the late January 2010 deadline by which the ALJ’s recommended decision would have been required. The hearing was held on March 16, 2010, and on May 6, 2010, the ALJ issued a decision finding that West Penn’s alternative smart meter deployment plan, which contemplated deployment of 375,000 smart meters by May 2012, complied with the requirements of Act 129 and recommended approval of the alternative plan, including West Penn’s proposed cost recovery mechanism, by the Pennsylvania PUC.

     However, in light of the significant expenditures that would be associated with its smart meter deployment plans and related infrastructure upgrades as previously proposed, as well as its evaluation of recent Pennsylvania PUC decisions approving less rapid deployment proposals by other EDCs, West Penn undertook to re-evaluate its Act 129 compliance strategy, including both its plans with respect to smart meter deployment and certain smart meter dependent aspects of the EE&C Plan. On July 21, 2010, the Pennsylvania PUC issued an order, in response to West Penn’s request, to stay West Penn’s smart meter implementation proceedings for a period of 90 days. On September 10, 2010, West Penn filed an Amended EE&C Plan that is less reliant on smart meter deployment and emphasized non-smart meter programs to meet the conservation and demand reduction requirements of Act 129.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Additionally, on October 19, 2010, West Penn and Pennsylvania’s Office of Consumer Advocate filed a Joint Petition for Settlement addressing West Penn’s smart meter implementation plan with the Pennsylvania PUC. Under the terms of the proposed Settlement, West Penn proposes to decelerate its previously contemplated smart meter deployment schedule, targeting the installation of an estimated 25,000 smart meters, based on customer requests, by mid-2012, in support of its EE&C Plan. Thereafter, West Penn proposes to install an additional 15,000 smart meters by 2013 and an additional 60,000 smart meters between 2013 and 2016. The proposed Settlement also contemplates that West Penn take advantage of the 30-month grace period authorized by the Pennsylvania PUC to continue its efforts to re-evaluate its full-scale smart meter deployment plans, and that it file a revised smart meter implementation plan reflecting those efforts, including its proposed plans for full-scale deployment of smart meters, which West Penn currently anticipates filing in June 2012. Under the terms of the proposed Settlement, West Penn would be permitted to recover certain previously-incurred and anticipated smart-meter related expenditures through a levelized customer surcharge, with certain expenditures amortized over a ten-year period and other expenditures amortized through 2017, in each case with interest on deferred amounts. Additionally, West Penn would be permitted to seek recovery of certain other costs as part of its revised smart meter implementation plan for full-scale deployment that it currently intends to file in June 2012 or in a future base distribution rate case. On December 8, 2010, the Pennsylvania PUC directed that the smart meter implementation proceeding be referred to the Administrative Law Judge for further proceedings to ensure that the impact of the proposed merger with FirstEnergy is considered and that the Joint Petition for Settlement filed in October 2010 had adequate support in the record.

     On December 17, 2010, an Administrative Law Judge issued a Recommended Decision that the Amended EE&C Plan filed by West Penn in September 2010 be approved. By order entered January 13, 2011, the Pennsylvania PUC approved West Penn’s Amended EE&C plan.

     West Penn’s actual cost to implement smart meter infrastructure may vary from its previous estimates as a result of changes in its procurement and installation plan as ultimately approved by the Pennsylvania PUC and the timing of that approval, among other factors.

West Virginia

     Rates. Rates in West Virginia are subject to traditional regulated utility ratemaking (i.e., cost-based rates).

     Rate Case. On August 13, 2009, Monongahela and Potomac Edison filed with the West Virginia PSC a request to increase retail rates by approximately $122.1 million annually, effective June 10, 2010. On January 12, 2010, Monongahela and Potomac Edison filed supplemental testimony discussing a tax treatment change that would result in a revenue requirement that is approximately $7.7 million lower than the requirement included in the original filing. In addition, in December 2009, subsidiaries of Monongahela and Potomac Edison completed a securitization transaction to finance certain costs associated with the installation of Scrubbers at the Fort Martin generating station, which costs would otherwise have been included in the request for rate recovery. Consequently, Monongahela and Potomac Edison ultimately requested an increase in retail rates of approximately $95 million, rather than $122.1 million, annually. On April 2, 2010, Monongahela and Potomac Edison filed with the West Virginia PSC a Joint Stipulation and Agreement of Settlement reached with the other parties in the proceeding that provided for:

	•		a $40 million annualized base rate increase effective June 29, 2010;
	•		a deferral of $9 million of February 2010 storm restoration expenses in West Virginia over a maximum five-year period;
	•		an additional $20 million annualized base rate increase effective in January 2011;
	•		a decrease of $20 million in ENEC rates effective January 2011, which amount is deferred for later recovery in 2012; and
	•		a moratorium on filing for further increases in base rates before December 1, 2011, except under specified circumstances.

     The West Virginia PSC approved the Joint Petition and Agreement of Settlement on June 25, 2010.

     Annual Adjustment of Fuel and Purchased Power Cost Rates. On August 29, 2008, Monongahela and Potomac Edison filed with the West Virginia PSC a request to increase retail rates by approximately $173 million annually to reflect expected increases in fuel and purchased power costs during 2009 and under-recovery of past costs through June 2008. The new rates, proposed to become effective January 1, 2009, were submitted pursuant to the schedule for annual fuel and purchased power cost reviews in connection with Monongahela’s and Potomac Edison’s purchased power cost recovery clause in West Virginia. On December 29, 2008, the West Virginia PSC issued an order approving a settlement agreement among Allegheny, the Consumer Advocate Division, the Staff of the West Virginia PSC and the West Virginia Energy Users Group, pursuant to which Allegheny’s rates in West Virginia were increased by $142.5 million annually beginning on January 1, 2009.

     On September 1, 2009, Monongahela and Potomac Edison filed their annual fuel adjustment request with the West Virginia PSC, requesting a rate increase of $143.2 million to reflect increases in their unrecovered balances of fuel and purchased power costs that have accrued through June 2009 and projected increases through June 2010. The new rates were submitted pursuant to the schedule for annual fuel and purchased power cost reviews. On December 2, 2009, the parties to the proceeding filed a Joint

ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stipulation providing that Monongahela and Potomac Edison would receive an increase of $118 million, effective January 1, 2010, plus deferred recovery of an additional $23.1 million effective January 1, 2011, with carrying charges of 6% on the deferred amount. The West Virginia PSC approved the Joint Stipulation on December 29, 2009.

Maryland

     Rates. In 1999, Maryland adopted electric industry restructuring legislation, which gave Potomac Edison’s Maryland retail electric customers the right to choose their electricity generation supplier. In 2000, Potomac Edison transferred its Maryland generation assets to AE Supply but remained obligated to provide standard offer generation service, or “SOS,” at capped rates to residential and non-residential customers for various periods. The longest such period, for residential customers, expired on December 31, 2008. As discussed below, Potomac Edison has implemented a rate stabilization plan to transition customers from capped generation rates to rates based on market prices. T&D rates for all customers are subject to traditional regulated utility ratemaking (i.e., cost-based rates).

     Rate Stabilization. In special session on June 23, 2006, the Maryland legislature passed emergency legislation, directing the Maryland PSC to, among other things, investigate options available to Potomac Edison to implement a rate mitigation or rate stabilization plan for SOS to protect its residential customers from rate shock in connection with the January 1, 2009 expiration of generation rate caps.

     In December 2006, Potomac Edison filed with the Maryland PSC a proposed Rate Stabilization Ramp-Up Transition Plan designed to transition residential customers from capped generation rates to rates based on market prices. Under the plan as approved by the Maryland PSC, residential customers who did not elect to opt out of the program began paying a surcharge in June 2007. The application of the surcharge resulted in an overall rate increase of approximately 15% in 2007 and 13% in 2008. With the expiration of the residential generation rate caps and the move to generation rates based on market prices on January 1, 2009, the surcharge converted to a credit on customers’ bills. Funds collected through the surcharge during 2007 and 2008, plus interest, were returned to customers as a credit on their electric bills through December 2010, thereby reducing the effect of the rate cap expiration. The resulting rate increase in 2009 was 11.3%, and the rate change approved in 2009 for 2010 was actually a decrease of 2.5%. Of Potomac Edison’s approximately 219,000 residential customers in Maryland, as of December 31, 2010, approximately 21.5% elected to opt-out of, or are not eligible for, Potomac Edison’s plan.

     Advanced Metering and Demand Side Management Initiatives. On September 28, 2007, the Maryland PSC issued an order in this case that required the utilities to file detailed plans for how they will meet the “EmPOWER Maryland” proposal that in Maryland electric consumption be reduced by 10% and electricity demand be reduced by 15%, in each case by 2015. On October 26, 2007, Potomac Edison filed its initial report on energy efficiency, conservation and demand reduction plans in connection with this order. The Maryland PSC conducted hearings on Potomac Edison’s and other utilities’ plans in November 2007 and further hearings on May 7, 2008.

     In a related development, the Maryland legislature in 2008 adopted a statute codifying the EmPOWER Maryland goals and setting a deadline of September 1, 2008 for the utilities to file comprehensive plans for attempting to achieve those goals. Potomac Edison filed its proposals on August 29, 2008, asking the Maryland PSC to approve seven programs for residential customers, five programs for commercial, industrial, and governmental customers, a customer education program, and a pilot deployment of Advanced Utility Infrastructure (“AUI”) that Allegheny has previously been testing in West Virginia. On December 31, 2008, the Maryland PSC issued an order approving some of Potomac Edison’s programs and directing that others be redesigned. Potomac Edison filed its revised programs on March 31, 2009, with new cost and benefit information. The Maryland PSC approved the programs on August 6, 2009, and approved cost recovery for the programs on October 6, 2009. Expenditures are expected to be approximately $101 million and will be recovered over the next six years. Meanwhile, the AUI pilot was placed on a separate track and is currently being re-examined after discussion with the Staff of the Maryland PSC and other stakeholders.

     See Note 6, “Transmission Expansion,” for information regarding rates and regulation related to the PATH and TrAIL projects.

NOTE 6: TRANSMISSION EXPANSION

Trans-Allegheny Interstate Line

     TrAIL is a 500 kV high voltage line that is to extend from southwestern Pennsylvania through West Virginia to a point of interconnection with Virginia Electric and Power Company (“Dominion”) in northern Virginia. In addition, TrAIL Company and Dominion will jointly own an approximately 30-mile 500 kV line segment that Dominion will construct in Virginia. TrAIL is scheduled to be completed and placed in service no later than June 2011.

     In June 2006, the board of directors of PJM approved TrAIL and designated Allegheny to build the Allegheny Power Zone (the “AP Zone”) portion of the line. PJM, which is a regional transmission operator, is responsible for the operation of, and reliability

ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

planning for, the transmission network in the PJM region and included the new line in its 2006 regional transmission expansion plan. In October 2006, Allegheny formed TrAIL Company as the entity responsible for financing, constructing, owning, operating and maintaining the new line.

     In addition to TrAIL, other TrAIL Company projects include a new static volt-ampere reactive power compensator at the Black Oak substation, upgrades and/or replacements of transformers and/or buses at other substations and the construction of a new transmission operations center located in West Virginia, which was completed in 2010.

Potomac-Appalachian Transmission Highline

     In June 2007, the board of PJM directed the construction of the PATH Project, a high-voltage transmission line project. In September 2007, Allegheny and AEP formed PATH, LLC to construct and operate PATH. PATH, LLC is a series limited liability company. The “West Virginia Series” is owned equally by Allegheny and a subsidiary of AEP. The “Allegheny Series” is 100% owned by Allegheny.

     The PATH Project is comprised of a 765 kV transmission line that is proposed to extend from West Virginia through Virginia and into Maryland, modifications to an existing substation in Putnam County, West Virginia, and the construction of new substations in Hardy County, West Virginia and Frederick County, Maryland.

     PJM initially authorized construction of PATH in June 2007 and, on June 17, 2010, requested that PATH, LLC proceed with all efforts related to the PATH Project, including state regulatory proceedings, assuming a required in-service date of June 2015. In December 2010, PJM advised that its 2011 Load Forecast Report included load projections that are different from previous forecasts and that may have an impact on the proposed in-service date for the PATH Project. If after further analysis PJM determines that the PATH Project is not required by June 2015 to address potential NERC reliability violations, it may delay the required in-service date for PATH to a later date or indefinitely, or it may suspend or cancel the project.

     Applications requesting authorization to construct the PATH Project are currently pending before state commissions in West Virginia, Maryland and Virginia. Allegheny anticipates that decisions by the state commissions on these applications will be issued in the third quarter of 2011 in Virginia and Maryland and in the first quarter of 2012 in West Virginia.

     See Note 23, “Variable Interest Entities,” for additional information relating to PATH-WV.

Federal Regulation and Rate Matters

     TrAIL. In July 2008, FERC approved a settlement that provides for an incentive return on equity of 12.7% for TrAIL and the Black Oak SVC and a return on equity of 11.7% for any other projects TrAIL Company may undertake for which no incentive return was requested. TrAIL Company was also granted the following incentives:

	•		a return on construction work in process prior to the in-service date of TrAIL and
	•		recovery of prudently incurred development and construction costs if TrAIL is abandoned as a result of factors beyond its control.

     PATH Project. PATH, LLC submitted a filing to FERC under Section 205 of the FPA in December 2007 to implement a formula rate tariff effective March 1, 2008. The filing also included a request for certain incentive rate treatments. In February 2008, FERC issued an order setting the cost of service formula rate to calculate annual revenue requirements for the project and granting the following incentives:

	•		a return on equity of 14.3%;
	•		a return on CWIP;
	•		recovery of prudently incurred start-up business and administrative costs incurred prior to the time the rates go into effect; and
	•		recovery of prudently incurred development and construction costs if the PATH Project is abandoned as a result of factors beyond the control of PATH, LLC.

     In December 2008, PATH, LLC submitted to FERC a settlement of the formula rate and protocols with the active parties that resolves all issues set for hearing. The return on equity was not included in the settlement because it was authorized by the February 2008 order and not set for hearing. On November 19, 2010, FERC approved the settlement, set the base return on equity for hearing and reaffirmed its prior authorization of a return on CWIP, recovery of start-up costs and recovery of abandonment costs. In the order, FERC also granted a 1.5% return on equity incentive adder and 0.50% return on equity adder for RTO participation. These adders will be applied to the base return on equity determined as a result of the hearing. PATH, LLC is currently engaged in settlement

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

discussions with the staff of FERC and intervenors regarding resolution of the base return on equity. Allegheny cannot predict the outcome of this proceeding or whether it will have a material impact on its operating results.

State Regulation Matters

Pennsylvania

     By order entered on December 12, 2008, the Pennsylvania PUC authorized TrAIL Company to construct a 1.2 mile portion of TrAIL in Pennsylvania from the proposed 502 Junction Substation in Greene County to the Pennsylvania-West Virginia state line. In the same order, the Pennsylvania PUC also authorized TrAIL Company to engage in a collaborative process to identify possible solutions to reliability problems in the Washington County, Pennsylvania area in lieu of the Prexy Facilities that had been a part of the original TrAIL proposal. As a result of the collaborative process, a settlement and an amendment to the application based on a consensus of the participants in the collaborative process was approved by the Pennsylvania PUC on November 19, 2010.

West Virginia

     On May 15, 2009, PATH-WV, PATH-Allegheny and certain other related entities filed an application with the West Virginia PSC for authorization to construct the West Virginia portion of the PATH Project.

Maryland

     On December 21, 2009, Potomac Edison filed an application with the Maryland PSC for authorization to construct the Maryland portions of the PATH Project. The project in Maryland will be owned by PATH-Allegheny Maryland Transmission Company, LLC, which is owned by Potomac Edison and PATH-Allegheny. Potomac Edison subsequently requested an extension of the procedural schedule. The Hearing Examiner has not ruled on the request. Based on the current procedural schedule, a decision on the application is expected in the third quarter of 2011.

Virginia

     On September 20, 2010, PATH-Allegheny Virginia Transmission Corporation filed an application with the Virginia SCC for authorization to construct the Virginia portions of the PATH Project. A decision on the application is expected in the third quarter of 2011.

ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 7: REGULATORY ASSETS AND LIABILITIES

     Allegheny’s regulated utility operations are subject to industry-specific accounting provisions. Regulatory assets represent probable future revenues associated with incurred costs that are expected to be recovered in the future from customers through the rate-making process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are to be credited or refunded to customers through the rate-making process or amounts collected for costs not yet incurred. Regulatory assets and regulatory liabilities reflected in the Consolidated Balance Sheets were as follows:

		December 31,
(In millions)		2010				2009
Regulatory assets, including current portion:
Income taxes (a)(b)		$	232.3			$	234.9
Pension benefits and postretirement benefits other than pensions (a)(c)			384.7				396.5
ENEC under recovery (a)(d)			90.1				109.5
Transmission revenue requirement and recoverable costs (e)			76.5				36.3
Unamortized loss on reacquired debt (a)(f)			32.4				26.8
Market-based generation costs (a)(g)			9.5				0.9
Unrealized loss on financial transmission rights (a)			0				1.7
Other (h)			58.1				43.4
Subtotal			883.6				850.0
Regulatory liabilities, including current portion:
Net asset removal costs (i)			388.3				374.2
Fort Martin Scrubber project-environmental control surcharge			36.1				40.1
ENEC over recovery (d)			30.3				0
Income taxes			27.4				29.3
SO2 allowances			12.3				12.8
Maryland rate stabilization and transition plan surcharge			0				30.1
Unrealized gain on financial transmission rights			9.8				0
Other			18.4				12.1
Subtotal			522.6				498.6
Net regulatory assets		$	361.0			$	351.4