##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 
 Name of RegistrantState of IncorporationCommission
    
    Address of Principal Executive
    
    IRS EmployerFile Number
    
    Offices and Telephone Number
    
    Identification Number1-267
    
    ALLEGHENY ENERGY, INC.
    
    13-5531602(A Maryland Corporation)800 Cabin Hill DriveGreensburg, Pennsylvania 15601Telephone (724) 837-30001-5164
    
    MONONGAHELA POWER COMPANY
    
    13-5229392(An Ohio Corporation)1310 Fairmont AvenueFairmont, West Virginia 26554Telephone (304) 366-30000-14688
    
    ALLEGHENY
    
    13-3079675GENERATING COMPANY(A Virginia Corporation)800 Cabin Hill DriveGreensburg, Pennsylvania 15601Telephone (724) 837-3000
 
  þ o
  Allegheny Energy, Inc.
    
    Yes þ
    
    No oMonongahela Power Company
    
    Yes o
    
    No þAllegheny Generating Company
    
    Yes o
    
    No þ
 þ o
  Large accelerated filer
    
    Accelerated filer
    
    Non-accelerated filerAllegheny Energy, Inc.
    
    þ
    
    o
    
    oMonongahela Power Company
    
    o
    
    o
    
    þAllegheny Generating Company
    
    o
    
    o
    
    þ
  Allegheny Energy, Inc.
    
    Yes o
    
    No þMonongahela Power Company
    
    Yes o
    
    No þAllegheny Generating Company
    
    Yes o
    
    No þ
  Allegheny Energy, Inc.
    
    
    164,590,518
    
    
    ($1.25 par value)Monongahela Power Company
    
    
    5,891,000
    
    
    ($50.00 par value)Allegheny Generating Company
    
    
    1,000
    
    
    ($1.00 par value)




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TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    
    3Allegheny Energy, Inc.:Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005
    
    
    3Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    4Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    7Monongahela Power Company:Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005
    
    
    35Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    36Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    37Notes to Consolidated Financial Statements
    
    
    39Allegheny Generating Company:Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005
    
    
    49Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    50Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    51Notes to Financial Statements
    
    
    53Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
    
    
    56Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    92Item 4. Controls and Procedures
    
    
    92PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    93Item 1A. Risk Factors
    
    
    93Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    94Item 3. Defaults Upon Senior Securities
    
    
    94Item 4. Submission of Matters to a Vote of Security Holders
    
    
    94Item 5. Other Information
    
    
    95Item 6. Exhibits
    
    
    96Signatures
    
    
    99
 1




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GLOSSARY
 I. The following abbreviations and terms are used in this report to identify Allegheny
Energy, Inc. and its subsidiaries:
 AE
    
    Allegheny Energy, Inc., a diversified utility holding company.Allegheny Ventures
    
    Allegheny Ventures, Inc., an unregulated subsidiary of AE.AE Solutions
    
    Allegheny Energy Solutions, Inc., a subsidiary of Allegheny Ventures.AE Supply
    
    Allegheny Energy Supply Company, LLC, an unregulated generation
subsidiary of AE.AGC
    
    Allegheny Generating Company, an unregulated generation subsidiary
of AE Supply and Monongahela.Allegheny
    
    AE together with its consolidated subsidiaries.Distribution Companies
    
    Collectively, Monongahela, Potomac Edison and West Penn. The
Distribution Companies do business as Allegheny Power.Monongahela
    
    Monongahela Power Company, a regulated subsidiary of AE.Mountaineer
    
    Mountaineer Gas Company, a former subsidiary of Monongahela, which
was sold on September 30, 2005.Potomac Edison
    
    The Potomac Edison Company, a regulated subsidiary of AE.West Penn
    
    West Penn Power Company, a regulated subsidiary of AE.
 2




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##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenues
    
    $
    722,235
    
    
    $
    714,650
    
    
    $
    1,567,881
    
    
    $
    1,468,680Operating expenses:Fuel consumed in electric generation
    
    
    186,185
    
    
    
    166,139
    
    
    
    399,392
    
    
    
    340,026Purchased power and transmission
    
    
    95,097
    
    
    
    108,243
    
    
    
    196,329
    
    
    
    213,065Gain on sale of OVEC power agreement and shares
    
    
    (1,124
    )
    
    
    
    
    
    
    (6,124
    )
    
    
    Deferred energy costs, net
    
    
    413
    
    
    
    (1,805
    )
    
    
    5,406
    
    
    
    (619
    )Operations and maintenance
    
    
    205,871
    
    
    
    200,906
    
    
    
    367,734
    
    
    
    363,583Depreciation and amortization
    
    
    68,169
    
    
    
    77,358
    
    
    
    136,011
    
    
    
    153,769Taxes other than income taxes
    
    
    52,201
    
    
    
    51,738
    
    
    
    105,868
    
    
    
    106,796Total operating expenses
    
    
    606,812
    
    
    
    602,579
    
    
    
    1,204,616
    
    
    
    1,176,620Operating income
    
    
    115,423
    
    
    
    112,071
    
    
    
    363,265
    
    
    
    292,060Other income and expenses, net (Note 14)
    
    
    10,258
    
    
    
    21,234
    
    
    
    17,929
    
    
    
    26,487Interest expense and preferred dividends:Interest expense
    
    
    76,425
    
    
    
    128,277
    
    
    
    143,813
    
    
    
    254,071Preferred dividends of subsidiary
    
    
    293
    
    
    
    1,260
    
    
    
    586
    
    
    
    2,519Total interest expense and preferred dividends
    
    
    76,718
    
    
    
    129,537
    
    
    
    144,399
    
    
    
    256,590Income from continuing operations before income taxes and minority
interest
    
    
    48,963
    
    
    
    3,768
    
    
    
    236,795
    
    
    
    61,957Income tax expense from continuing operations
    
    
    16,741
    
    
    
    9,815
    
    
    
    89,245
    
    
    
    33,191Minority interest in net income of subsidiaries
    
    
    191
    
    
    
    52
    
    
    
    1,369
    
    
    
    467Income (loss) from continuing operations
    
    
    32,031
    
    
    
    (6,099
    )
    
    
    146,181
    
    
    
    28,299Loss from discontinued operations, net of tax (Note 5)
    
    
    (898
    )
    
    
    (12,308
    )
    
    
    (1,664
    )
    
    
    (4,064
    )Net income (loss)
    
    $
    31,133
    
    
    $
    (18,407
    )
    
    $
    144,517
    
    
    $
    24,235Common share data:Weighted average common shares outstandingBasic
    
    
    163,526
    
    
    
    156,731
    
    
    
    163,304
    
    
    
    147,128Diluted
    
    
    168,608
    
    
    
    156,731
    
    
    
    168,557
    
    
    
    150,276Basic income (loss) per common share:Income (loss) from continuing operations
    
    $
    0.20
    
    
    $
    (0.04
    )
    
    $
    0.89
    
    
    $
    0.19Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.08
    )
    
    
    (0.01
    )
    
    
    (0.03
    )Net income (loss) per common share
    
    $
    0.19
    
    
    $
    (0.12
    )
    
    $
    0.88
    
    
    $
    0.16Diluted income (loss) per common share:Income (loss) from continuing operations
    
    $
    0.19
    
    
    $
    (0.04
    )
    
    $
    0.87
    
    
    $
    0.19Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.08
    )
    
    
    (0.01
    )
    
    
    (0.03
    )Net income (loss) per common share
    
    $
    0.18
    
    
    $
    (0.12
    )
    
    $
    0.86
    
    
    $
    0.16
  3




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##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Six Months EndedJune 30,(In thousands)
    
    2006
    
    
    2005(Revised-Note 1)Cash Flows From Operating Activities:Net income
    
    $
    144,517
    
    
    $
    24,235Loss from discontinued operations, net of tax
    
    
    1,664
    
    
    
    4,064Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    136,011
    
    
    
    153,769Amortization of debt issuance costs
    
    
    16,171
    
    
    
    10,632Amortization of power sale liability related to Ohio sale
    
    
    (15,500
    )
    
    
    Amortization of reserve for adverse power purchase commitment
    
    
    (8,577
    )
    
    
    (8,363
    )Gain on asset sales and disposals
    
    
    (1,023
    )
    
    
    (1,614
    )Minority interest in net income of subsidiaries
    
    
    1,369
    
    
    
    467Deferred income taxes and investment tax credit, net
    
    
    89,628
    
    
    
    27,650Stock-based compensation expense
    
    
    7,928
    
    
    
    6,390Unrealized gains on commodity contracts, net
    
    
    (18,301
    )
    
    
    (13,278
    )Pension and other postretirement employee benefit plans expense
    
    
    21,193
    
    
    
    21,662Pension and other postretirement employee benefit plans contributions
    
    
    (65,381
    )
    
    
    (42,269
    )Other, net
    
    
    17,514
    
    
    
    9,089Changes in certain assets and liabilities:Accounts receivable, net
    
    
    46,303
    
    
    
    (35,795
    )Materials, supplies and fuel
    
    
    (23,558
    )
    
    
    (22,701
    )Prepaid taxes
    
    
    (7,596
    )
    
    
    (4,029
    )Collateral deposits
    
    
    87,129
    
    
    
    (17,111
    )Other current assets
    
    
    164
    
    
    
    7,093Accounts payable
    
    
    (111,169
    )
    
    
    (21,769
    )Accrued taxes
    
    
    (23,056
    )
    
    
    (21,171
    )Accrued interest
    
    
    5,429
    
    
    
    41,082Other current liabilities
    
    
    937
    
    
    
    6,546Other assets
    
    
    20,196
    
    
    
    122Other liabilities
    
    
    (1,038
    )
    
    
    2,924Net cash provided by (used in) operating activities of discontinued operations
    
    
    (2,138
    )
    
    
    61,850Net cash provided by operating activities
    
    
    318,816
    
    
    
    189,475Cash Flows From Investing Activities:Capital expenditures
    
    
    (196,757
    )
    
    
    (126,641
    )Proceeds from asset sales
    
    
    2,081
    
    
    
    13,361Purchase of minority interest in Hunlock Creek Energy Ventures
    
    
    (13,900
    )
    
    
    Decrease in restricted funds
    
    
    7,282
    
    
    
    206,562Other investments
    
    
    (1,701
    )
    
    
    (767
    )Net cash provided by (used in) investing activities of discontinued operations
    
    
    27,401
    
    
    
    (3,766
    )Net cash provided by (used in) investing activities
    
    
    (175,594
    )
    
    
    88,749Cash Flows From Financing Activities:Issuance of long-term debt
    
    
    1,142,076
    
    
    
    160,040Repayment of long-term debt
    
    
    (1,352,056
    )
    
    
    (443,145
    )Payments on capital lease obligations
    
    
    (29
    )
    
    
    Proceeds
from the exercise of employee stock options
    
    
    10,244
    
    
    
    1,196Cash dividends paid to minority shareholder in Hunlock Creek Energy Ventures
    
    
    (400
    )
    
    
    Net cash used in financing activities of discontinued operations
    
    
    
    
    
    
    (7
    )Net cash used in financing activities
    
    
    (200,165
    )
    
    
    (281,916
    )Net decrease in cash and cash equivalents
    
    
    (56,943
    )
    
    
    (3,692
    )Cash and cash equivalents at beginning of period
    
    
    262,212
    
    
    
    189,482Cash and cash equivalents at end of period
    
    $
    205,269
    
    
    $
    185,790Supplemental Cash Flow Information:Cash paid for interest (net of amount capitalized)
    
    $
    126,549
    
    
    $
    216,945
  4




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 June 30,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    205,269
    
    
    $
    262,212Accounts receivable:Customer
    
    
    170,807
    
    
    
    179,634Unbilled utility revenue
    
    
    97,678
    
    
    
    129,111Wholesale and other
    
    
    68,117
    
    
    
    82,261Allowance for uncollectible accounts
    
    
    (16,085
    )
    
    
    (16,778
    )Materials and supplies
    
    
    94,983
    
    
    
    98,069Fuel
    
    
    91,556
    
    
    
    67,273Deferred income taxes
    
    
    56,429
    
    
    
    93,404Prepaid taxes
    
    
    53,354
    
    
    
    45,758Assets held for sale (Note 5)
    
    
    921
    
    
    
    1,521Collateral deposits
    
    
    60,646
    
    
    
    147,775Commodity contracts
    
    
    4,651
    
    
    
    9,325Restricted funds
    
    
    14,307
    
    
    
    21,589Regulatory assets
    
    
    37,777
    
    
    
    38,418Other
    
    
    12,365
    
    
    
    14,246Total current assets
    
    
    952,775
    
    
    
    1,173,818Property, Plant and Equipment, Net:Generation
    
    
    5,759,004
    
    
    
    5,751,077Transmission
    
    
    1,050,271
    
    
    
    1,028,323Distribution
    
    
    3,521,355
    
    
    
    3,448,350Other
    
    
    401,226
    
    
    
    429,108Accumulated depreciation
    
    
    (4,563,742
    )
    
    
    (4,508,707
    )Subtotal
    
    
    6,168,114
    
    
    
    6,148,151Construction work in progress
    
    
    182,436
    
    
    
    129,277Total property, plant and equipment, net
    
    
    6,350,550
    
    
    
    6,277,428Investments and Other Assets:Non-current assets held for sale (Note 5)
    
    
    21,179
    
    
    
    48,559Goodwill
    
    
    367,287
    
    
    
    367,287Investments in unconsolidated affiliates
    
    
    28,020
    
    
    
    28,555Intangible assets
    
    
    27,396
    
    
    
    27,396Other
    
    
    42,067
    
    
    
    49,413Total investments and other assets
    
    
    485,949
    
    
    
    521,210Deferred Charges:Commodity contracts
    
    
    234
    
    
    
    Regulatory assets
    
    
    521,515
    
    
    
    544,810Other
    
    
    30,918
    
    
    
    41,546Total deferred charges
    
    
    552,667
    
    
    
    586,356Total Assets
    
    $
    8,341,941
    
    
    $
    8,558,812
  5




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
 June 30,
    
    
    December 31,(In thousands, except share amounts)
    
    2006
    
    
    2005LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Long-term debt due within one year (Note 4)
    
    $
    494,889
    
    
    $
    477,217Accounts payable
    
    
    211,734
    
    
    
    316,713Accrued taxes
    
    
    138,534
    
    
    
    154,587Commodity contracts
    
    
    32,732
    
    
    
    92,934Accrued interest
    
    
    94,253
    
    
    
    91,433Other
    
    
    149,821
    
    
    
    153,570Total current liabilities
    
    
    1,121,963
    
    
    
    1,286,454Long-term Debt (Note 4)
    
    
    3,404,112
    
    
    
    3,624,483Deferred Credits and Other Liabilities:Commodity contracts
    
    
    20,169
    
    
    
    22,994Investment tax credit
    
    
    74,423
    
    
    
    76,965Deferred income taxes
    
    
    755,960
    
    
    
    692,241Obligations under capital leases
    
    
    13,918
    
    
    
    16,427Regulatory liabilities
    
    
    456,055
    
    
    
    454,275Adverse power purchase commitment
    
    
    175,581
    
    
    
    184,224Other
    
    
    409,734
    
    
    
    459,465Total deferred credits and other liabilities
    
    
    1,905,840
    
    
    
    1,906,591Commitments and Contingencies (Note 18)Minority Interest
    
    
    9,520
    
    
    
    21,989Preferred Stock of Subsidiary
    
    
    24,000
    
    
    
    24,000Common Stockholders Equity:Common stock$1.25 par value per share, 260 million
shares authorized and 164,223,364 and 163,002,295
shares issued at June 30, 2006 and December 31, 2005
    
    
    205,279
    
    
    
    203,753Other paid-in capital
    
    
    1,891,907
    
    
    
    1,880,644Accumulated deficit
    
    
    (100,107
    )
    
    
    (244,625
    )Treasury stock at cost; 49,493 shares
    
    
    (1,756
    )
    
    
    (1,756
    )Accumulated other comprehensive loss
    
    
    (118,817
    )
    
    
    (142,721
    )Total common stockholders equity
    
    
    1,876,506
    
    
    
    1,695,295Total Liabilities and Stockholders Equity
    
    $
    8,341,941
    
    
    $
    8,558,812
  6




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##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Note No.
    
    Page No.1
    Basis of Presentation
    
    82
    Stock-Based Compensation
    
    93
    Review of Estimated Remaining Service Lives and Depreciation Practices
    
    134
    Debt
    
    145
    Discontinued Operations and Assets Held for Sale
    
    156
    Derivative Instruments and Hedging Activities
    
    177
    Asset Retirement Obligations (AROs)
    
    178
    Business Segments
    
    199
    Goodwill and Intangible Assets
    
    2010
    Comprehensive Income (Loss)
    
    2011
    Pension Benefits and Postretirement Benefits Other Than Pensions
    
    2112
    Income (Loss) Per Share
    
    2413
    Accounting for the Effects of Price Regulation
    
    2514
    Other Income and Expenses, Net
    
    2515
    Guarantees and Letters of Credit
    
    2616
    Variable Interest Entities
    
    2617
    HCEV Partnership Interest
    
    2718
    Commitments and Contingencies
    
    2719
    Subsequent Event
    
    34
 7




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 1: BASIS OF PRESENTATION
         New Accounting Standards
 8




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Federal and State Income Taxes
   NOTE 2: STOCK-BASED COMPENSATION
   9




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Stock options
    
    $
    1.9
    
    
    $
    
    
    
    $
    4.0
    
    
    $
    Stock units
    
    
    1.5
    
    
    
    3.0
    
    
    
    3.3
    
    
    
    6.1Other
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.3Compensation expense included in operations and maintenance expense
    
    
    3.7
    
    
    
    3.2
    
    
    
    7.9
    
    
    
    6.4Income tax benefit
    
    
    1.5
    
    
    
    1.4
    
    
    
    3.2
    
    
    
    2.7Total, net of tax
    
    $
    2.2
    
    
    $
    1.8
    
    
    $
    4.7
    
    
    $
    3.7
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2005
    
    
    2005Consolidated net income (loss), as reported
    
    $
    (18.4
    )
    
    $
    24.2Add:Stock-based employee compensation
expense included in consolidated net
income, net of related tax effects
    
    
    1.8
    
    
    
    3.7Deduct:Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects
    
    
    3.0
    
    
    
    6.2Consolidated net income (loss), pro forma
    
    $
    (19.6
    )
    
    $
    21.7Basic income (loss) per share:As reported
    
    $
    (0.12
    )
    
    $
    0.16Pro forma
    
    $
    (0.13
    )
    
    $
    0.15Diluted income (loss) per share:As reported
    
    $
    (0.12
    )
    
    $
    0.16Pro forma
    
    $
    (0.13
    )
    
    $
    0.14
 Stock Options
  10




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(Dollar amounts in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Annual risk-free interest rate
    
    
    4.96
    %
    
    
    4.28
    %
    
    
    4.55
    %
    
    
    4.15
    %Expected term of the option (in years)
    
    
    6.5
    
    
    
    6.5
    
    
    
    6.5
    
    
    
    6.5Expected annual dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected stock price volatility
    
    
    29.5
    %
    
    
    35.0
    %
    
    
    29.5
    %
    
    
    35.0
    %Grant date fair value per stock option
    
    $
    14.54
    
    
    $
    9.22
    
    
    $
    14.18
    
    
    $
    8.77
  Weighted-AverageNumber of
    
    
    ExerciseStock Options
    
    
    PriceOutstanding at March 31, 2006
    
    
    5,961,523
    
    
    $
    16.90Granted
    
    
    3,000
    
    
    $
    35.39Exercised
    
    
    (89,550
    )
    
    $
    19.97Forfeited
    
    
    (243,960
    )
    
    $
    23.86Outstanding at June 30, 2006
    
    
    5,631,013
    
    
    $
    16.56
  Weighted-AverageNumber of
    
    
    ExerciseStock Options
    
    
    PriceOutstanding at December 31, 2005
    
    
    6,141,357
    
    
    $
    17.04Granted
    
    
    138,000
    
    
    $
    35.49Exercised
    
    
    (390,984
    )
    
    $
    26.20Forfeited
    
    
    (257,360
    )
    
    $
    23.35Outstanding at June 30, 2006
    
    
    5,631,013
    
    
    $
    16.56
  11




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Weighted-AverageRemaining
    
    
    
    
    
    
    AggregateNumber of
    
    
    Contractual Term
    
    
    
    
    
    
    Intrinsic ValueRange of Exercise Prices
    
    Stock Options
    
    
    (in Years)
    
    
    Exercise Price
    
    
    (in millions)$10.00 - $14.99
    
    
    4,569,996
    
    
    
    7.67
    
    
    $
    13.45
    
    
    $
    108.0$15.00 - $19.99
    
    
    161,800
    
    
    
    8.56
    
    
    $
    18.91
    
    
    
    2.9$20.00 - $24.99
    
    
    215,000
    
    
    
    8.52
    
    
    $
    21.03
    
    
    
    3.5$25.00 - $29.99
    
    
    75,000
    
    
    
    9.42
    
    
    $
    28.49
    
    
    
    0.6$30.00 - $34.99
    
    
    257,500
    
    
    
    3.54
    
    
    $
    31.77
    
    
    
    1.4$35.00 - $39.99
    
    
    160,800
    
    
    
    9.02
    
    
    $
    35.99
    
    
    
    0.2$40.00 - $44.99
    
    
    175,917
    
    
    
    4.44
    
    
    $
    42.28
    
    
    
    *$45.00 - $49.99
    
    
    15,000
    
    
    
    4.75
    
    
    $
    46.26
    
    
    
    *Total
    
    
    5,631,013
    
    
    
    7.49
    
    
    $
    16.56
    
    
    $
    116.6
 
 *
    
    The aggregate intrinsic value of these stock options is zero, because the exercise prices
of these stock options exceeded the market price of Alleghenys stock at June 30, 2006.  Weighted AverageRemaining
    
    
    
    
    
    
    AggregateNumber of
    
    
    Contractual Term
    
    
    
    
    
    
    Intrinsic ValueRange of Exercise Prices
    
    Stock Options
    
    
    (in Years)
    
    
    Exercise Price
    
    
    (in millions)$10.00 - $14.99
    
    
    2,139,522
    
    
    
    7.65
    
    
    $
    13.41
    
    
    $
    50.6$15.00 - $19.99
    
    
    34,333
    
    
    
    8.56
    
    
    $
    18.99
    
    
    
    0.6$20.00 - $24.99
    
    
    59,000
    
    
    
    7.88
    
    
    $
    20.92
    
    
    
    1.0$25.00 - $29.99
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    $30.00 - $34.99
    
    
    257,500
    
    
    
    3.54
    
    
    $
    31.77
    
    
    
    1.4$35.00 - $39.99
    
    
    22,800
    
    
    
    5.18
    
    
    $
    39.01
    
    
    
    *$40.00 - $44.99
    
    
    175,917
    
    
    
    4.44
    
    
    $
    42.29
    
    
    
    *$45.00 - $49.99
    
    
    15,000
    
    
    
    4.75
    
    
    $
    46.26
    
    
    
    *Total
    
    
    2,704,072
    
    
    
    7.04
    
    
    $
    17.67
    
    
    $
    53.6
 
 *
    
    The aggregate intrinsic value of these stock options is zero, because the exercise prices
of these stock options exceeded the market price of Alleghenys stock at June 30, 2006.  Stock Units
  12




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Weighted-Average
    
    
    AggregateNumber of
    
    
    Grant Date
    
    
    Intrinsic ValueStock Units
    
    
    Fair Value
    
    
    (in millions)Outstanding at March 31, 2006
    
    
    2,899,288
    
    
    $
    15.39Converted
    
    
    (1,239,663
    )
    
    $
    15.35Forfeited
    
    
    (20,000
    )
    
    $
    14.74Outstanding at June 30, 2006
    
    
    1,639,625
    
    
    $
    15.43
    
    
    $
    60.8Convertible at June 30, 2006
    
    
    365,628
    
    
    $
    15.30
    
    
    $
    13.5
  Weighted Average
    
    
    AggregateNumber of
    
    
    Grant Date
    
    
    Intrinsic ValueStock Units
    
    
    Fair Value
    
    
    (in millions)Outstanding at December 31, 2005
    
    
    3,006,506
    
    
    $
    15.39Converted
    
    
    (1,346,881
    )
    
    $
    15.34Forfeited
    
    
    (20,000
    )
    
    $
    14.74Outstanding at June 30, 2006
    
    
    1,639,625
    
    
    $
    15.43
    
    
    $
    60.8Convertible at June 30, 2006
    
    
    365,628
    
    
    $
    15.30
    
    
    $
    13.5
   NOTE 3: REVIEW OF ESTIMATED REMAINING SERVICE LIVES AND DEPRECIATION PRACTICES
  13




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 4: DEBT
  (In millions)
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalAE:AE Credit Facility
    
    $
    0.9
    
    
    $
    1.8
    
    
    $
    1.8
    
    
    $
    1.8
    
    
    $
    1.8
    
    
    $
    161.0
    
    
    $
    169.1Total AE
    
    $
    0.9
    
    
    $
    1.8
    
    
    $
    1.8
    
    
    $
    1.8
    
    
    $
    1.8
    
    
    $
    161.0
    
    
    $
    169.1AE Supply:Pollution Control Bonds
    
    $
    
    
    
    $
    91.7
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    191.4
    
    
    $
    283.1Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,050.0
    
    
    
    1,050.0Debentures-AGC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0
    
    
    
    100.0AE Supply Credit Facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    852.0
    
    
    
    852.0Total AE Supply
    
    $
    
    
    
    $
    91.7
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,193.4
    
    
    $
    2,285.1Monongahela:First Mortgage Bonds
    
    $
    300.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    190.0
    
    
    $
    490.0Pollution Control Bonds
    
    
    
    
    
    
    15.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70.3
    
    
    
    85.8Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110.0
    
    
    
    
    
    
    
    110.0Total Monongahela
    
    $
    300.0
    
    
    $
    15.5
    
    
    $
    
    
    
    $
    
    
    
    $
    110.0
    
    
    $
    260.3
    
    
    $
    685.8Potomac Edison:First Mortgage Bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    320.0
    
    
    $
    320.0Medium-Term Notes
    
    
    100.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0Total Potomac Edison
    
    $
    100.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    320.0
    
    
    $
    420.0West Penn:Transition Bonds
    
    $
    36.7
    
    
    $
    79.9
    
    
    $
    75.4
    
    
    $
    73.1
    
    
    $
    14.7
    
    
    $
    
    
    
    $
    279.8Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80.0
    
    
    
    80.0Total West Penn
    
    $
    36.7
    
    
    $
    79.9
    
    
    $
    75.4
    
    
    $
    73.1
    
    
    $
    14.7
    
    
    $
    80.0
    
    
    $
    359.8AGC:Debentures
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100.0
    
    
    $
    100.0Total AGC
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100.0
    
    
    $
    100.0Unamortized debt discounts,
premiums and terminated
interest rate swaps
    
    
    (0.6
    )
    
    
    (1.2
    )
    
    
    (1.2
    )
    
    
    (1.3
    )
    
    
    (1.2
    )
    
    
    (2.5
    )
    
    
    (8.0
    )Eliminations
    
    
    
    
    
    
    (2.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (110.5
    )
    
    
    (112.8
    )Total consolidated debt
    
    $
    437.0
    
    
    $
    185.4
    
    
    $
    76.0
    
    
    $
    73.6
    
    
    $
    125.3
    
    
    $
    3,001.7
    
    
    $
    3,899.0
    14




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2006(In millions)
    
    Issuances
    
    
    Repayments
    
    
    Issuances
    
    
    RepaymentsAE:AE Credit Facility (a)
    
    $
    179.1
    
    
    $
    10.0
    
    
    $
    179.1
    
    
    $
    10.0Prior Credit Facility (b)
    
    
    
    
    
    
    189.0
    
    
    
    
    
    
    
    199.0Total AE
    
    $
    179.1
    
    
    $
    199.0
    
    
    $
    179.1
    
    
    $
    209.0AE Supply:AE Supply Credit Facility (c)
    
    $
    967.0
    
    
    $
    115.0
    
    
    $
    967.0
    
    
    $
    115.0Prior AE Supply Loan (d)
    
    
    
    
    
    
    967.0
    
    
    
    
    
    
    
    989.0Total AE Supply
    
    $
    967.0
    
    
    $
    1,082.0
    
    
    $
    967.0
    
    
    $
    1,104.0West Penn:Transition Bonds (e)
    
    $
    1.3
    
    
    $
    19.3
    
    
    $
    2.6
    
    
    $
    39.1Consolidated Total
    
    $
    1,147.4
    
    
    $
    1,300.3
    
    
    $
    1,148.7
    
    
    $
    1,352.1
 
 (a)
    
    Reflects issuances and repayments under the AE Credit Facility, which was entered into on
May 22, 2006.(b)
    
    Reflects repayments under AEs prior credit facility, which was refinanced on May 22, 2006.(c)
    
    Reflects issuances and repayments under the AE Supply Credit Facility, which was entered into
on May 2, 2006.(d)
    
    Reflects issuances and repayments under AE Supplys prior term loan, which was refinanced on
May 2, 2006.(e)
    
    The issuance amounts represent interest that was accrued and added to the principal amount of
certain of the bonds. NOTE 5: DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
  15




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005AE Supply:Operating revenues
    
    $
    
    
    
    $
    0.2
    
    
    $
    
    
    
    $
    0.4Operating expenses
    
    
    (0.4
    )
    
    
    (1.1
    )
    
    
    (0.8
    )
    
    
    (2.3
    )Interest expense
    
    
    (0.9
    )
    
    
    (3.1
    )
    
    
    (1.8
    )
    
    
    (6.2
    )Loss before income taxes
    
    
    (1.3
    )
    
    
    (4.0
    )
    
    
    (2.6
    )
    
    
    (8.1
    )Income tax benefit
    
    
    0.5
    
    
    
    1.4
    
    
    
    1.0
    
    
    
    2.8Impairment charge, net of tax
    
    
    (0.1
    )
    
    
    (3.2
    )
    
    
    (0.1
    )
    
    
    (3.2
    )Loss from discontinued operations, net of tax
    
    $
    (0.9
    )
    
    $
    (5.8
    )
    
    $
    (1.7
    )
    
    $
    (8.5
    )Monongahela:Operating revenues
    
    $
    
    
    
    $
    46.6
    
    
    $
    
    
    
    $
    196.8Operating expenses
    
    
    
    
    
    
    (46.0
    )
    
    
    
    
    
    
    (176.2
    )Other income and expenses, net
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    0.9Interest expense
    
    
    
    
    
    
    (2.0
    )
    
    
    
    
    
    
    (4.1
    )Income (loss) before income taxes
    
    
    
    
    
    
    (0.8
    )
    
    
    
    
    
    
    17.4Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.7
    )Impairment charge, net of tax
    
    
    
    
    
    
    (5.7
    )
    
    
    
    
    
    
    (6.3
    )Income (loss) from discontinued operations, net of tax
    
    $
    
    
    
    $
    (6.5
    )
    
    $
    
    
    
    $
    4.4Allegheny:Operating revenues
    
    $
    
    
    
    $
    46.8
    
    
    $
    
    
    
    $
    197.2Operating expenses
    
    
    (0.4
    )
    
    
    (47.1
    )
    
    
    (0.8
    )
    
    
    (178.5
    )Other income and expenses, net
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    0.9Interest expense
    
    
    (0.9
    )
    
    
    (5.1
    )
    
    
    (1.8
    )
    
    
    (10.3
    )Income (loss) before income taxes
    
    
    (1.3
    )
    
    
    (4.8
    )
    
    
    (2.6
    )
    
    
    9.3Income tax benefit (expense)
    
    
    0.5
    
    
    
    1.4
    
    
    
    1.0
    
    
    
    (3.9
    )Impairment charge, net of tax
    
    
    (0.1
    )
    
    
    (8.9
    )
    
    
    (0.1
    )
    
    
    (9.5
    )Loss from discontinued operations, net of tax.
    
    $
    (0.9
    )
    
    $
    (12.3
    )
    
    $
    (1.7
    )
    
    $
    (4.1
    )
   June 30,
    
    
    December 31,(In millions)
    
    2006
    
    
    2005Current assets
    
    $
    0.9
    
    
    $
    1.5Property, plant and equipment
    
    
    21.2
    
    
    
    23.1Receivable from TVA
    
    
    
    
    
    
    25.5Total
    
    $
    22.1
    
    
    $
    50.1
  16




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 6: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
    NOTE 7: ASSET RETIREMENT OBLIGATIONS (AROs)
   Effect of Adopting FIN 47 IncreaseProperty,
    
    
    
    
    
    
    Non-CurrentPlant and
    
    
    Non-Current
    
    
    LiabilitiesEquipment,
    
    
    Regulatory
    
    
    (Conditional(In millions)
    
    Net
    
    
    Asset
    
    
    AROs)AE Supply
    
    $
    0.5
    
    
    $
    
    
    
    $
    9.8Monongahela
    
    
    0.3
    
    
    
    5.3
    
    
    
    5.6Potomac Edison
    
    
    
    
    
    
    0.3
    
    
    
    0.4West Penn
    
    
    
    
    
    
    0.4
    
    
    
    0.4Total Allegheny
    
    $
    0.8
    
    
    $
    6.0
    
    
    $
    16.2
  17




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   June 30,
    
    
    December 31,(In millions)
    
    2006
    
    
    2005Monongahela
    
    $
    246.8
    
    
    $
    242.1Potomac Edison
    
    
    177.3
    
    
    
    170.8West Penn
    
    
    (15.9
    )
    
    
    (17.4
    )Total
    
    $
    408.2
    
    
    $
    395.5
 18




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 8: BUSINESS SEGMENTS
  Three months ended June 30, 2006
    
    
    Three months ended June 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    630.6
    
    
    $
    91.7
    
    
    $
    
    
    
    $
    722.3
    
    
    $
    661.1
    
    
    $
    53.6
    
    
    $
    
    
    
    $
    714.7Internal operating revenues
    
    
    1.9
    
    
    
    322.4
    
    
    
    (324.3
    )
    
    
    
    
    
    
    2.1
    
    
    
    350.9
    
    
    
    (353.0
    )
    
    
    Total operating revenues
    
    $
    632.5
    
    
    $
    414.1
    
    
    $
    (324.3
    )
    
    $
    722.3
    
    
    $
    663.2
    
    
    $
    404.5
    
    
    $
    (353.0
    )
    
    $
    714.7Depreciation and amortization
    
    $
    37.9
    
    
    $
    30.3
    
    
    $
    
    
    
    $
    68.2
    
    
    $
    39.0
    
    
    $
    38.4
    
    
    $
    
    
    
    $
    77.4Operating income
    
    $
    54.3
    
    
    $
    61.2
    
    
    $
    
    
    
    $
    115.5
    
    
    $
    58.9
    
    
    $
    53.2
    
    
    $
    
    
    
    $
    112.1Interest expense
    
    $
    22.1
    
    
    $
    55.3
    
    
    $
    (1.0
    )
    
    $
    76.4
    
    
    $
    46.5
    
    
    $
    82.0
    
    
    $
    (0.2
    )
    
    $
    128.3Income (loss) from continuing
operations
    
    $
    23.3
    
    
    $
    8.7
    
    
    $
    
    
    
    $
    32.0
    
    
    $
    16.9
    
    
    $
    (23.0
    )
    
    $
    
    
    
    $
    (6.1
    )Loss from discontinued
operations, net of tax
    
    $
    
    
    
    $
    (0.9
    )
    
    $
    
    
    
    $
    (0.9
    )
    
    $
    (6.5
    )
    
    $
    (5.8
    )
    
    $
    
    
    
    $
    (12.3
    )Net income (loss)
    
    $
    23.3
    
    
    $
    7.8
    
    
    $
    
    
    
    $
    31.1
    
    
    $
    10.4
    
    
    $
    (28.8
    )
    
    $
    
    
    
    $
    (18.4
    )
 Six months ended June 30, 2006
    
    
    Six months ended June 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    1,331.4
    
    
    $
    236.5
    
    
    $
    
    
    
    $
    1,567.9
    
    
    $
    1,398.3
    
    
    $
    70.4
    
    
    $
    
    
    
    $
    1,468.7Internal operating revenues
    
    
    3.7
    
    
    
    684.7
    
    
    
    (688.4
    )
    
    
    
    
    
    
    4.3
    
    
    
    751.0
    
    
    
    (755.3
    )
    
    
    Total operating revenues
    
    $
    1,335.1
    
    
    $
    921.2
    
    
    $
    (688.4
    )
    
    $
    1,567.9
    
    
    $
    1,402.6
    
    
    $
    821.4
    
    
    $
    (755.3
    )
    
    $
    1,468.7Depreciation and amortization
    
    $
    75.6
    
    
    $
    60.4
    
    
    $
    
    
    
    $
    136.0
    
    
    $
    77.1
    
    
    $
    76.7
    
    
    $
    
    
    
    $
    153.8Operating income
    
    $
    146.4
    
    
    $
    216.9
    
    
    $
    
    
    
    $
    363.3
    
    
    $
    154.8
    
    
    $
    137.3
    
    
    $
    
    
    
    $
    292.1Interest expense
    
    $
    41.8
    
    
    $
    103.4
    
    
    $
    (1.4
    )
    
    $
    143.8
    
    
    $
    75.4
    
    
    $
    178.9
    
    
    $
    (0.2
    )
    
    $
    254.1Income (loss) from continuing operations
    
    $
    69.7
    
    
    $
    76.5
    
    
    $
    
    
    
    $
    146.2
    
    
    $
    66.6
    
    
    $
    (38.2
    )
    
    $
    (0.1
    )
    
    $
    28.3Income (loss) from discontinued operations, net of
tax
    
    $
    
    
    
    $
    (1.7
    )
    
    $
    
    
    
    $
    (1.7
    )
    
    $
    4.3
    
    
    $
    (8.5
    )
    
    $
    0.1
    
    
    $
    (4.1
    )Net income (loss)
    
    $
    69.7
    
    
    $
    74.8
    
    
    $
    
    
    
    $
    144.5
    
    
    $
    70.9
    
    
    $
    (46.7
    )
    
    $
    
    
    
    $
    24.2
 19




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 9: GOODWILL AND INTANGIBLE ASSETS
    June 30, 2006
    
    
    December 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    Accumulated(In millions)
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationLand easements, amortized
    
    $
    97.8
    
    
    $
    27.8
    
    
    $
    97.7
    
    
    $
    27.1Land easements, unamortized
    
    
    30.7
    
    
    
    
    
    
    
    30.6
    
    
    
    Software
    
    
    54.3
    
    
    
    38.2
    
    
    
    72.3
    
    
    
    50.9Total
    
    $
    182.8
    
    
    $
    66.0
    
    
    $
    200.6
    
    
    $
    78.0
   (In millions)
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Annual amortization expense
    
    $
    13.1
    
    
    $
    12.7
    
    
    $
    10.5
    
    
    $
    9.8
    
    
    $
    8.8
 NOTE 10: COMPREHENSIVE INCOME (LOSS)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Consolidated net income (loss)
    
    $
    31.1
    
    
    $
    (18.4
    )
    
    $
    144.5
    
    
    $
    24.2Other comprehensive income (loss), net of tax:Minimum pension liability adjustment
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.2
    )Changes in value of available for sale securities
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.3
    )Changes in fair value of cash flow hedges
    
    
    6.2
    
    
    
    0.4
    
    
    
    23.9
    
    
    
    (9.4
    )Consolidated comprehensive income (loss), net of income taxes
    
    $
    37.3
    
    
    $
    (18.3
    )
    
    $
    168.4
    
    
    $
    14.3
 20




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Unrealized
    
    
    MinimumGain (Loss) on
    
    
    Pension
    
    
    Accumulated OtherCash Flow
    
    
    Liability
    
    
    Comprehensive(In millions)
    
    Hedges
    
    
    Adjustment
    
    
    Income (Loss)Balance at December 31, 2005
    
    $
    (31.5
    )
    
    $
    (111.2
    )
    
    $
    (142.7
    )Changes in accumulated other comprehensive loss, net of tax
    
    
    17.7
    
    
    
    
    
    
    
    17.7Balance at March 31, 2006
    
    $
    (13.8
    )
    
    $
    (111.2
    )
    
    $
    (125.0
    )Changes in accumulated other comprehensive loss, net of tax
    
    
    6.2
    
    
    
    
    
    
    
    6.2Balance at June 30, 2006
    
    $
    (7.6
    )
    
    $
    (111.2
    )
    
    $
    (118.8
    )
 NOTE 11: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
   21




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Pension BenefitsThree Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Components of net periodic cost:Service cost
    
    $
    5.5
    
    
    $
    5.8
    
    
    $
    10.9
    
    
    $
    11.7Interest cost
    
    
    15.3
    
    
    
    16.0
    
    
    
    30.7
    
    
    
    31.8Expected return on plan assets
    
    
    (17.4
    )
    
    
    (17.3
    )
    
    
    (34.8
    )
    
    
    (34.6
    )Amortization of unrecognized transition obligation
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2Amortization of prior service cost
    
    
    0.9
    
    
    
    0.9
    
    
    
    1.8
    
    
    
    1.8Recognized actuarial loss
    
    
    3.1
    
    
    
    2.3
    
    
    
    6.2
    
    
    
    4.6Subtotal
    
    
    7.5
    
    
    
    7.8
    
    
    
    15.0
    
    
    
    15.5Settlements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Net periodic cost
    
    $
    7.5
    
    
    $
    7.8
    
    
    $
    15.0
    
    
    $
    15.7Allocation of net periodic cost:Monongahela
    
    $
    1.9
    
    
    $
    2.5
    
    
    $
    3.9
    
    
    $
    5.0AE Supply
    
    
    2.3
    
    
    
    2.1
    
    
    
    4.5
    
    
    
    4.4West Penn
    
    
    1.9
    
    
    
    1.8
    
    
    
    3.7
    
    
    
    3.5Potomac Edison
    
    
    1.3
    
    
    
    1.3
    
    
    
    2.7
    
    
    
    2.6AE
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2Net periodic cost
    
    $
    7.5
    
    
    $
    7.8
    
    
    $
    15.0
    
    
    $
    15.7
 Postretirement Benefits Other Than PensionsThree Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Components of net periodic cost:Service cost
    
    $
    1.3
    
    
    $
    1.0
    
    
    $
    2.6
    
    
    $
    2.0Interest cost
    
    
    4.2
    
    
    
    4.2
    
    
    
    8.4
    
    
    
    8.4Expected return on plan assets
    
    
    (1.8
    )
    
    
    (1.5
    )
    
    
    (3.5
    )
    
    
    (3.0
    )Amortization of unrecognized transition obligation
    
    
    1.5
    
    
    
    1.4
    
    
    
    2.9
    
    
    
    2.9Recognized actuarial loss
    
    
    1.0
    
    
    
    0.5
    
    
    
    1.9
    
    
    
    1.0Net periodic cost
    
    $
    6.2
    
    
    $
    5.6
    
    
    $
    12.3
    
    
    $
    11.3Allocation of net periodic cost:Monongahela
    
    $
    1.7
    
    
    $
    1.6
    
    
    $
    3.4
    
    
    $
    3.2West Penn
    
    
    1.7
    
    
    
    1.6
    
    
    
    3.4
    
    
    
    3.1Potomac Edison
    
    
    1.3
    
    
    
    1.2
    
    
    
    2.6
    
    
    
    2.4AE Supply
    
    
    1.5
    
    
    
    1.2
    
    
    
    2.8
    
    
    
    2.5AE
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1Net periodic cost
    
    $
    6.2
    
    
    $
    5.6
    
    
    $
    12.3
    
    
    $
    11.3
  22




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Employer Contributions.
   23




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 12: INCOME (LOSS) PER SHARE
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions, except share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Basic Income (Loss) per Share:Numerator:Income (loss) from continuing operations, net of tax
    
    $
    32.0
    
    
    $
    (6.1
    )
    
    $
    146.2
    
    
    $
    28.3Loss from discontinued operations, net of tax
    
    
    (0.9
    )
    
    
    (12.3
    )
    
    
    (1.7
    )
    
    
    (4.1
    )Net income (loss)
    
    $
    31.1
    
    
    $
    (18.4
    )
    
    $
    144.5
    
    
    $
    24.2Denominator:Weighted average common shares outstanding
    
    
    163,526,221
    
    
    
    156,730,744
    
    
    
    163,304,498
    
    
    
    147,127,707Basic Income (Loss) per Share:Income (loss) from continuing operations, net of tax
    
    $
    0.20
    
    
    $
    (0.04
    )
    
    $
    0.89
    
    
    $
    0.19Loss from discontinued operations, net of tax
    
    
    (0.01
    )
    
    
    (0.08
    )
    
    
    (0.01
    )
    
    
    (0.03
    )Net income (loss)
    
    $
    0.19
    
    
    $
    (0.12
    )
    
    $
    0.88
    
    
    $
    0.16Diluted Income (Loss) per Share:Numerator:Income (loss) from continuing operations, net of tax
    
    $
    32.0
    
    
    $
    (6.1
    )
    
    $
    146.2
    
    
    $
    28.3Loss from discontinued operations, net of tax
    
    
    (0.9
    )
    
    
    (12.3
    )
    
    
    (1.7
    )
    
    
    (4.1
    )Net income (loss)
    
    $
    31.1
    
    
    $
    (18.4
    )
    
    $
    144.5
    
    
    $
    24.2Denominator:Weighted average common shares outstanding
    
    
    163,526,221
    
    
    
    156,730,744
    
    
    
    163,304,498
    
    
    
    147,127,707Effect of dilutive securities:Stock options
    
    
    2,599,683
    
    
    
    
    
    
    
    2,582,517
    
    
    
    999,071Performance shares
    
    
    25,497
    
    
    
    
    
    
    
    35,839
    
    
    
    61,065Non-employee stock awards
    
    
    40,677
    
    
    
    
    
    
    
    37,177
    
    
    
    19,600Stock units
    
    
    2,415,780
    
    
    
    
    
    
    
    2,596,948
    
    
    
    2,068,986Total shares
    
    
    168,607,858
    
    
    
    156,730,744
    
    
    
    168,556,979
    
    
    
    150,276,429Shares potentially issuable under:Stock options
    
    
    
    
    
    
    1,041,027
    
    
    
    
    
    
    
    Performance shares
    
    
    
    
    
    
    62,765
    
    
    
    
    
    
    
    Non-employee stock awards
    
    
    
    
    
    
    22,400
    
    
    
    
    
    
    
    Stock units
    
    
    
    
    
    
    1,914,873
    
    
    
    
    
    
    
    Convertible Securities
    
    
    
    
    
    
    5,819,363
    
    
    
    
    
    
    
    15,356,198Total shares
    
    
    
    
    
    
    8,860,428
    
    
    
    
    
    
    
    15,356,198Diluted Income (Loss) per Share:Income (loss) from continuing operations, net of tax
    
    $
    0.19
    
    
    $
    (0.04
    )
    
    $
    0.87
    
    
    $
    0.19Loss from discontinued operations, net of tax
    
    
    (0.01
    )
    
    
    (0.08
    )
    
    
    (0.01
    )
    
    
    (0.03
    )Net income (loss)
    
    $
    0.18
    
    
    $
    (0.12
    )
    
    $
    0.86
    
    
    $
    0.16
  24




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 13: ACCOUNTING FOR THE EFFECTS OF PRICE REGULATION
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Decrease in liability for adverse power purchase commitments
    
    $
    4.3
    
    
    $
    4.2
    
    
    $
    8.6
    
    
    $
    8.4
  June 30,
    
    
    December 31,(In millions)
    
    2006
    
    
    2005Property, plant and equipment
    
    $
    4,245.5
    
    
    $
    4,160.4Amounts under construction included above
    
    $
    95.2
    
    
    $
    62.7Accumulated depreciation
    
    $
    (2,027.3
    )
    
    $
    (1,992.4
    )
 NOTE 14: OTHER INCOME AND EXPENSES, NET
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Interest and dividend income
    
    $
    5.3
    
    
    $
    3.2
    
    
    $
    10.8
    
    
    $
    5.0Coal brokering income
    
    
    0.9
    
    
    
    1.1
    
    
    
    0.9
    
    
    
    1.1Gain on sale of land
    
    
    0.8
    
    
    
    
    
    
    
    0.8
    
    
    
    1.6Premium services
    
    
    0.6
    
    
    
    0.8
    
    
    
    2.0
    
    
    
    1.8Gain on sale of investments
    
    
    0.3
    
    
    
    0.8
    
    
    
    0.3
    
    
    
    0.8Cash received from a former trading executives forfeited assets
    
    
    
    
    
    
    11.2
    
    
    
    
    
    
    
    11.2Proceeds from sale of AFN
    
    
    
    
    
    
    3.0
    
    
    
    
    
    
    
    3.0Other
    
    
    2.3
    
    
    
    1.1
    
    
    
    3.1
    
    
    
    2.0Total
    
    $
    10.2
    
    
    $
    21.2
    
    
    $
    17.9
    
    
    $
    26.5
 25




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 15: GUARANTEES AND LETTERS OF CREDIT
  June 30, 2006
    
    
    December 31, 2005Amounts
    
    
    
    
    
    
    
    
    
    
    AmountsRecorded on
    
    
    Total
    
    
    Recorded on
    
    
    Totalthe
    
    
    Guarantees
    
    
    the
    
    
    GuaranteesConsolidated
    
    
    and Letters
    
    
    Consolidated
    
    
    and Letters(In millions)
    
    Balance Sheet
    
    
    of Credit
    
    
    Balance Sheet
    
    
    of CreditGuarantees:Performance of a put option issued in connection with an asset sale (a)
    
    $
    
    
    
    $
    
    
    
    $
    6.4
    
    
    $
    6.4Loans and other financing-related matters
    
    
    
    
    
    
    8.5
    
    
    
    
    
    
    
    8.7Lease agreement
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    4.7Purchase, sale, exchange or transportation of wholesale natural gas, electric
power and related services
    
    
    
    
    
    
    8.9
    
    
    
    
    
    
    
    3.9Other
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Total Guarantees
    
    $
    0.2
    
    
    $
    22.3
    
    
    $
    6.6
    
    
    $
    23.9Letters of Credit:Under AEs Revolving Facility (b)
    
    $
    
    
    
    $
    135.5
    
    
    $
    
    
    
    $
    136.5Other (c)
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    1.6Total Letters of Credit
    
    
    
    
    
    
    137.6
    
    
    
    
    
    
    
    138.1Total Guarantees and Letters of Credit
    
    $
    0.2
    
    
    $
    159.9
    
    
    $
    6.6
    
    
    $
    162.0
 
 (a)
    
    The $6.4 million guarantee outstanding at December 31, 2005 was terminated during the first quarter of 2006 in connection with the purchase by Allegheny
Energy Hunlock Creek LLC (AE Hunlock), a wholly owned subsidiary of AE, of a 50% interest owned by UGI Hunlock Creek Development Company (UGI) in
Hunlock Creek Energy Ventures, LLC, (HCEV). See Note 17, HCEV Partnership Interest, to the Consolidated Financial Statements for additional
information.(b)
    
    This amount is comprised of a letter of credit for $125.0 million that expires in June 2007 and was issued on September 23, 2005 on behalf of Allegheny
as collateral to stay enforcement of the judgment in Alleghenys litigation against Merrill Lynch while an appeal is pending, a letter of credit for $9.5
million issued due to an AE Ventures contractual obligation that expires in July 2007 and a $1.0 million letter of credit that is related to an
interconnection agreement with TVA.(c)
    
    These amounts are not issued under either the AE Revolving Credit Facility or the AE Supply Revolving Facility. NOTE 16: VARIABLE INTEREST ENTITIES
   26




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
    NOTE 17: HCEV PARTNERSHIP INTEREST
   NOTE 18: COMMITMENTS AND CONTINGENCIES
 Environmental Matters and Litigation
  Clean Air Act Matters. 2
  27




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  2 2 2 2 2
 X X x x
 x x 2 x x X
  2 X
  28




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
       29




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Canadian Toxic-Tort Class Action:
 Global Warming Class Action:
 Claims Related to Alleged Asbestos Exposure: ,
     Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) Claim:
 30




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Other Litigation
 Nevada Power Contracts .
   Sierra/Nevada .
  Litigation Involving Merrill Lynch .
  31




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
     Putative Shareholder, Benefit Plan Class Actions and Derivative Action .
   32




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Suits Related to the Gleason Generation Facility .
 Harrison Fuel Litigation.
 Litigation with Mobotec . x
  33




---



##### 



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Ordinary Course of Business .
 NOTE 19: SUBSEQUENT EVENT
  34




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenues
    
    $
    177,421
    
    
    $
    178,117
    
    
    $
    374,616
    
    
    $
    364,698Operating expenses:Fuel consumed in electric generation
    
    
    40,522
    
    
    
    33,281
    
    
    
    84,586
    
    
    
    68,258Purchased power and transmission
    
    
    42,696
    
    
    
    54,839
    
    
    
    83,832
    
    
    
    113,497Deferred energy costs, net
    
    
    (623
    )
    
    
    
    
    
    
    (623
    )
    
    
    Operations and maintenance
    
    
    49,211
    
    
    
    52,205
    
    
    
    90,699
    
    
    
    96,116Depreciation and amortization
    
    
    16,354
    
    
    
    16,734
    
    
    
    32,720
    
    
    
    33,504Taxes other than income taxes
    
    
    11,813
    
    
    
    12,693
    
    
    
    24,083
    
    
    
    25,426Total operating expenses
    
    
    159,973
    
    
    
    169,752
    
    
    
    315,297
    
    
    
    336,801Operating income
    
    
    17,448
    
    
    
    8,365
    
    
    
    59,319
    
    
    
    27,897Other income and expenses, net (Note 8)
    
    
    4,179
    
    
    
    3,480
    
    
    
    7,837
    
    
    
    5,712Interest expense
    
    
    10,583
    
    
    
    10,618
    
    
    
    21,311
    
    
    
    21,361Income from continuing operations before income taxes
    
    
    11,044
    
    
    
    1,227
    
    
    
    45,845
    
    
    
    12,248Income tax expense (benefit) from continuing operations
    
    
    4,185
    
    
    
    (7,862
    )
    
    
    17,256
    
    
    
    (8,163
    )Income from continuing operations
    
    
    6,859
    
    
    
    9,089
    
    
    
    28,589
    
    
    
    20,411Income (loss) from discontinued operations, net of tax (Note 3)
    
    
    
    
    
    
    (6,501
    )
    
    
    
    
    
    
    4,370Net income
    
    $
    6,859
    
    
    $
    2,588
    
    
    $
    28,589
    
    
    $
    24,781
  35




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Six Months EndedJune 30,(In thousands)
    
    2006
    
    
    2005(Revised-Note 1)Cash Flows From Operating Activities:Net income
    
    $
    28,589
    
    
    $
    24,781Income from discontinued operations, net of tax
    
    
    
    
    
    
    (4,370
    )Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    32,720
    
    
    
    33,504Amortization of power sale liability related to Ohio sale
    
    
    (15,500
    )
    
    
    Gain on asset sales
    
    
    (72
    )
    
    
    (64
    )Deferred income taxes and investment tax credit, net
    
    
    15,965
    
    
    
    1,761Other, net
    
    
    3,035
    
    
    
    538Changes in certain assets and liabilities:Accounts receivable, net
    
    
    18,935
    
    
    
    (7,135
    )Materials, supplies and fuel
    
    
    (4,015
    )
    
    
    (1,074
    )Prepaid taxes
    
    
    6,592
    
    
    
    7,464Collateral deposits
    
    
    9,538
    
    
    
    (9,540
    )Other current assets
    
    
    (249
    )
    
    
    882Accounts payable
    
    
    (8,812
    )
    
    
    (4,812
    )Accounts payable to affiliates, net
    
    
    (2,038
    )
    
    
    32,963Accrued taxes
    
    
    (4,317
    )
    
    
    (14,192
    )Other current liabilities
    
    
    (6,449
    )
    
    
    (632
    )Other assets
    
    
    8,093
    
    
    
    1,888Other liabilities
    
    
    (5,291
    )
    
    
    660Net cash provided by operating activities of discontinued operations
    
    
    
    
    
    
    97,279Net cash provided by operating activities
    
    
    76,724
    
    
    
    159,901Cash Flows From Investing Activities:Capital expenditures
    
    
    (40,963
    )
    
    
    (30,657
    )Proceeds from asset sales
    
    
    129
    
    
    
    129Note receivable from affiliate
    
    
    (60,756
    )
    
    
    (42,995
    )Net cash used in investing activities of discontinued operations
    
    
    
    
    
    
    (3,766
    )Net cash used in investing activities
    
    
    (101,590
    )
    
    
    (77,289
    )Cash Flows From Financing Activities:Deferred financing costs
    
    
    (135
    )
    
    
    Cash dividends paid on capital stock:Preferred stock
    
    
    (586
    )
    
    
    (2,519
    )Common stock
    
    
    (10,015
    )
    
    
    Net cash used in financing activities of discontinued operations
    
    
    
    
    
    
    (76,379
    )Net cash used in financing activities
    
    
    (10,736
    )
    
    
    (78,898
    )Net increase (decrease) in cash and cash equivalents
    
    
    (35,602
    )
    
    
    3,714Cash and cash equivalents at beginning of period
    
    
    136,491
    
    
    
    45,092Cash and cash equivalents at end of period
    
    $
    100,889
    
    
    $
    48,806Supplemental Cash Flow Information:Cash paid for interest (net of amount capitalized)
    
    $
    19,440
    
    
    $
    23,695
  36




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 June 30,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    100,889
    
    
    $
    136,491Accounts receivable:Customer
    
    
    37,710
    
    
    
    45,061Unbilled utility revenue
    
    
    28,520
    
    
    
    38,200Wholesale and other
    
    
    17,362
    
    
    
    20,598Allowance for uncollectible accounts
    
    
    (2,649
    )
    
    
    (2,489
    )Note receivable from affiliate
    
    
    86,229
    
    
    
    25,473Materials and supplies
    
    
    14,874
    
    
    
    15,916Fuel
    
    
    19,808
    
    
    
    14,751Prepaid taxes
    
    
    13,483
    
    
    
    20,075Collateral deposits
    
    
    (5
    )
    
    
    9,533Regulatory assets
    
    
    5,003
    
    
    
    4,379Other
    
    
    3,809
    
    
    
    3,827Total current assets
    
    
    325,033
    
    
    
    331,815Property, Plant and Equipment, Net:Generation
    
    
    958,444
    
    
    
    951,636Transmission
    
    
    281,976
    
    
    
    281,048Distribution
    
    
    948,211
    
    
    
    930,817Other
    
    
    69,360
    
    
    
    73,807Accumulated depreciation
    
    
    (912,742
    )
    
    
    (890,548
    )Subtotal
    
    
    1,345,249
    
    
    
    1,346,760Construction work in progress
    
    
    26,058
    
    
    
    17,401Total property, plant and equipment, net
    
    
    1,371,307
    
    
    
    1,364,161Investments and Other Assets:Investment in AGC
    
    
    48,169
    
    
    
    48,197Other
    
    
    5,026
    
    
    
    6,904Total investments and other assets
    
    
    53,195
    
    
    
    55,101Deferred Charges:Regulatory assets
    
    
    94,498
    
    
    
    101,117Other
    
    
    5,939
    
    
    
    6,985Total deferred charges
    
    
    100,437
    
    
    
    108,102Total Assets
    
    $
    1,849,972
    
    
    $
    1,859,179
  37




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
 June 30,
    
    
    December 31,(In thousands, except share amounts)
    
    2006
    
    
    2005LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Long-term debt due within one year (Note 2)
    
    $
    300,986
    
    
    $
    299,959Accounts payable
    
    
    39,420
    
    
    
    48,232Accounts payable to affiliates, net
    
    
    55,289
    
    
    
    57,434Deferred income taxes
    
    
    2,025
    
    
    
    Accrued taxes
    
    
    37,449
    
    
    
    41,766Accrued interest
    
    
    8,848
    
    
    
    8,929Ohio power commitment
    
    
    20,900
    
    
    
    25,900Other
    
    
    16,648
    
    
    
    24,378Total current liabilities
    
    
    481,565
    
    
    
    506,598Long-term Debt (Note 2)
    
    
    384,122
    
    
    
    385,067Deferred Credits and Other Liabilities:Investment tax credit
    
    
    
    
    
    
    442Non-current income taxes payable
    
    
    45,671
    
    
    
    45,671Deferred income taxes
    
    
    208,458
    
    
    
    194,248Obligations under capital leases
    
    
    3,628
    
    
    
    5,554Regulatory liabilities
    
    
    238,696
    
    
    
    242,416Other
    
    
    31,504
    
    
    
    41,219Total deferred credits and other liabilities
    
    
    527,957
    
    
    
    529,550Commitments and Contingencies (Note 9)Preferred Stock
    
    
    24,000
    
    
    
    24,000Common Stockholders Equity:Common stock, $50 par value, 8 million shares authorized
and 5,891,000 shares outstanding
    
    
    294,550
    
    
    
    294,550Other paid-in capital
    
    
    41,094
    
    
    
    40,719Retained earnings
    
    
    96,683
    
    
    
    78,694Accumulated other comprehensive income
    
    
    1
    
    
    
    1Total common stockholders equity
    
    
    432,328
    
    
    
    413,964Total Liabilities and Stockholders Equity
    
    $
    1,849,972
    
    
    $
    1,859,179
  38




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Note No.
    
    Page No.1
    Basis of Presentation
    
    402
    Debt
    
    413
    Discontinued Operations
    
    414
    Asset Retirement Obligations (AROs)
    
    425
    Business Segments
    
    436
    Intangible Assets
    
    447
    Pension Benefits and Postretirement Benefits Other Than Pensions
    
    448
    Other Income and Expenses, Net
    
    449
    Commitments and Contingencies
    
    44
 39




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 1: BASIS OF PRESENTATION
        40




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Federal and State Income Taxes
  NOTE 2: DEBT
  (In millions)
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalFirst Mortgage Bonds
    
    $
    300.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    190.0
    
    
    $
    490.0Pollution Control Bonds
    
    
    
    
    
    
    15.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70.3
    
    
    
    85.8Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110.0
    
    
    
    
    
    
    
    110.0Total
    
    $
    300.0
    
    
    $
    15.5
    
    
    $
    
    
    
    $
    
    
    
    $
    110.0
    
    
    $
    260.3
    
    
    $
    685.8
   NOTE 3: DISCONTINUED OPERATIONS
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,(In millions)
    
    2005
    
    
    2005Operating revenues
    
    $
    46.6
    
    
    $
    196.8Operating expenses
    
    
    (46.0
    )
    
    
    (176.2
    )Other income and expenses, net
    
    
    0.6
    
    
    
    0.9Interest expense
    
    
    (2.0
    )
    
    
    (4.1
    )Income (loss) before income taxes
    
    
    (0.8
    )
    
    
    17.4Income tax expense
    
    
    
    
    
    
    (6.7
    )Impairment charge, net of tax
    
    
    (5.7
    )
    
    
    (6.3
    )Income (loss) from discontinued operations, net of tax
    
    $
    (6.5
    )
    
    $
    4.4
  41




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 4: ASSET RETIREMENT OBLIGATIONS (AROs)
     42




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 5: BUSINESS SEGMENTS
   Three months ended June 30, 2006
    
    
    Three months ended June 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    156.7
    
    
    $
    20.7
    
    
    $
    
    
    
    $
    177.4
    
    
    $
    161.7
    
    
    $
    16.4
    
    
    $
    
    
    
    $
    178.1Internal operating revenues
    
    
    
    
    
    
    69.6
    
    
    
    (69.6
    )
    
    
    
    
    
    
    
    
    
    
    75.3
    
    
    
    (75.3
    )
    
    
    Total operating revenues
    
    $
    156.7
    
    
    $
    90.3
    
    
    $
    (69.6
    )
    
    $
    177.4
    
    
    $
    161.7
    
    
    $
    91.7
    
    
    $
    (75.3
    )
    
    $
    178.1Depreciation and amortization
    
    $
    7.5
    
    
    $
    8.8
    
    
    $
    
    
    
    $
    16.3
    
    
    $
    8.0
    
    
    $
    8.7
    
    
    $
    
    
    
    $
    16.7Operating income (loss)
    
    $
    19.5
    
    
    $
    (2.1
    )
    
    $
    
    
    
    $
    17.4
    
    
    $
    10.2
    
    
    $
    (1.8
    )
    
    $
    
    
    
    $
    8.4Interest expense
    
    $
    6.0
    
    
    $
    4.5
    
    
    $
    
    
    
    $
    10.5
    
    
    $
    6.1
    
    
    $
    4.6
    
    
    $
    
    
    
    $
    10.7Income (loss) from continuing
operations
    
    $
    8.6
    
    
    $
    (1.7
    )
    
    $
    
    
    
    $
    6.9
    
    
    $
    7.9
    
    
    $
    1.2
    
    
    $
    
    
    
    $
    9.1Loss from discontinued
operations, net of tax
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (6.5
    )
    
    $
    
    
    
    $
    
    
    
    $
    (6.5
    )Net income (loss)
    
    $
    8.6
    
    
    $
    (1.7
    )
    
    $
    
    
    
    $
    6.9
    
    
    $
    1.4
    
    
    $
    1.2
    
    
    $
    
    
    
    $
    2.6
 Six months ended June 30, 2006
    
    
    Six months ended June 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    330.8
    
    
    $
    43.8
    
    
    $
    
    
    
    $
    374.6
    
    
    $
    339.0
    
    
    $
    25.7
    
    
    $
    
    
    
    $
    364.7Internal operating revenues
    
    
    
    
    
    
    147.6
    
    
    
    (147.6
    )
    
    
    
    
    
    
    
    
    
    
    157.0
    
    
    
    (157.0
    )
    
    
    Total operating revenues
    
    $
    330.8
    
    
    $
    191.4
    
    
    $
    (147.6
    )
    
    $
    374.6
    
    
    $
    339.0
    
    
    $
    182.7
    
    
    $
    (157.0
    )
    
    $
    364.7Depreciation and amortization
    
    $
    15.1
    
    
    $
    17.6
    
    
    $
    
    
    
    $
    32.7
    
    
    $
    16.1
    
    
    $
    17.4
    
    
    $
    
    
    
    $
    33.5Operating income (loss)
    
    $
    56.7
    
    
    $
    2.6
    
    
    $
    
    
    
    $
    59.3
    
    
    $
    31.1
    
    
    $
    (3.2
    )
    
    $
    
    
    
    $
    27.9Interest expense
    
    $
    12.2
    
    
    $
    9.1
    
    
    $
    
    
    
    $
    21.3
    
    
    $
    12.3
    
    
    $
    9.1
    
    
    $
    
    
    
    $
    21.4Income from continuing
operations
    
    $
    28.4
    
    
    $
    0.2
    
    
    $
    
    
    
    $
    28.6
    
    
    $
    19.5
    
    
    $
    0.9
    
    
    $
    
    
    
    $
    20.4Income from discontinued
operations, net of tax
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4.4
    
    
    $
    
    
    
    $
    
    
    
    $
    4.4Net income
    
    $
    28.4
    
    
    $
    0.2
    
    
    $
    
    
    
    $
    28.6
    
    
    $
    23.9
    
    
    $
    0.9
    
    
    $
    
    
    
    $
    24.8
 43




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 6: INTANGIBLE ASSETS
  June 30, 2006
    
    
    December 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    Accumulated(In millions)
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationLand easements, amortized
    
    $
    0.5
    
    
    $
    0.2
    
    
    $
    0.5
    
    
    $
    0.2Land easements, unamortized
    
    
    30.7
    
    
    
    
    
    
    
    30.6
    
    
    
    Software
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3Total
    
    $
    31.5
    
    
    $
    0.5
    
    
    $
    31.4
    
    
    $
    0.5
  NOTE 7: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Pension
    
    $
    1.9
    
    
    $
    2.5
    
    
    $
    3.9
    
    
    $
    5.0Postretirement benefits other than pensions
    
    $
    1.7
    
    
    $
    1.6
    
    
    $
    3.4
    
    
    $
    3.2
 NOTE 8: OTHER INCOME AND EXPENSES, NET
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Interest income
    
    $
    2.1
    
    
    $
    1.4
    
    
    $
    4.1
    
    
    $
    1.5Equity in earnings of AGC
    
    
    1.6
    
    
    
    1.8
    
    
    
    3.0
    
    
    
    3.5Premium services
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.2Other
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.5Total
    
    $
    4.1
    
    
    $
    3.5
    
    
    $
    7.8
    
    
    $
    5.7
 NOTE 9: COMMITMENTS AND CONTINGENCIES
 Environmental Matters and Litigation
  44




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Clean Air Act Matters. 2
  2 2 2 2 2
 X X x x
 x x 2 x x x X
   45




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
       46




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Canadian Toxic-Tort Class Action:
 Claims Related to Alleged Asbestos Exposure: ,
     Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) Claim:
 47




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Harrison Fuel Litigation.
 Ordinary Course of Business .
 48




---



##### 



ALLEGHENY GENERATING COMPANY
STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenues
    
    $
    13,901
    
    
    $
    16,724
    
    
    $
    31,239
    
    
    $
    33,583Operating expenses:Operations and maintenance
    
    
    1,055
    
    
    
    1,069
    
    
    
    2,562
    
    
    
    2,206Depreciation
    
    
    4,290
    
    
    
    4,309
    
    
    
    8,575
    
    
    
    8,546Taxes other than income taxes
    
    
    798
    
    
    
    737
    
    
    
    1,597
    
    
    
    1,474Total operating expenses
    
    
    6,143
    
    
    
    6,115
    
    
    
    12,734
    
    
    
    12,226Operating income
    
    
    7,758
    
    
    
    10,609
    
    
    
    18,505
    
    
    
    21,357Other income and expenses, net
    
    
    701
    
    
    
    76
    
    
    
    746
    
    
    
    129Interest expense
    
    
    1,790
    
    
    
    1,848
    
    
    
    3,598
    
    
    
    3,803Income before income taxes
    
    
    6,669
    
    
    
    8,837
    
    
    
    15,653
    
    
    
    17,683Income tax expense (benefit)
    
    
    (77
    )
    
    
    1,080
    
    
    
    2,772
    
    
    
    2,562Net income
    
    $
    6,746
    
    
    $
    7,757
    
    
    $
    12,881
    
    
    $
    15,121
  49




---



##### 



ALLEGHENY GENERATING COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
 Six Months EndedJune 30,(In thousands)
    
    2006
    
    
    2005Cash Flows From Operating Activities:Net income
    
    $
    12,881
    
    
    $
    15,121Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    8,575
    
    
    
    8,546Deferred income taxes and investment tax credit, net
    
    
    (3,526
    )
    
    
    (3,553
    )Other, net
    
    
    143
    
    
    
    142Changes in certain assets and liabilities:Materials and supplies
    
    
    (107
    )
    
    
    (113
    )Taxes receivable/accrued, net
    
    
    (309
    )
    
    
    (216
    )Other current assets
    
    
    (350
    )
    
    
    198Accounts payable
    
    
    (2,685
    )
    
    
    (26
    )Accounts payable to affiliates, net
    
    
    471
    
    
    
    470Other current liabilities
    
    
    234
    
    
    
    242Other liabilities
    
    
    1
    
    
    
    1Net cash provided by operating activities
    
    
    15,328
    
    
    
    20,812Cash Flows From Investing Activities:Capital expenditures
    
    
    (1,367
    )
    
    
    (4,394
    )Cash Flows From Financing Activities:Note payable to parent
    
    
    
    
    
    
    (15,000
    )Cash dividends paid on common stock
    
    
    (13,000
    )
    
    
    (7,200
    )Net cash used in financing activities
    
    
    (13,000
    )
    
    
    (22,200
    )Net increase (decrease) in cash and cash equivalents
    
    
    961
    
    
    
    (5,782
    )Cash and cash equivalents at beginning of period
    
    
    1,858
    
    
    
    7,500Cash and cash equivalents at end of period
    
    $
    2,819
    
    
    $
    1,718Supplemental Cash Flow Information:Cash paid for interest
    
    $
    3,455
    
    
    $
    3,660
  50




---



##### 



ALLEGHENY GENERATING COMPANY
BALANCE SHEETS
(unaudited)
 June 30,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,819
    
    
    $
    1,858Materials and supplies
    
    
    1,658
    
    
    
    1,551Taxes receivable
    
    
    2,006
    
    
    
    3,004Other
    
    
    574
    
    
    
    225Total current assets
    
    
    7,057
    
    
    
    6,638Property, Plant and Equipment, Net:Generation
    
    
    781,829
    
    
    
    788,952Transmission
    
    
    52,451
    
    
    
    47,098Other
    
    
    2,948
    
    
    
    2,960Accumulated depreciation
    
    
    (318,548
    )
    
    
    (316,250
    )Subtotal
    
    
    518,680
    
    
    
    522,760Construction work in progress
    
    
    9,244
    
    
    
    12,372Total property, plant and equipment, net
    
    
    527,924
    
    
    
    535,132Deferred Charges:Regulatory assets
    
    
    8,171
    
    
    
    8,295Other
    
    
    94
    
    
    
    97Total deferred charges
    
    
    8,265
    
    
    
    8,392Total Assets
    
    $
    543,246
    
    
    $
    550,162
  51




---



##### 



ALLEGHENY GENERATING COMPANY
BALANCE SHEETS (continued)
(unaudited)
 June 30,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    3
    
    
    $
    2,687Accounts payable to affiliates, net
    
    
    5,167
    
    
    
    4,696Accrued taxes
    
    
    1,854
    
    
    
    Accrued interest
    
    
    2,292
    
    
    
    2,292Other
    
    
    233
    
    
    
    Total current liabilities
    
    
    9,549
    
    
    
    9,675Long-term Debt (Note 2)
    
    
    99,442
    
    
    
    99,425Deferred Credits and Other Liabilities:Investment tax credit
    
    
    36,613
    
    
    
    37,273Non-current income taxes payable
    
    
    17,545
    
    
    
    17,544Deferred income taxes
    
    
    147,996
    
    
    
    153,630Regulatory liabilities
    
    
    22,411
    
    
    
    22,806Total deferred credits and other liabilities
    
    
    224,565
    
    
    
    231,253Commitments and Contingencies (Note 4)Stockholders Equity:Common stock, $1.00 par value, 5,000 shares authorized and 1,000 shares outstanding
    
    
    1
    
    
    
    1Other paid-in capital
    
    
    172,669
    
    
    
    172,669Retained earnings
    
    
    37,020
    
    
    
    37,139Total stockholders equity
    
    
    209,690
    
    
    
    209,809Total Liabilities and Stockholders Equity
    
    $
    543,246
    
    
    $
    550,162
  52




---



##### 



ALLEGHENY GENERATING COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 Note No.
    
    
    
    Page No.1
    
    Basis of Presentation
    
    
    542
    
    Debt
    
    
    543
    
    Intangible Assets
    
    
    544
    
    Commitments and Contingencies
    
    
    55
 53




---



##### 



ALLEGHENY GENERATING COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 NOTE 1: BASIS OF PRESENTATION
       Federal and State Income Taxes
 NOTE 2: DEBT
  (In millions)
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalDebentures
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100.0
    
    
    $
    100.0
  NOTE 3: INTANGIBLE ASSETS
  June 30, 2006
    
    
    December 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    Accumulated(In millions)
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationLand easements, amortized
    
    $
    1.5
    
    
    $
    0.8
    
    
    $
    1.5
    
    
    $
    0.8Software
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1Total
    
    $
    1.7
    
    
    $
    0.9
    
    
    $
    1.7
    
    
    $
    0.9
 54




---



##### 



ALLEGHENY GENERATING COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
   NOTE 4: COMMITMENTS AND CONTINGENCIES
 Canadian Toxic-Tort Class Action:
 Ordinary Course of Business .
 55




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward-Looking Statements
  
    
    rate regulation and the status of retail generation service supply competition
in states served by the Distribution Companies;
    
    financing plans;
    
    demand for energy and the cost and availability of raw materials, including coal;
    
    provider-of-last resort (PLR) and power supply contracts;
    
    results of litigation;
    
    results of operations;
    
    internal controls and procedures;
    
    capital expenditures;
    
    status and condition of plants and equipment;
    
    capacity purchase commitments;
    
    regulatory matters; and
    
    asset sales and transfers.
   
    
    plant performance and unplanned outages;
    
    changes in the price of power and fuel for electric generation;
    
    general economic and business conditions;
    
    changes in access to capital markets;
    
    complications or other factors that make it difficult or impossible to obtain
necessary lender consents or regulatory authorizations on a timely basis;
    
    environmental regulations;
    
    the results of regulatory proceedings, including proceedings related to rates;
 56




---



##### 




    
    changes in industry capacity, development and other activities by competitors of AE and
its consolidated subsidiaries;
    
    changes in the weather and other natural phenomena;
    
    changes in the underlying inputs and assumptions, including market conditions, used to
estimate the fair values of commodity contracts;
    
    changes in customer switching behavior and their resulting effects on existing and
future PLR load requirements;
    
    changes in laws and regulations applicable to Allegheny, its markets or its activities;
    
    the loss of any significant customers or suppliers;
    
    dependence on other electric transmission systems and their constraints on availability;
    
    changes in the market rules, including changes to participant rules and tariffs in the
energy market operated by PJM Interconnection, LLC (PJM), which is a regional
transmission organization;
    
    the effect of accounting pronouncements issued periodically by accounting standard-setting
bodies; and
    
    the continuing effects of global instability, terrorism and war.
  Harrison
Unplanned Outage
  57




---



##### 



ALLEGHENY RESULTS OF OPERATIONS
 Overview
  Key Indicators and Performance Factors
 The Delivery and Services Segment
  Revenue per Megawatt-hour (MWh) sold
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Revenue per MWh sold
    
    $
    58.06
    
    
    $
    54.49
    
    
    $
    58.66
    
    
    $
    55.21
  Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeDelivery and Services:Retail electricity sales (million Kilowatt-hour (kWhs)
    
    
    10,049
    
    
    
    11,369
    
    
    
    (11.6
    )%
    
    
    21,231
    
    
    
    23,870
    
    
    
    (11.1
    )%HDD (a)
    
    
    530
    
    
    
    598
    
    
    
    (11.4
    )%
    
    
    2,956
    
    
    
    3,314
    
    
    
    (10.8
    )%CDD (a)
    
    
    172
    
    
    
    266
    
    
    
    (35.3
    )%
    
    
    172
    
    
    
    266
    
    
    
    (35.3
    )%
 
 (a)
    
    Heating degree-days (HDD) and cooling degree-days (CDD).The operations of the Distribution Companies are weather sensitive. Weather conditions
directly influence the volume of electricity delivered by the Distribution Companies but represent only one of several factors that impact the volume of
electricity. Accordingly, deviations in weather from normal levels can affect Alleghenys financial performance. HDD and CDD are most likely to impact the
usage of Alleghenys residential and commercial customers. Industrial customers are less weather sensitive. Degree-day data is used to estimate amounts of
energy required to maintain comfortable indoor temperature levels based on each days average temperature. HDD is the measure of the variation in the
weather based on the extent to which the average daily temperature falls below 65° Fahrenheit, and CDD is the measure of the variation in the weather based
on the extent to which the average daily temperature rises above 65° Fahrenheit. Each degree of temperature above 65° Fahrenheit is counted as one cooling
degree-day, and each degree of temperature below 65° Fahrenheit is counted as one heating degree-day. Normal (historical) HDDs are 656 and 3,497 for the
three and six months ended June 30, respectively, and normal (historical) CDDs are 205 and 206 for the three and six months ended June 30, calculated on a
weighted-average basis across the geographic areas served by the Distribution Companies. The Generation and Marketing Segment
  Equivalent Availability Factor (EAF).
 58




---



##### 



kWhs generated.
  Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSupercritical Units:EAF
    
    
    77.8
    %
    
    
    79.2
    %
    
    
    (1.4
    )%
    
    
    84.5
    %
    
    
    83.2
    %
    
    
    1.3
    %All Generation Units:EAF
    
    
    83.3
    %
    
    
    85.3
    %
    
    
    (2.0
    )%
    
    
    87.3
    %
    
    
    87.4
    %
    
    
    (0.1
    )%kWhs generated (in millions)
    
    
    11,234
    
    
    
    11,089
    
    
    
    1.3
    %
    
    
    24,251
    
    
    
    23,386
    
    
    
    3.7
    %
 59




---



##### 



ALLEGHENY ENERGY, INC.CONSOLIDATED RESULTS OF OPERATIONS
 Income (Loss) Summary
 Three Months Ended
    
    
    Three Months EndedJune 30, 2006
    
    
    June 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    632.5
    
    
    $
    414.1
    
    
    $
    (324.3
    )
    
    $
    722.3
    
    
    $
    663.2
    
    
    $
    404.5
    
    
    $
    (353.0
    )
    
    $
    714.7Fuel consumed in electric generation
    
    
    
    
    
    
    186.2
    
    
    
    
    
    
    
    186.2
    
    
    
    
    
    
    
    166.1
    
    
    
    
    
    
    
    166.1Purchased power and transmission
    
    
    414.9
    
    
    
    2.7
    
    
    
    (322.5
    )
    
    
    95.1
    
    
    
    436.0
    
    
    
    23.2
    
    
    
    (350.9
    )
    
    
    108.3Gain on sale of OVEC power agreement
and shares
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred energy costs, net
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    (1.8
    )
    
    
    
    
    
    
    
    
    
    
    (1.8
    )Operations and maintenance
    
    
    93.1
    
    
    
    114.5
    
    
    
    (1.8
    )
    
    
    205.8
    
    
    
    99.7
    
    
    
    103.3
    
    
    
    (2.1
    )
    
    
    200.9Depreciation and amortization
    
    
    37.9
    
    
    
    30.3
    
    
    
    
    
    
    
    68.2
    
    
    
    39.0
    
    
    
    38.4
    
    
    
    
    
    
    
    77.4Taxes other than income taxes
    
    
    31.9
    
    
    
    20.3
    
    
    
    
    
    
    
    52.2
    
    
    
    31.4
    
    
    
    20.3
    
    
    
    
    
    
    
    51.7Total operating expenses
    
    
    578.2
    
    
    
    352.9
    
    
    
    (324.3
    )
    
    
    606.8
    
    
    
    604.3
    
    
    
    351.3
    
    
    
    (353.0
    )
    
    
    602.6Operating income
    
    
    54.3
    
    
    
    61.2
    
    
    
    
    
    
    
    115.5
    
    
    
    58.9
    
    
    
    53.2
    
    
    
    
    
    
    
    112.1Other income and expenses, net
    
    
    6.9
    
    
    
    4.3
    
    
    
    (1.0
    )
    
    
    10.2
    
    
    
    8.5
    
    
    
    12.9
    
    
    
    (0.2
    )
    
    
    21.2Interest expense and preferred dividends
    
    
    22.3
    
    
    
    55.4
    
    
    
    (1.0
    )
    
    
    76.7
    
    
    
    47.3
    
    
    
    82.4
    
    
    
    (0.2
    )
    
    
    129.5Income (loss) from continuing
operations before income taxes and
minority interest
    
    
    38.9
    
    
    
    10.1
    
    
    
    
    
    
    
    49.0
    
    
    
    20.1
    
    
    
    (16.3
    )
    
    
    
    
    
    
    3.8Income tax expense from continuing
operations
    
    
    15.6
    
    
    
    1.2
    
    
    
    
    
    
    
    16.8
    
    
    
    3.2
    
    
    
    6.6
    
    
    
    
    
    
    
    9.8Minority interest
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Income (loss) from continuing operations
    
    
    23.3
    
    
    
    8.7
    
    
    
    
    
    
    
    32.0
    
    
    
    16.9
    
    
    
    (23.0
    )
    
    
    
    
    
    
    (6.1
    )Loss from discontinued operations, net
of tax
    
    
    
    
    
    
    (0.9
    )
    
    
    
    
    
    
    (0.9
    )
    
    
    (6.5
    )
    
    
    (5.8
    )
    
    
    
    
    
    
    (12.3
    )Net income (loss)
    
    $
    23.3
    
    
    $
    7.8
    
    
    $
    
    
    
    $
    31.1
    
    
    $
    10.4
    
    
    $
    (28.8
    )
    
    $
    
    
    
    $
    (18.4
    )
 Six Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    1,335.1
    
    
    $
    921.2
    
    
    $
    (688.4
    )
    
    $
    1,567.9
    
    
    $
    1,402.6
    
    
    $
    821.4
    
    
    $
    (755.3
    )
    
    $
    1,468.7Fuel consumed in electric generation
    
    
    
    
    
    
    399.4
    
    
    
    
    
    
    
    399.4
    
    
    
    
    
    
    
    340.0
    
    
    
    
    
    
    
    340.0Purchased power and transmission
    
    
    862.6
    
    
    
    18.4
    
    
    
    (684.7
    )
    
    
    196.3
    
    
    
    921.1
    
    
    
    43.0
    
    
    
    (751.0
    )
    
    
    213.1Gain on sale of OVEC power agreement
and shares
    
    
    
    
    
    
    (6.1
    )
    
    
    
    
    
    
    (6.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred energy costs, net
    
    
    5.4
    
    
    
    
    
    
    
    
    
    
    
    5.4
    
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )Operations and maintenance
    
    
    179.9
    
    
    
    191.5
    
    
    
    (3.7
    )
    
    
    367.7
    
    
    
    184.2
    
    
    
    183.6
    
    
    
    (4.3
    )
    
    
    363.5Depreciation and amortization
    
    
    75.6
    
    
    
    60.4
    
    
    
    
    
    
    
    136.0
    
    
    
    77.1
    
    
    
    76.7
    
    
    
    
    
    
    
    153.8Taxes other than income taxes
    
    
    65.2
    
    
    
    40.7
    
    
    
    
    
    
    
    105.9
    
    
    
    66.0
    
    
    
    40.8
    
    
    
    
    
    
    
    106.8Total operating expenses
    
    
    1,188.7
    
    
    
    704.3
    
    
    
    (688.4
    )
    
    
    1,204.6
    
    
    
    1,247.8
    
    
    
    684.1
    
    
    
    (755.3
    )
    
    
    1,176.6Operating income
    
    
    146.4
    
    
    
    216.9
    
    
    
    
    
    
    
    363.3
    
    
    
    154.8
    
    
    
    137.3
    
    
    
    
    
    
    
    292.1Other income and expenses, net
    
    
    11.2
    
    
    
    8.1
    
    
    
    (1.4
    )
    
    
    17.9
    
    
    
    12.2
    
    
    
    14.6
    
    
    
    (0.3
    )
    
    
    26.5Interest expense and preferred dividends
    
    
    42.2
    
    
    
    103.6
    
    
    
    (1.4
    )
    
    
    144.4
    
    
    
    77.0
    
    
    
    179.8
    
    
    
    (0.2
    )
    
    
    256.6Income (loss) from continuing
operations before income taxes and
minority interest
    
    
    115.4
    
    
    
    121.4
    
    
    
    
    
    
    
    236.8
    
    
    
    90.0
    
    
    
    (27.9
    )
    
    
    (0.1
    )
    
    
    62.0Income tax expense from continuing
operations
    
    
    45.7
    
    
    
    43.5
    
    
    
    
    
    
    
    89.2
    
    
    
    23.4
    
    
    
    9.8
    
    
    
    
    
    
    
    33.2Minority interest
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5Income (loss) from continuing operations
    
    
    69.7
    
    
    
    76.5
    
    
    
    
    
    
    
    146.2
    
    
    
    66.6
    
    
    
    (38.2
    )
    
    
    (0.1
    )
    
    
    28.3Income (loss) from discontinued
operations, net of tax
    
    
    
    
    
    
    (1.7
    )
    
    
    
    
    
    
    (1.7
    )
    
    
    4.3
    
    
    
    (8.5
    )
    
    
    0.1
    
    
    
    (4.1
    )Net income (loss)
    
    $
    69.7
    
    
    $
    74.8
    
    
    $
    
    
    
    $
    144.5
    
    
    $
    70.9
    
    
    $
    (46.7
    )
    
    $
    
    
    
    $
    24.2
 60




---



##### 



ALLEGHENY ENERGY, INC.CONSOLIDATED RESULTS
 Operating Revenues
  
    
    higher generation rates charged to Pennsylvania customers effective
January 1, 2006 as a result of a West Penn settlement with the
Pennsylvania Public Utility Commission (the Pennsylvania PUC),
    
    increased MWhs generated,
    
    the expiration of a PLR contract with one large industrial customer
in Maryland in December 2005, which resulted in sales into PJM at
market prices and
    
    Monongahelas agreement to provide power to Columbus Southern Power
Company (Columbus Southern), a subsidiary of American Electric
Power that serves Monongahelas former Ohio service territory as of
January 1, 2006, under a fixed price power supply agreement at a
higher rate per kWh net of lost transmission and distribution
(T&D) revenues.These increases were partially offset by:
    
    a decrease in average market prices,
    
    the expiration of a third-party transmission services contract,
    
    the March 2006 assignment of AE Supplys rights to generation from
the Ohio Valley Electric Corporation (OVEC) in connection with the
December 31, 2004 sale of a portion of AEs equity interest in OVEC
and
    
    milder weather.
  
    
    higher generation rates charged to Pennsylvania customers effective January 1, 2006 as a
result of a West Penn settlement with the Pennsylvania PUC,
    
    increased MWhs generated and increased average market prices,
    
    the expiration of a PLR contract with one large industrial customer in Maryland in
December 2005 that resulted in sales into PJM at market prices and
    
    Monongahelas agreement to provide power to Columbus Southern to serve Monongahelas
former Ohio service territory at a higher rate per kWh net of lost
T&D revenues.These increases were partially offset by:
    
    the expiration of a third-party transmission capacity sales contract,
    
    the March 2006 assignment of AE Supplys rights to generation from OVEC in connection
with the December 31, 2004 sale of a portion of AEs equity interest in OVEC and
    
    milder weather.
 Operating Income
  
    
    the $7.6 million increase in operating revenues discussed above,
    
    partially offset by a $4.2 million increase in operating expenses.
  61




---



##### 




    
    the $99.2 million increase in operating revenues discussed above,
    
    partially offset by a $28.0 million increase in operating expenses.
  Income from Continuing Operations
  
    
    the $3.4 million increase in operating income discussed above and
    
    a $52.8 million decrease in interest expense and preferred dividends
due to costs associated with the April 2005 tender offer for AEs
Trust Preferred Securities, lower average debt outstanding and lower
borrowing rates, partially offset by the write-off of prior deferred
financing costs as a result of the May 2006 refinancings.These increases were partially offset by:
    
    an $11.0 million decrease in other income and
expenses, net, primarily due to $11.2 million of cash received from a
former trading executives forfeited assets during the three months
ended June 30, 2005 and
    
    a $7.0 million increase in income tax expense resulting primarily from
increased income from continuing operations, partially offset by state
deferred income tax adjustments recorded in 2005.
 62




---



##### 




    
    the $71.2 million increase in operating income discussed above and
    
    a $112.2 million decrease in interest expense and preferred dividends
due to costs associated with the April 2005 tender offer for AEs
Trust Preferred Securities, $38.5 million of interest recorded during
the three months ended June 30, 2005 related to a court decision in
the litigation involving Merrill Lynch, lower average debt outstanding
and lower borrowing rates, partially offset by the write-off of prior
deferred financing costs as a result of the May 2006 refinancings,These increases were partially offset by:
    
    an $8.6 million decrease in other income and
expenses, net, primarily due to $11.2 million of cash received from a
former trading executives forfeited assets during the three months
ended June 30, 2005 and
    
    a $56.0 million increase in income tax expense resulting primarily
from increased income from continuing operations.
  Income Tax Expense
     
    
    two charges to adjust state deferred and accrued income taxes taken during the three months ended
June 30, 2005 in the amounts of $3.8 million and $1.9 million, respectively, as described in Note 1,
Basis of Presentation, to the Consolidated Financial Statements and
    
    state income taxes, tax credits, the effects of utility rate making and certain non-deductible expenses.
 Discontinued Operations
     63




---



##### 



ALLEGHENY ENERGY, INC.DISCUSSION OF SEGMENT RESULTS OF OPERATIONS:
 Delivery and Services
  Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeRetail electricity sales (million kWhs)
    
    
    10,049
    
    
    
    11,369
    
    
    
    (11.6
    )%
    
    
    21,231
    
    
    
    23,870
    
    
    
    (11.1
    )%HDD (a)
    
    
    530
    
    
    
    598
    
    
    
    (11.4
    )%
    
    
    2,956
    
    
    
    3,314
    
    
    
    (10.8
    )%CDD (a)
    
    
    172
    
    
    
    266
    
    
    
    (35.3
    )%
    
    
    172
    
    
    
    266
    
    
    
    (35.3
    )%
 
 (a)
    
    Normal (historical) HDDs are 656 and 3,497 for the three and six months ended June 30, respectively, and normal (historical) CDDs are 205 and 206 for
the three and six months ended June 30, respectively, calculated on a weighted-average basis across the geographic areas served by the Distribution
Companies. Operating Revenues
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail electric:Generation
    
    $
    392.6
    
    
    $
    416.7
    
    
    $
    831.2
    
    
    $
    881.7Transmission
    
    
    37.0
    
    
    
    40.9
    
    
    
    79.2
    
    
    
    86.9Distribution
    
    
    153.8
    
    
    
    161.8
    
    
    
    335.0
    
    
    
    349.3Total retail electric
    
    
    583.4
    
    
    
    619.4
    
    
    
    1,245.4
    
    
    
    1,317.9Transmission services and bulk power
    
    
    38.2
    
    
    
    29.1
    
    
    
    73.8
    
    
    
    57.5Other affiliated and nonaffiliated energy services
    
    
    10.9
    
    
    
    14.7
    
    
    
    15.9
    
    
    
    27.2Total operating revenues
    
    $
    632.5
    
    
    $
    663.2
    
    
    $
    1,335.1
    
    
    $
    1,402.6
  
    
    a $44.4 million decrease in generation revenues as a result of
decreased usage due to the expiration of a contract with one large
industrial customer in Maryland in December 2005, the sale of
Monongahelas Ohio service territory on December 31, 2005
and milder
weather and
    
    an $11.9 million decrease in T&D revenues as a result of decreased
customer usage due to milder weather, the loss of one large
industrial customer in Maryland and the sale of Monongahelas Ohio
service territory on December 31, 2005,
    
    partially offset by a $24.5 million increase in generation revenues
due to higher generation rates charged to Pennsylvania customers
effective January 1, 2006 as a result of a West Penn settlement with
the Pennsylvania PUC and an increase in the average generation rate at
Potomac Edison due to a non-residential rate increase.
 64




---



##### 




    
    a $91.9 million decrease in generation revenues as a result of
decreased usage due to the expiration of a contract with one large
industrial customer in Maryland in December 2005, the sale of
Monongahelas Ohio service territory on December 31, 2005
and milder
weather and
    
    a $22.0 million decrease in T&D revenues as a result of decreased
customer usage due to milder weather, the loss of one large
industrial customer in Maryland and the sale of Monongahelas Ohio
service territory on December 31, 2005,
    
    partially offset by a $43.5 million increase in generation revenues
due to higher generation rates charged to Pennsylvania customers
effective January 1, 2006 as a result of a West Penn settlement with
the Pennsylvania PUC and an increase in the average generation rate at
Potomac Edison due to a non-residential rate increase.
  
    
    an $18.8 million increase in bulk power revenues related to the fixed
price power supply agreement with Columbus Southern to serve
Monongahelas former Ohio service territory as of January 1, 2006,
    
    partially offset by a $7.7 million decrease in transmission revenues
related to the expiration of a third-party transmission services
contract.
  
    
    a $38.4 million increase in bulk power revenues related to the fixed
price power supply agreement with Columbus Southern to serve
Monongahelas former Ohio service territory as of January 1, 2006,
    
    partially offset by a $15.1 million decrease in transmission revenues
related to the expiration of a third-party transmission services
contract and
    
    a $7.5 million decrease in bulk power revenues resulting from
decreased power sales from the AES Warrior Run generation facility due
to a scheduled outage at that facility during the first quarter of
2006.
  Operating Expenses
 Purchased Power and Transmission:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Other purchased power and transmission
    
    $
    361.8
    
    
    $
    385.6
    
    
    $
    763.4
    
    
    $
    818.4From PURPA generation (a)
    
    
    53.1
    
    
    
    50.4
    
    
    
    99.2
    
    
    
    102.7Total purchased power and transmission
    
    $
    414.9
    
    
    $
    436.0
    
    
    $
    862.6
    
    
    $
    921.1a) PURPA cost (cents per kWh sold)
    
    
    5.6
    
    
    
    5.3
    
    
    
    5.4
    
    
    
    5.2
  65




---



##### 




    
    a $19.0 million decrease in other purchased power and transmission due
to the expiration of a contract with one large industrial customer in
Maryland in December 2005,
    
    a $12.1 million decrease in other purchased power and transmission
due to the sale of Monongahelas Ohio electric service territory and
    
    a reduction in other purchased power as a result of milder weather,
    
    partially offset by an $8.0 million increase in other purchased power
and transmission, primarily due to a net increase in the price of
purchased power from AE Supply for Pennsylvania customers effective
January 1, 2006 as a result of a 5% rate increase resulting from a
West Penn settlement with the Pennsylvania PUC, partially offset by
scheduled contractual price decreases under a contract with AE Supply.
  
    
    a $30.0 million decrease in other purchased power and transmission
related to the expiration of a contract with one large industrial
customer in Maryland in December 2005,
    
    a $31.5 million decrease in other purchased power and transmission
related to the sale of Monongahelas Ohio electric service territory
and
    
    a reduction in other purchased power as a result of milder weather,
    
    partially offset by a $24.1 million increase in other purchased power
and transmission, primarily due to a net increase in the price of
purchased power from AE Supply for Pennsylvania customers effective
January 1, 2006 as a result of a 5% rate increase resulting from a
West Penn settlement with the Pennsylvania PUC, partially offset by
scheduled contractual price decreases.
   Deferred Energy Costs, Net:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Deferred energy costs, net
    
    $
    0.4
    
    
    $
    (1.8
    )
    
    $
    5.4
    
    
    $
    (0.6
    )
  66




---



##### 



AES Warrior Run PURPA Generation
  Market-based Generation Costs
    Operations and Maintenance:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Operations and maintenance
    
    $
    93.1
    
    
    $
    99.7
    
    
    $
    179.9
    
    
    $
    184.2
  
    
    a $4.7 million decrease in salaries and wages expenses, primarily due
to a decrease in the number of information and technology employees as
a result of the outsourcing of this function during 2005 and
    
    a $5.4 million decrease in cost of goods sold and services expenses,
primarily due to reductions in equipment procurement and
subcontracting costs associated with a construction project that was
completed during the second quarter of 2006,
    
    partially offset by a $4.3 million increase in outside services
expenses, primarily due to costs associated with the implementation of
Alleghenys information technology initiatives.
 67




---



##### 




    
    a $5.4 million decrease in salaries and wages expenses, primarily due
to a decrease in the number of information and technology employees as
a result of the outsourcing of this function during 2005 and
    
    an $8.3 million decrease in cost of goods sold and services expenses,
primarily due to reductions in equipment procurement and
subcontracting costs associated with a construction project that was
completed during the second quarter of 2006,
    
    partially offset by a $6.6 million increase in outside services
expenses, primarily due to costs associated with the implementation of
Alleghenys information technology initiatives.
 Depreciation and Amortization:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Depreciation and amortization
    
    $
    37.9
    
    
    $
    39.0
    
    
    $
    75.6
    
    
    $
    77.1
  Other Income and Expenses, Net:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Other income and expenses, net
    
    $
    6.9
    
    
    $
    8.5
    
    
    $
    11.2
    
    
    $
    12.2
  Interest Expense and Preferred Dividends:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Interest expense and preferred dividends
    
    $
    22.3
    
    
    $
    47.3
    
    
    $
    42.2
    
    
    $
    77.0
  
    
    $21.0 million of costs related to the April 2005 tender offer for outstanding Trust Preferred Securities and
    
    a $5.7 million decrease in interest expense on long-term debt as a result of lower average debt
outstanding and lower borrowing rates, partially offset by the write-off of certain prior deferred
financing costs as a result of the May 2006 AE refinancing.
 68




---



##### 




    
    $21.0 million of costs related to the April 2005 tender offer for outstanding Trust Preferred Securities and
    
    a $14.8 million decrease in interest expense on long-term debt as a result of lower average debt
outstanding and lower borrowing rates, partially offset by the write-off of certain prior deferred
financing costs as a result of the May 2006 AE refinancing.
  Discontinued Operations:
  Generation and Marketing
  Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeGeneration (million kWhs)
    
    
    11,234
    
    
    
    11,088
    
    
    
    1.3
    %
    
    
    24,251
    
    
    
    23,386
    
    
    
    3.7
    %
 Operating Revenues
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue from affiliates
    
    $
    322.4
    
    
    $
    350.9
    
    
    $
    684.7
    
    
    $
    751.0Wholesale and other revenue, net (a)
    
    
    91.7
    
    
    
    53.6
    
    
    
    236.5
    
    
    
    70.4Total revenues
    
    $
    414.1
    
    
    $
    404.5
    
    
    $
    921.2
    
    
    $
    821.4
 
 (a)
    
    Amounts are net of energy trading gains and losses as described in Note 6, Derivative Instruments
and Hedging Activities, to the Consolidated Financial Statements. Energy trading gains (losses) are
presented in the wholesale and other revenues table below. Revenue from affiliates:
    69




---



##### 




    
    an $8.7 million decrease in revenue related to decreased sales volumes
from certain of Potomac Edisons customers in Maryland that were
previously provided power by the Generation and Marketing segment and
are now served by nonaffiliated suppliers,
    
    an $18.4 million decrease in revenue related to decreased sales
volumes due to the expiration of a contract with one large industrial
customer in Maryland in December 2005,
    
    a $3.3 million decrease in revenue related to decreased sales volumes
as a result of Monongahela no longer serving customers in its former
Ohio service territory, which was sold on December 31, 2005, and the
concurrent expiration of a power supply contract between Monongahela
and AE Supply and
    
    decreased sales volumes as a result of milder weather, which caused
a decrease in electricity demand by the Delivery and Services segment,
    
    partially offset by a $13.5 million increase in affiliated revenues
related to higher generation rates charged to Pennsylvania customers
effective January 1, 2006 as a result of a West Penn settlement with
the Pennsylvania PUC.
  
    
    a $33.6 million decrease in revenue related to decreased sales volumes
from certain of Potomac Edisons customers in Maryland that were
previously provided power by the Generation and Marketing segment and
are now served by nonaffiliated suppliers,
    
    a $36.4 million decrease in revenue related to decreased sales volumes
due to the expiration of a contract with one large industrial customer
in Maryland in December 2005,
    
    a $7.0 million decrease in revenue related to decreased sales volumes
as a result of Monongahela no longer serving customers in its former
Ohio service territory, which was sold on December 31, 2005, and the
concurrent expiration of a power supply contract between Monongahela
and AE Supply and
    
    decreased sales volumes as a result of milder weather, which caused
a decrease in electricity demand by the Delivery and Services segment,
    
    partially offset by a $32.9 million increase in affiliated revenues
related to higher generation rates charged to Pennsylvania customers
effective January 1, 2006 as a result of a West Penn settlement with
the Pennsylvania PUC.
 70




---



##### 



Wholesale and other revenues, net:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005PJM Revenue:Generation sold to PJM
    
    $
    468.8
    
    
    $
    486.6
    
    
    $
    1,050.8
    
    
    $
    1,014.8Power purchased from PJM
    
    
    (382.9
    )
    
    
    (446.4
    )
    
    
    (844.2
    )
    
    
    (966.8
    )Net
    
    
    85.9
    
    
    
    40.2
    
    
    
    206.6
    
    
    
    48.0Cash flow hedges and trading activities:Realized losses
    
    
    (8.2
    )
    
    
    (4.2
    )
    
    
    (4.6
    )
    
    
    (6.8
    )Unrealized gains
    
    
    5.3
    
    
    
    9.2
    
    
    
    18.3
    
    
    
    13.3Net
    
    
    (2.9
    )
    
    
    5.0
    
    
    
    13.7
    
    
    
    6.5Other revenues
    
    
    8.7
    
    
    
    8.4
    
    
    
    16.2
    
    
    
    15.9Total wholesale and other revenues
    
    $
    91.7
    
    
    $
    53.6
    
    
    $
    236.5
    
    
    $
    70.4
  
    
    an increase in net PJM revenues of $45.7 million,
    
    partially offset by a $7.9 million decrease in net gains on cash flow
hedges and trading revenues, primarily related to the settlement of
cash flow hedges, losses on mark-to-market purchase contracts and a
reduction in contracts that were designated as normal purchase and
normal sale during 2006.
   
    
    an increase in net PJM revenues of $158.6 million and
    
    a $7.2 million increase in net gains on cash flow hedges and trading
revenues, primarily related to the settlement of cash flow hedges,
partially offset by losses on mark-to-market purchase contracts and a
reduction in contracts that were designated as normal purchase and
normal sale during 2006.
  71




---



##### 



Fair Value of Contracts :
   Fair value of contracts at June 30, 2006Classification of contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Settlementby source of fair
    
    
Settlement
by:
    
    
    In Excess ofvalue (In millions)
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Five Years
    
    
    TotalPrices actively quoted
    
    $
    (26.6
    )
    
    $
    (5.7
    )
    
    $
    (5.5
    )
    
    $
    (5.2
    )
    
    $
    (4.9
    )
    
    $
    (1.6
    )
    
    $
    (49.5
    )Prices provided by other external sources
    
    
    1.0
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2Prices based on models
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Total
    
    $
    (25.3
    )
    
    $
    (5.5
    )
    
    $
    (5.5
    )
    
    $
    (5.2
    )
    
    $
    (4.9
    )
    
    $
    (1.6
    )
    
    $
    (48.0
    )
   Changes in Fair Value :
 Three Months Ended
    
    
    Six Months Ended(In millions)
    
    June 30, 2006
    
    
    June 30, 2006Net fair value of contract liabilities at April 1 and January 1, respectively
    
    $
    (62.3
    )
    
    $
    (106.6
    )Changes in fair value of cash flow hedges
    
    
    10.0
    
    
    
    39.0Unrealized gains on contracts, net
    
    
    4.3
    
    
    
    17.3Net options paid
    
    
    
    
    
    
    2.3Net fair value of contract liabilities at June 30
    
    $
    (48.0
    )
    
    $
    (48.0
    )
   72




---



##### 



Operating Expenses
 Fuel Consumed in Electric Generation:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Fuel consumed in electric generation
    
    $
    186.2
    
    
    $
    166.1
    
    
    $
    399.4
    
    
    $
    340.0
   Purchased Power and Transmission:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Purchased power and transmission expenses
    
    $
    2.7
    
    
    $
    23.2
    
    
    $
    18.4
    
    
    $
    43.0
  Gain on Sale of OVEC Power Agreement and Shares:
 Operations and Maintenance:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Operations and maintenance
    
    $
    114.5
    
    
    $
    103.3
    
    
    $
    191.5
    
    
    $
    183.6
  73




---



##### 




    
    a $13.3 million increase in contract work expense due to insurance
proceeds received during 2005 related to Hatfields Ferry Unit No. 2
and increased planned maintenance costs and
    
    a $5.9 million increase in outside service expense, primarily due to
costs associated with the implementation of Alleghenys information
technology initiatives,
    
    partially offset by a $10.8 million decrease in other operations and
maintenance expense primarily due to the reversal of a guarantee
liability associated with the Hunlock Creek Energy Ventures (HCEV)
partnership.
  Depreciation and Amortization:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Depreciation and amortization
    
    $
    30.3
    
    
    $
    38.4
    
    
    $
    60.4
    
    
    $
    76.7
  Other Income and Expenses, Net:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Other income and expenses, net
    
    $
    4.3
    
    
    $
    12.9
    
    
    $
    8.1
    
    
    $
    14.6
  Interest Expense and Preferred Dividends:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Interest expense and preferred dividends
    
    $
    55.4
    
    
    $
    82.4
    
    
    $
    103.6
    
    
    $
    179.8
  
    
    $26.2 million in costs related to the April 2005 tender offer for AEs Trust Preferred Securities and
    
    a $4.7 million decrease in interest expense on long-term debt as a result of lower average debt
outstanding and lower borrowing rates, partially offset by the write-off of certain prior deferred
financing costs as a result of the May 2006 refinancings.
 74




---



##### 




    
    $26.2 million in costs related to the April 2005 tender offer for outstanding AEs Trust Preferred Securities,
    
    $38.5 million in interest expense recorded during the first quarter of 2005 related to a court decision in
the litigation involving Merrill Lynch and
    
    a $12.6 million decrease in interest expense on long-term debt as a result of lower average debt outstanding
and lower borrowing rates, partially offset by the write-off of certain prior deferred financing costs as a
result of the May 2006 refinancings.
  Minority Interest
  Discontinued Operations:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Loss from discontinued operations
    
    $
    0.9
    
    
    $
    5.8
    
    
    $
    1.7
    
    
    $
    8.5
   75




---



##### 



MONONGAHELA POWER COMPANY AND SUBSIDIARIESCONSOLIDATED RESULTS OF OPERATIONS
 Income (Loss) Summary
 Three Months Ended
    
    
    Three Months EndedJune 30, 2006
    
    
    June 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    156.7
    
    
    $
    90.3
    
    
    $
    (69.6
    )
    
    $
    177.4
    
    
    $
    161.7
    
    
    $
    91.7
    
    
    $
    (75.3
    )
    
    $
    178.1Fuel consumed in electric generation
    
    
    
    
    
    
    40.5
    
    
    
    
    
    
    
    40.5
    
    
    
    
    
    
    
    33.3
    
    
    
    
    
    
    
    33.3Purchased power and transmission
    
    
    98.4
    
    
    
    13.9
    
    
    
    (69.6
    )
    
    
    42.7
    
    
    
    106.8
    
    
    
    23.3
    
    
    
    (75.3
    )
    
    
    54.8Deferred energy costs, net
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operations and maintenance
    
    
    25.9
    
    
    
    23.3
    
    
    
    
    
    
    
    49.2
    
    
    
    29.9
    
    
    
    22.3
    
    
    
    
    
    
    
    52.2Depreciation and amortization
    
    
    7.5
    
    
    
    8.8
    
    
    
    
    
    
    
    16.3
    
    
    
    8.0
    
    
    
    8.7
    
    
    
    
    
    
    
    16.7Taxes other than income taxes
    
    
    6.0
    
    
    
    5.9
    
    
    
    
    
    
    
    11.9
    
    
    
    6.8
    
    
    
    5.9
    
    
    
    
    
    
    
    12.7Total operating expenses
    
    
    137.2
    
    
    
    92.4
    
    
    
    (69.6
    )
    
    
    160.0
    
    
    
    151.5
    
    
    
    93.5
    
    
    
    (75.3
    )
    
    
    169.7Operating income (loss)
    
    
    19.5
    
    
    
    (2.1
    )
    
    
    
    
    
    
    17.4
    
    
    
    10.2
    
    
    
    (1.8
    )
    
    
    
    
    
    
    8.4Other income and expenses, net
    
    
    1.5
    
    
    
    2.6
    
    
    
    
    
    
    
    4.1
    
    
    
    1.4
    
    
    
    2.1
    
    
    
    
    
    
    
    3.5Interest expense
    
    
    6.0
    
    
    
    4.5
    
    
    
    
    
    
    
    10.5
    
    
    
    6.1
    
    
    
    4.6
    
    
    
    
    
    
    
    10.7Income (loss) from continuing operations
before income taxes
    
    
    15.0
    
    
    
    (4.0
    )
    
    
    
    
    
    
    11.0
    
    
    
    5.5
    
    
    
    (4.3
    )
    
    
    
    
    
    
    1.2Income tax expense (benefit) from continuing
operations
    
    
    6.4
    
    
    
    (2.3
    )
    
    
    
    
    
    
    4.1
    
    
    
    (2.4
    )
    
    
    (5.5
    )
    
    
    
    
    
    
    (7.9
    )Income (loss) from continuing operations
    
    
    8.6
    
    
    
    (1.7
    )
    
    
    
    
    
    
    6.9
    
    
    
    7.9
    
    
    
    1.2
    
    
    
    
    
    
    
    9.1Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.5
    )
    
    
    
    
    
    
    
    
    
    
    (6.5
    )Net income (loss)
    
    $
    8.6
    
    
    $
    (1.7
    )
    
    
    
    
    
    $
    6.9
    
    
    $
    1.4
    
    
    $
    1.2
    
    
    $
    
    
    
    $
    2.6
 Six Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    330.8
    
    
    $
    191.4
    
    
    $
    (147.6
    )
    
    $
    374.6
    
    
    $
    339.0
    
    
    $
    182.7
    
    
    $
    (157.0
    )
    
    $
    364.7Fuel consumed in electric generation
    
    
    
    
    
    
    84.6
    
    
    
    
    
    
    
    84.6
    
    
    
    
    
    
    
    68.3
    
    
    
    
    
    
    
    68.3Purchased power and transmission
    
    
    197.1
    
    
    
    34.3
    
    
    
    (147.6
    )
    
    
    83.8
    
    
    
    221.3
    
    
    
    49.2
    
    
    
    (157.0
    )
    
    
    113.5Deferred energy costs, net
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operations and maintenance
    
    
    50.2
    
    
    
    40.5
    
    
    
    
    
    
    
    90.7
    
    
    
    56.9
    
    
    
    39.2
    
    
    
    
    
    
    
    96.1Depreciation and amortization
    
    
    15.1
    
    
    
    17.6
    
    
    
    
    
    
    
    32.7
    
    
    
    16.1
    
    
    
    17.4
    
    
    
    
    
    
    
    33.5Taxes other than income taxes
    
    
    12.3
    
    
    
    11.8
    
    
    
    
    
    
    
    24.1
    
    
    
    13.6
    
    
    
    11.8
    
    
    
    
    
    
    
    25.4Total operating expenses
    
    
    274.1
    
    
    
    188.8
    
    
    
    (147.6
    )
    
    
    315.3
    
    
    
    307.9
    
    
    
    185.9
    
    
    
    (157.0
    )
    
    
    336.8Operating income (loss)
    
    
    56.7
    
    
    
    2.6
    
    
    
    
    
    
    
    59.3
    
    
    
    31.1
    
    
    
    (3.2
    )
    
    
    
    
    
    
    27.9Other income and expenses, net
    
    
    3.0
    
    
    
    4.8
    
    
    
    
    
    
    
    7.8
    
    
    
    1.6
    
    
    
    4.1
    
    
    
    
    
    
    
    5.7Interest expense
    
    
    12.2
    
    
    
    9.1
    
    
    
    
    
    
    
    21.3
    
    
    
    12.3
    
    
    
    9.1
    
    
    
    
    
    
    
    21.4Income (loss) from continuing operations
before income taxes
    
    
    47.5
    
    
    
    (1.7
    )
    
    
    
    
    
    
    45.8
    
    
    
    20.4
    
    
    
    (8.2
    )
    
    
    
    
    
    
    12.2Income tax expense (benefit) from continuing
operations
    
    
    19.1
    
    
    
    (1.9
    )
    
    
    
    
    
    
    17.2
    
    
    
    0.9
    
    
    
    (9.1
    )
    
    
    
    
    
    
    (8.2
    )Income from continuing operations
    
    
    28.4
    
    
    
    0.2
    
    
    
    
    
    
    
    28.6
    
    
    
    19.5
    
    
    
    0.9
    
    
    
    
    
    
    
    20.4Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.4
    
    
    
    
    
    
    
    
    
    
    
    4.4Net income
    
    $
    28.4
    
    
    $
    0.2
    
    
    $
    
    
    
    $
    28.6
    
    
    $
    23.9
    
    
    $
    0.9
    
    
    
    
    
    
    $
    24.8
 76




---



##### 



MONONGAHELA POWER COMPANYCONSOLIDATED RESULTS
  Operating Revenues
  
    
    increased generation revenue from sales as a result of additional MWhs generated and
    
    increased revenues related to Monongahelas agreement to provide power to Columbus
Southern Power Company (Columbus Southern), a subsidiary of American Electric
Power that serves Monongahelas former Ohio service territory as of January 1,
2006, under a fixed price power supply agreement, at a higher rate per kWh, net of
lost T&D revenues,
    
    partially offset by decreased retail revenue resulting from
milder weather.
 Operating Income
   
    
    a $21.5 million decrease in operating expenses and
    
    a $9.9 million increase in total operating revenues, as discussed above.
  Income from Continuing Operations
  
    
    a $12.0 million increase in income tax expense,
    
    partially offset by a $9.0 million increase in operating income, as discussed above.
 77




---



##### 




    
    a $31.4 million increase in operating income, as discussed above,
    
    partially offset by a $25.4 million increase in income tax expense.
 Income Tax Expense
   Discontinued Operations
   78




---



##### 



MONONGAHELA POWER COMPANYDISCUSSION OF SEGMENT RESULTS OF OPERATIONS:
 Delivery and Services
  Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeRetail electricity sales (million kWhs)
    
    
    2,402
    
    
    
    2,921
    
    
    
    (17.8
    )%
    
    
    5,054
    
    
    
    6,071
    
    
    
    (16.8
    )%HDD (a)
    
    
    452
    
    
    
    484
    
    
    
    (6.6
    )%
    
    
    2,599
    
    
    
    2,883
    
    
    
    (9.9
    )%CDD (a)
    
    
    177
    
    
    
    299
    
    
    
    (40.8
    )%
    
    
    178
    
    
    
    299
    
    
    
    (40.5
    )%
 
 (a)
    
    Normal (historical) HDD are 663 and 3,428 for the three and six months ended June 30, respectively, and normal (historical) CDD are 193 for both the
three and six months ended June 30, calculated on a weighted-average basis across the geographic areas served by Monongahela. Operating Revenues
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail electric:Generation
    
    $
    83.3
    
    
    $
    98.2
    
    
    $
    173.8
    
    
    $
    203.8Transmission
    
    
    7.8
    
    
    
    9.5
    
    
    
    16.5
    
    
    
    19.8Distribution
    
    
    41.1
    
    
    
    46.5
    
    
    
    90.5
    
    
    
    100.6Total retail electric
    
    
    132.2
    
    
    
    154.2
    
    
    
    280.8
    
    
    
    324.2Transmission services and bulk power
    
    
    21.5
    
    
    
    5.8
    
    
    
    44.4
    
    
    
    11.5Other affiliated and non-affiliated energy services
    
    
    3.0
    
    
    
    1.7
    
    
    
    5.6
    
    
    
    3.3Total revenues
    
    $
    156.7
    
    
    $
    161.7
    
    
    $
    330.8
    
    
    $
    339.0
    79




---



##### 



Operating Expenses
 Purchased Power and Transmission:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Other purchased power and transmission
    
    $
    82.8
    
    
    $
    93.3
    
    
    $
    166.7
    
    
    $
    193.2From PURPA generation (a)
    
    
    15.6
    
    
    
    13.5
    
    
    
    30.4
    
    
    
    28.1Total purchased power and transmission
    
    $
    98.4
    
    
    $
    106.8
    
    
    $
    197.1
    
    
    $
    221.3
 
 (a) PURPA cost (cents per kWh sold)
    
    
    4.6
    
    
    
    4.2
    
    
    
    4.4
    
    
    
    4.3
      Operations and Maintenance:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Operations and maintenance
    
    $
    25.9
    
    
    $
    29.9
    
    
    $
    50.2
    
    
    $
    56.9
  Depreciation and Amortization:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Depreciation and amortization
    
    $
    7.5
    
    
    $
    8.0
    
    
    $
    15.1
    
    
    $
    16.1
  80




---



##### 



Taxes Other Than Income Taxes:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Taxes other than income taxes
    
    $
    6.0
    
    
    $
    6.8
    
    
    $
    12.3
    
    
    $
    13.6
  Other Income and Expenses, Net:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Other income and expenses, net
    
    $
    1.5
    
    
    $
    1.4
    
    
    $
    3.0
    
    
    $
    1.6
  Generation and Marketing
  Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeGeneration (million kWhs)
    
    
    2,494
    
    
    
    2,283
    
    
    
    9.2
    %
    
    
    5,287
    
    
    
    4,985
    
    
    
    6.1
    %
 Operating Revenues
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue from affiliates
    
    $
    71.6
    
    
    $
    74.5
    
    
    $
    148.7
    
    
    $
    159.4Wholesale and other, net
    
    
    18.7
    
    
    
    17.2
    
    
    
    42.7
    
    
    
    23.3Total revenues
    
    $
    90.3
    
    
    $
    91.7
    
    
    $
    191.4
    
    
    $
    182.7
     81




---



##### 



Operating Expenses
 Fuel Consumed in Electric Generation:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Fuel consumed in electric generation
    
    $
    40.5
    
    
    $
    33.3
    
    
    $
    84.6
    
    
    $
    68.3
   Purchased Power and Transmission:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Purchased power and transmission
    
    $
    13.9
    
    
    $
    23.3
    
    
    $
    34.3
    
    
    $
    49.2
  Operations and Maintenance:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Operations and maintenance
    
    $
    23.3
    
    
    $
    22.3
    
    
    $
    40.5
    
    
    $
    39.2
   82




---



##### 



ALLEGHENY GENERATING COMPANYRESULTS OF OPERATIONS
 Income Summary
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Operating revenues
    
    $
    13.9
    
    
    $
    16.7
    
    
    $
    31.2
    
    
    $
    33.6Operating income
    
    $
    7.8
    
    
    $
    10.6
    
    
    $
    18.5
    
    
    $
    21.4Income before income taxes
    
    $
    6.7
    
    
    $
    8.8
    
    
    $
    15.7
    
    
    $
    17.7Net income
    
    $
    6.7
    
    
    $
    7.8
    
    
    $
    12.9
    
    
    $
    15.1
 Operating Revenues and Expenses
   Operating Revenues:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Operating revenues
    
    $
    13.9
    
    
    $
    16.7
    
    
    $
    31.2
    
    
    $
    33.6
  Income Tax Expense
   83




---



##### 



FINANCIAL CONDITION, REQUIREMENTS AND RESOURCES
 Liquidity and Capital Requirements
   June 30, 2006
    
    
    December 31, 2005(In millions)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Debt
    
    $
    3,899.0
    
    
    
    67.2
    
    
    $
    4,101.7
    
    
    
    70.5Common equity
    
    
    1,876.5
    
    
    
    32.4
    
    
    
    1,695.3
    
    
    
    29.1Preferred equity
    
    
    24.0
    
    
    
    0.4
    
    
    
    24.0
    
    
    
    0.4Total
    
    $
    5,799.5
    
    
    
    100.0
    
    
    $
    5,821.0
    
    
    
    100.0
     Off-Balance Sheet Arrangements
  Long-Term Debt and Contractual Obligations
    84




---



##### 



Payments fromContractual Obligations and
    
    July 1, to
    
    
    Payments from
    
    
    Payments from
    
    
    Payments fromCommitments
    
    December 31,
    
    
    January 1, 2007 to
    
    
    January 1, 2009 to
    
    
    January 1, 2011(In millions)
    
    2006
    
    
    December 31, 2008
    
    
    December 31, 2010
    
    
    and beyond
    
    
    TotalLong-term debt (a)
    
    $
    437.6
    
    
    $
    263.9
    
    
    $
    201.3
    
    
    $
    3,004.2
    
    
    $
    3,907.0Interest on long-term debt (b)
    
    
    119.4
    
    
    
    441.5
    
    
    
    427.6
    
    
    
    447.0
    
    
    
    1,435.5Interest rate swap obligations
    
    
    3.1
    
    
    
    12.2
    
    
    
    12.2
    
    
    
    2.1
    
    
    
    29.6Capital lease obligations
    
    
    4.5
    
    
    
    12.2
    
    
    
    6.9
    
    
    
    2.0
    
    
    
    25.6Operating lease obligations
    
    
    2.5
    
    
    
    7.2
    
    
    
    6.7
    
    
    
    19.5
    
    
    
    35.9PURPA purchased power
    
    
    115.0
    
    
    
    458.9
    
    
    
    467.8
    
    
    
    4,179.5
    
    
    
    5,221.2Fuel purchase and transportation commitments
    
    
    312.3
    
    
    
    1,030.7
    
    
    
    666.6
    
    
    
    2,221.9
    
    
    
    4,231.5Other purchase obligation (c)
    
    
    34.7
    
    
    
    53.3
    
    
    
    50.4
    
    
    
    44.9
    
    
    
    183.3Total
    
    $
    1,029.1
    
    
    $
    2,279.9
    
    
    $
    1,839.5
    
    
    $
    9,921.1
    
    
    $
    15,069.6
 
 (a)
    
    Does not include debt associated with unamortized debt expense, discounts, premiums,
payments made subsequent to June 30, 2006 and any debt prepayments.(b)
    
    Amounts are based on interest rates as of June 30, 2006 and do not reflect any payments made
subsequent to June 30, 2006 and any debt prepayments or interest rate changes. Total interest
on long-term debt includes $11.0 million in interest that will accrue and be added to the
principal amount of West Penns $115.0 million of 4.46% Transaction Bonds, Series 2005-A.(c)
    
    Amounts represent Alleghenys expected cash payments for outsourcing of certain information
technology functions and assistance with the installation of an enterprise resource planning
system.  Payments fromContractual Obligations and
    
    July 1, to
    
    
    Payments from
    
    
    Payments from
    
    
    Payments fromCommitments
    
    December 31,
    
    
    January 1, 2007 to
    
    
    January 1, 2009 to
    
    
    January 1, 2011(In millions)
    
    2006
    
    
    December 31, 2008
    
    
    December 31, 2010
    
    
    and beyond
    
    
    TotalLong-term debt (a)
    
    $
    300.0
    
    
    $
    15.5
    
    
    $
    110.0
    
    
    $
    260.3
    
    
    $
    685.8Interest on long-term debt (b)
    
    
    15.8
    
    
    
    47.6
    
    
    
    39.3
    
    
    
    76.5
    
    
    
    179.2Capital lease obligations
    
    
    1.4
    
    
    
    3.7
    
    
    
    2.0
    
    
    
    0.5
    
    
    
    7.6Operating lease obligations
    
    
    0.3
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    0.7PURPA purchased power
    
    
    32.3
    
    
    
    130.7
    
    
    
    132.7
    
    
    
    1,524.5
    
    
    
    1,820.2Fuel purchase and transportation commitments
    
    
    64.4
    
    
    
    216.4
    
    
    
    139.6
    
    
    
    472.8
    
    
    
    893.2Total
    
    $
    414.2
    
    
    $
    414.3
    
    
    $
    423.6
    
    
    $
    2,334.6
    
    
    $
    3,586.7
 
 (a)
    
    Does not include debt associated with unamortized debt expense, discounts, premiums,
payments made subsequent to June 30, 2006 and any debt prepayments.(b)
    
    Amounts are based on interest rates as of June 30, 2006 and do not reflect any payments made
subsequent to June 30, 2006 and any debt prepayments or interest rate changes.   85




---



##### 



Financing
 Debt:
 Short-term Debt:
  Asset Sales
   Cash Flows
 Allegheny
  Operating Activities:
   86




---



##### 



Investing Activities:
   Financing Activities:
   Monongahela
   Operating Activities:
   87




---



##### 



Investing Activities:
 Financing Activities:
  AGC
   Operating Activities:
    Investing Activities:
 Financing Activities:
 88




---



##### 



Change in Credit Ratings
  Moodys
    
    S & P
    
    FitchOutlook
    
    Stable
    
    Positive
    
    StableAE:Corporate Credit Rating
    
    Ba1(a)
    
    BB+
    
    NRSenior Unsecured Debt
    
    Ba2
    
    BB-
    
    BB+Short-term Rating
    
    SGL-2(b)
    
    B2
    
    NRAE Supply:Senior Unsecured Debt
    
    Ba3
    
    BB-
    
    BB+Senior Secured Debt
    
    Ba2
    
    BBB-
    
    BBB-Pollution Control Bonds
    
    NR
    
    NR
    
    AAAMonongahela:First Mortgage Bonds
    
    Baa3
    
    BBB-
    
    BBB+Senior Unsecured Debt
    
    Ba1
    
    BB-
    
    BBB-Preferred Stock
    
    Ba3
    
    B+
    
    BB+Potomac Edison:First Mortgage Bonds
    
    Baa2
    
    BBB-
    
    BBB+Senior Unsecured Debt
    
    Baa3
    
    BB-
    
    BBB-West Penn:Transition Bonds
    
    Aaa
    
    AAA
    
    AAASenior Unsecured Debt
    
    Baa3
    
    BB+
    
    BBB-AGC:Senior Unsecured Debt
    
    Ba3
    
    BB-
    
    BB+
 
 (a)
    
    Corporate Family rating(b)
    
    Liquidity rating 89




---



##### 



OTHER MATTERS
 Critical Accounting Policies
  REGULATORY MATTERS
  Federal Legislation, Regulation and Rate Matters
     90




---



##### 



State Legislation, Regulation and Rate Matters
 West Virginia:
 91




---



##### 



Maryland:
 Pennsylvania: en
banc
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  ,
  ITEM 4. CONTROLS AND PROCEDURES
  Disclosure Controls and Procedures.
 Changes in Internal Control Over Financial Reporting
 92




---



##### 



PART II. OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  Alleghenys leverage could adversely affect its ability to operate successfully and meet
contractual obligations.
   
    
    make it more difficult for Allegheny to satisfy its obligations under the agreements
governing its debt;
    
    require Allegheny to dedicate a substantial portion of its cash flow to payments on
its debt, thereby reducing the availability of its cash flow for working capital, capital
expenditures and other general corporate purposes;
    
    limit Alleghenys flexibility in planning for, or reacting to, changes in its
business, regulatory environment and the industry in which it operates;
    
    place Allegheny at a competitive disadvantage compared to its competitors that have less leverage;
    
    limit Alleghenys ability to borrow additional funds; and
    
    increase Alleghenys vulnerability to general adverse economic, regulatory and industry conditions.
 The supply and price of fuel and emissions credits may impact Alleghenys financial results.
  2 2
 93




---



##### 



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 AE.
   Election of directors:
 Nominees for Director
    
    Votes For
    
    Votes withheldH. Furlong Baldwin
    
    
    132,164,541
    
    
    
    3,212,470Eleanor Baum
    
    
    131,753,227
    
    
    
    3,623,784Paul J. Evanson
    
    
    131,820,699
    
    
    
    3,556,312Cyrus F. Freidheim, Jr.
    
    
    132,360,862
    
    
    
    3,016,149Julia L. Johnson
    
    
    132,355,654
    
    
    
    3,021,357Ted J. Kleisner
    
    
    132,401,762
    
    
    
    2,975,249Steven H. Rice
    
    
    131,876,564
    
    
    
    3,500,447Gunnar E. Sarsten
    
    
    131,851,809
    
    
    
    3,525,202Michael H. Sutton
    
    
    132,463,139
    
    
    
    2,913,872
 94




---



##### 



Other items as described above:
 Item
    
    Votes For
    
    Votes Against
    
    Abstentions
    
    Broker Non-Votes(2)
    
    132,824,152
    
    1,457,546
    
    1,095,313
    
    0(3)
    
    40,550,056
    
    71,581,125
    
    1,756,372
    
    21,489,458(4)
    
    48,149,635
    
    64,155,943
    
    1,581,975
    
    21,489,458(5)
    
    6,638,590
    
    105,338,626
    
    1,910,337
    
    21,489,458(6)
    
    51,440,868
    
    60,750,872
    
    1,695,813
    
    21,489,458(7)
    
    49,665,097
    
    62,498,901
    
    1,723,555
    
    21,489,458(8)
    
    46,453,399
    
    61,631,129
    
    5,803,025
    
    21,489,458(9)
    
    32,454,651
    
    79,390,349
    
    2,042,553
    
    21,489,458
 Monongahela
 AGC
 ITEM 5. OTHER INFORMATION
  95




---



##### 



ITEM 6. EXHIBITS
 EXHIBIT INDEX
 Allegheny Energy, Inc.
 Documents10.1
    
    EPC Agreement No. 1001 dated July 12, 2006, between Allegheny Energy
Supply Company, LLC and The Babcock & Wilcox Company covering Flue Gas
Desulfurization Project at Hatfields Ferry Units 1, 2 and 310.2
    
    EPC Agreement No. 1002 dated July 13, 2006, between Allegheny Energy
Supply Company, LLC and Washington Group International covering Balance of
Plant for Flue Gas Desulfurization Project at Hatfields Ferry Units 1, 2
and 310.3
    
    Letter Agreement, dated August 3, 2006, between Allegheny Energy Service
Corporation and David E. Flitman31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under
Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under
Securities Exchange Act of 193432.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 135032.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
 96




---



##### 



EXHIBIT INDEX
 Monongahela Power Company
 Documents31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 193432.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 135032.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
 97




---



##### 



EXHIBIT INDEX
 Allegheny Generating Company
 Documents31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 193432.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 135032.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
 98




---



##### 



SIGNATURE
  ALLEGHENY ENERGY, INC.Date:  August 8, 2006
    By:
    /s/  Philip L. GouldingPhilip L. GouldingSenior Vice President and
Chief Financial OfficerMONONGAHELA POWER COMPANYDate:  August 8, 2006
    By:
    /s/  Philip L. GouldingPhilip L. GouldingVice President and
Principal Financial OfficerALLEGHENY GENERATING COMPANY.Date:  August 8, 2006
    By:
    /s/  Philip L. GouldingPhilip L. GouldingVice President and
Principal Financial Officer 99