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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 March 31, 2007
 
 Name of RegistrantState of IncorporationAddress of Principal
    
    IRS EmployerCommission
    
    Executive
    
    IdentificationFile Number
    
    Offices and Telephone Number
    
    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
 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.
    
    
    165,710,517
    
    
    ($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)Allegheny Energy, Inc. and Subsidiaries
    
    
    4Monongahela Power Company and Subsidiaries
    
    
    32Allegheny Generating Company
    
    
    49Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
    
    
    57Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    96Item 4. Controls and Procedures
    
    
    96PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    97Item 1A. Risk Factors
    
    
    97Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    97Item 3. Defaults Upon Senior Securities
    
    
    97Item 4. Submission of Matters to a Vote of Security Holders
    
    
    97Item 5. Other Information
    
    
    97Item 6. Exhibits
    
    
    98Signatures
    
    
    101EX-10.1EX-31.1EX-31.2EX-32.1EX-32.2
  2




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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 companyAllegheny Ventures
    
    Allegheny Ventures, Inc., an unregulated subsidiary of AEAE Solutions
    
    Allegheny Energy Solutions, Inc., a subsidiary of Allegheny VenturesAE Supply
    
    Allegheny Energy Supply Company, LLC, an unregulated generation subsidiary of AEAGC
    
    Allegheny Generating Company, an unregulated generation subsidiary of AE Supply
and MonongahelaAllegheny
    
    AE together with its consolidated subsidiariesDistribution Companies
    
    Collectively, Monongahela, Potomac Edison and West Penn. The Distribution
Companies do business as Allegheny PowerMonongahela
    
    Monongahela Power Company, a regulated subsidiary of AEPotomac Edison
    
    The Potomac Edison Company, a regulated subsidiary of AETrAIL Company
    
    Trans-Allegheny Interstate Line Company, an indirect subsidiary of AEWest Penn
    
    West Penn Power Company, a regulated subsidiary of AE
 3




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended March 31,(In thousands)
    
    2007
    
    
    2006Operating revenues
    
    $
    847,625
    
    
    $
    845,646Operating expenses:Fuel
    
    
    232,225
    
    
    
    218,689Purchased power and transmission
    
    
    93,266
    
    
    
    101,232Gain on sale of OVEC power agreement and shares
    
    
    
    
    
    
    (5,000
    )Deferred energy costs, net
    
    
    (1,455
    )
    
    
    4,993Operations and maintenance
    
    
    160,544
    
    
    
    156,381Depreciation and amortization
    
    
    71,981
    
    
    
    67,842Taxes other than income taxes
    
    
    55,890
    
    
    
    53,667Total operating expenses
    
    
    612,451
    
    
    
    597,804Operating income
    
    
    235,174
    
    
    
    247,842Other income and expenses, net
    
    
    5,862
    
    
    
    7,671Interest expense and preferred dividends:Interest expense
    
    
    59,236
    
    
    
    67,388Preferred dividend of subsidiary
    
    
    293
    
    
    
    293Total interest expense and preferred dividends
    
    
    59,529
    
    
    
    67,681Income from continuing operations before income taxes and
minority interest
    
    
    181,507
    
    
    
    187,832Income tax expense
    
    
    71,378
    
    
    
    72,504Minority interest in net income of subsidiaries
    
    
    387
    
    
    
    1,178Income from continuing operations
    
    
    109,742
    
    
    
    114,150Loss from discontinued operations, net of tax (Note 8)
    
    
    
    
    
    
    (766
    )Net income
    
    $
    109,742
    
    
    $
    113,384Common share data:Weighted average common shares outstandingBasic
    
    
    165,494
    
    
    
    163,080Diluted
    
    
    169,181
    
    
    
    168,504Basic income per common share:Income from continuing operations
    
    $
    0.66
    
    
    $
    0.70Loss from discontinued operations, net of tax
    
    
    
    
    
    
    Net income per common share
    
    $
    0.66
    
    
    $
    0.70Diluted income (loss) per common share:Income from continuing operations
    
    $
    0.65
    
    
    $
    0.68Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.01
    )Net income per common share
    
    $
    0.65
    
    
    $
    0.67
  4




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Three Months EndedMarch 31,(In thousands)
    
    2007
    
    
    2006Cash Flows From Operating Activities:Net income
    
    $
    109,742
    
    
    $
    113,384Loss from discontinued operations, net of tax
    
    
    
    
    
    
    766Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    71,981
    
    
    
    67,842Amortization of debt issuance costs
    
    
    2,695
    
    
    
    3,541Amortization of power sale liability related to Ohio sale
    
    
    (9,100
    )
    
    
    (10,700
    )Amortization of liability for adverse power purchase commitment
    
    
    (4,322
    )
    
    
    (4,289
    )Amortization of Pennsylvania stranded cost recovery asset
    
    
    4,664
    
    
    
    3,980Minority interest in net income of subsidiaries
    
    
    387
    
    
    
    1,178Deferred income taxes and investment tax credit, net
    
    
    74,955
    
    
    
    71,870Stock-based compensation expense
    
    
    2,823
    
    
    
    4,152Unrealized gains on commodity contracts, net
    
    
    (2,450
    )
    
    
    (13,005
    )Pension and other postretirement employee benefit plan expense
    
    
    9,414
    
    
    
    10,435Pension and other postretirement employee benefit plan contributions
    
    
    (39,322
    )
    
    
    (62,482
    )Other, net
    
    
    (508
    )
    
    
    5,898Changes in certain assets and liabilities:Accounts receivable, net
    
    
    (44,519
    )
    
    
    14,741Materials, supplies and fuel
    
    
    851
    
    
    
    (3,227
    )Prepaid taxes
    
    
    (34,542
    )
    
    
    (32,703
    )Collateral deposits
    
    
    (8,333
    )
    
    
    53,601Prepayments
    
    
    (1,304
    )
    
    
    (245
    )Other current assets
    
    
    10,668
    
    
    
    647Accounts payable
    
    
    24,958
    
    
    
    (106,668
    )Accrued taxes
    
    
    (11,433
    )
    
    
    (52,568
    )Accrued interest
    
    
    8,189
    
    
    
    15,271Other current liabilities
    
    
    92
    
    
    
    (7,255
    )Other assets
    
    
    (2,076
    )
    
    
    1,252Deferred income taxes
    
    
    (12,262
    )
    
    
    35,942Other liabilities
    
    
    2,599
    
    
    
    80Net cash used in operating activities of discontinued operations
    
    
    
    
    
    
    (1,250
    )Net cash provided by operating activities
    
    
    153,847
    
    
    
    110,188Cash Flows From Investing Activities:Capital expenditures
    
    
    (168,439
    )
    
    
    (94,760
    )Proceeds from sale of assets
    
    
    260
    
    
    
    34Purchase of minority interest in Hunlock Creek Energy Ventures
    
    
    
    
    
    
    (13,900
    )Decrease in restricted funds
    
    
    1,322
    
    
    
    5,271Other investments
    
    
    (992
    )
    
    
    (1,725
    )Net cash used in investing activities
    
    
    (167,849
    )
    
    
    (105,080
    )Cash Flows From Financing Activities:Deferred financing costs
    
    
    
    
    
    
    (206
    )Repayment of long-term debt
    
    
    (36,073
    )
    
    
    (51,757
    )Payments on capital lease obligations
    
    
    (1
    )
    
    
    (11
    )Exercise of stock options
    
    
    4,580
    
    
    
    8,465Cash dividends paid to minority shareholder in Hunlock Creek Energy Ventures
    
    
    
    
    
    
    (400
    )Net cash used in financing activities
    
    
    (31,494
    )
    
    
    (43,909
    )Net decrease in cash and cash equivalents
    
    
    (45,496
    )
    
    
    (38,801
    )Cash and cash equivalents at beginning of period
    
    
    114,138
    
    
    
    262,212Cash and cash equivalents at end of period
    
    $
    68,642
    
    
    $
    223,411Supplemental Cash Flow Information:Cash paid for interest (net of amount capitalized)
    
    $
    48,493
    
    
    $
    50,709
  5




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 March 31,
    
    
    December 31,(In thousands)
    
    2007
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    68,642
    
    
    $
    114,138Accounts receivable:Customer
    
    
    220,788
    
    
    
    167,792Unbilled utility revenue
    
    
    97,553
    
    
    
    117,977Wholesale and other
    
    
    72,948
    
    
    
    63,894Allowance for uncollectible accounts
    
    
    (13,758
    )
    
    
    (14,591
    )Materials and supplies
    
    
    98,661
    
    
    
    96,117Fuel
    
    
    71,556
    
    
    
    74,951Deferred income taxes
    
    
    129,636
    
    
    
    127,531Prepaid taxes
    
    
    79,145
    
    
    
    44,603Collateral deposits
    
    
    47,264
    
    
    
    39,399Commodity contracts
    
    
    34
    
    
    
    1,430Restricted funds
    
    
    11,601
    
    
    
    12,923Regulatory assets
    
    
    40,784
    
    
    
    39,128Other
    
    
    14,766
    
    
    
    24,130Total current assets
    
    
    939,620
    
    
    
    909,422Property, Plant and Equipment, Net:Generation
    
    
    5,831,687
    
    
    
    5,820,278Transmission
    
    
    1,061,692
    
    
    
    1,056,759Distribution
    
    
    3,632,429
    
    
    
    3,597,405Other
    
    
    448,625
    
    
    
    412,894Accumulated depreciation
    
    
    (4,706,362
    )
    
    
    (4,636,972
    )Subtotal
    
    
    6,268,071
    
    
    
    6,250,364Construction work in progress
    
    
    308,708
    
    
    
    262,529Total property, plant and equipment, net
    
    
    6,576,779
    
    
    
    6,512,893Investments and Other Assets:Goodwill
    
    
    367,287
    
    
    
    367,287Investments in unconsolidated affiliates
    
    
    28,114
    
    
    
    28,259Other
    
    
    28,714
    
    
    
    27,932Total investments and other assets
    
    
    424,115
    
    
    
    423,478Deferred Charges:Regulatory assets
    
    
    657,746
    
    
    
    674,095Other
    
    
    36,020
    
    
    
    32,558Total deferred charges
    
    
    693,766
    
    
    
    706,653Total Assets
    
    $
    8,634,280
    
    
    $
    8,552,446
  6




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
 March 31,
    
    
    December 31,(In thousands, except share data)
    
    2007
    
    
    2006LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Long-term debt due within one year (Note 5)
    
    $
    187,136
    
    
    $
    201,189Accounts payable
    
    
    243,002
    
    
    
    236,706Accrued taxes
    
    
    100,590
    
    
    
    136,216Commodity contracts
    
    
    10,272
    
    
    
    5,984Accrued interest
    
    
    108,043
    
    
    
    99,854Other
    
    
    130,019
    
    
    
    140,830Total current liabilities
    
    
    779,062
    
    
    
    820,779Long-term Debt (Note 5)
    
    
    3,363,668
    
    
    
    3,383,986Deferred Credits and Other Liabilities:Commodity contracts
    
    
    15,324
    
    
    
    17,982Taxes payable
    
    
    64,065
    
    
    
    Investment tax credit
    
    
    72,042
    
    
    
    72,938Deferred income taxes
    
    
    978,935
    
    
    
    936,911Obligations under capital leases
    
    
    26,962
    
    
    
    26,007Regulatory liabilities
    
    
    443,211
    
    
    
    464,092Adverse power purchase commitment
    
    
    162,653
    
    
    
    166,937Other
    
    
    516,229
    
    
    
    547,706Total deferred credits and other liabilities
    
    
    2,279,421
    
    
    
    2,232,573Commitments and Contingencies (Note 20)Minority Interest
    
    
    11,120
    
    
    
    10,713Preferred Stock of Subsidiary
    
    
    24,000
    
    
    
    24,000Common Stockholders Equity:Common stock, $1.25 par value, 260 million shares
authorized and 165,654,590 and 165,409,908 shares
issued at March 31, 2007 and December 31, 2006,
respectively
    
    
    207,068
    
    
    
    206,762Other paid-in capital
    
    
    1,913,920
    
    
    
    1,907,879Retained earnings
    
    
    166,717
    
    
    
    74,698Treasury stock at cost; 49,493 shares
    
    
    (1,756
    )
    
    
    (1,756
    )Accumulated other comprehensive loss
    
    
    (108,940
    )
    
    
    (107,188
    )Total common stockholders equity
    
    
    2,177,009
    
    
    
    2,080,395Total Liabilities and Stockholders Equity
    
    $
    8,634,280
    
    
    $
    8,552,446
  7




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(unaudited)
 AccumulatedOther
    
    
    
    
    
    
    
    
    
    
    other
    
    
    TotalShares
    
    
    Common
    
    
    paid-in
    
    
    Retained
    
    
    Treasury
    
    
    comprehensive
    
    
    stockholders(In thousands, except shares)
    
    outstanding
    
    
    stock
    
    
    capital
    
    
    earnings
    
    
    stock
    
    
    loss
    
    
    equityBalance at December 31, 2006
    
    
    165,360,415
    
    
    $
    206,762
    
    
    $
    1,907,879
    
    
    $
    74,698
    
    
    $
    (1,756
    )
    
    $
    (107,188
    )
    
    $
    2,080,395Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,742
    
    
    
    
    
    
    
    
    
    
    
    109,742Adoption of FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,722
    )
    
    
    
    
    
    
    
    
    
    
    (17,722
    )Pension and other postretirement
employee benefit amortization,
net of tax of $1,069
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,569
    
    
    
    1,569Unrealized income on
available-for-sale securities,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Unrealized losses on cash flow
hedges for the period, net of
tax of $2,110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,324
    )
    
    
    (3,324
    )Stock-based compensation expense:Stock units
    
    
    
    
    
    
    
    
    
    
    798
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    798Non-employee stock awards
    
    
    12,400
    
    
    
    15
    
    
    
    378
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    393Stock options
    
    
    
    
    
    
    
    
    
    
    1,631
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,631Exercise of stock options
    
    
    163,805
    
    
    
    205
    
    
    
    4,376
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,581Conversion of stock units
    
    
    68,477
    
    
    
    86
    
    
    
    (1,142
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,056
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Balance at March 31, 2007
    
    
    165,605,097
    
    
    $
    207,068
    
    
    $
    1,913,920
    
    
    $
    166,717
    
    
    $
    (1,756
    )
    
    $
    (108,940
    )
    
    $
    2,177,009
  8




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Note No.
    
    
    
    Page No.1
    
    Basis of Presentation
    
    
    102
    
    Recent Accounting Pronouncements
    
    
    113
    
    Asset Swap
    
    
    124
    
    Income Taxes
    
    
    125
    
    Debt
    
    
    146
    
    Stock-Based Compensation
    
    
    157
    
    Derivative Instruments and Hedging Activities
    
    
    178
    
    Discontinued Operations
    
    
    179
    
    Business Segments
    
    
    1810
    
    Goodwill and Intangible Assets
    
    
    1811
    
    Comprehensive Income
    
    
    1912
    
    Pension Benefits and Postretirement Benefits Other Than Pensions
    
    
    1913
    
    Income (Loss) Per Share
    
    
    2114
    
    Adverse Power Purchase Commitment Liability
    
    
    2215
    
    Regulatory Assets and Liabilities
    
    
    2216
    
    Asset Retirement Obligations (AROs)
    
    
    2317
    
    Other Income and Expenses, Net
    
    
    2318
    
    Guarantees and Letters of Credit
    
    
    2419
    
    Variable Interest Entities (VIE)
    
    
    2420
    
    Commitments and Contingencies
    
    
    2521
    
    Subsequent Event
    
    
    31
 9




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 1: BASIS OF PRESENTATION
         10




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
      11




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 3: ASSET SWAP
    
 NOTE 4: INCOME TAXES
      12




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
    13




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 5: DEBT
  (In millions)
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    TotalAE Supply:Medium-Term Notes
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    400.0
    
    
    $
    650.0
    
    
    $
    1,050.0AE Supply Credit Facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    747.0
    
    
    
    
    
    
    
    747.0Pollution Control Bonds
    
    
    95.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179.0
    
    
    
    274.4Debentures-AGC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0
    
    
    
    100.0Total AE Supply
    
    $
    95.4
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,147.0
    
    
    $
    929.0
    
    
    $
    2,171.4Monongahela:First Mortgage Bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    340.0
    
    
    $
    340.0Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110.0
    
    
    
    
    
    
    
    
    
    
    
    110.0Pollution Control Bonds
    
    
    14.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70.2
    
    
    
    84.7Total Monongahela
    
    $
    14.5
    
    
    $
    
    
    
    $
    
    
    
    $
    110.0
    
    
    $
    
    
    
    $
    410.2
    
    
    $
    534.7Potomac Edison:First Mortgage Bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    420.0
    
    
    $
    420.0Total Potomac Edison
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    420.0
    
    
    $
    420.0West Penn:Transition Bonds
    
    $
    59.3
    
    
    $
    76.5
    
    
    $
    75.5
    
    
    $
    15.2
    
    
    $
    
    
    
    $
    
    
    
    $
    226.5First Mortgage Bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145.0
    
    
    
    145.0Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80.0
    
    
    
    80.0Total West Penn
    
    $
    59.3
    
    
    $
    76.5
    
    
    $
    75.5
    
    
    $
    15.2
    
    
    $
    
    
    
    $
    225.0
    
    
    $
    451.5AGC:Debentures
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100.0
    
    
    $
    100.0Total AGC
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100.0
    
    
    $
    100.0Unamortized debt
discounts and premiums
    
    
    (1.0
    )
    
    
    (1.4
    )
    
    
    (1.4
    )
    
    
    (1.3
    )
    
    
    (1.0
    )
    
    
    (2.2
    )
    
    
    (8.3
    )Eliminations (a)
    
    
    (4.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114.4
    )
    
    
    (118.5
    )Total consolidated debt
    
    $
    164.1
    
    
    $
    75.1
    
    
    $
    74.1
    
    
    $
    123.9
    
    
    $
    1,146.0
    
    
    $
    1,967.6
    
    
    $
    3,550.8
 
 (a)
    
    Represents the elimination of AGCs $100 million 6 7/8% Debentures due 2023, which are
also included above under AE Supply, and $18.5 million in the aggregate of pollution control
bonds, for which Monongahela and AE Supply were co-obligors.  14




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  (In millions)
    
    Issuances
    
    
    RepaymentsMonongahela:Pollution Control Bonds
    
    $
    
    
    
    $
    1.0AE Supply:Pollution Control Bonds
    
    
    7.0
    
    
    
    15.6West Penn:Transition Bonds (a)
    
    
    1.4
    
    
    
    20.6Eliminations (b)
    
    
    (7.0
    )
    
    
    (1.2
    )Consolidated Total
    
    $
    1.4
    
    
    $
    36.0
 
 (a)
    
    The issuance amounts represent interest that was accrued and added to the principal amount
of certain of the bonds.(b)
    
    Represents the elimination of changes in the balances for certain pollution control bonds for
which Monongahela and AE Supply were co-obligors, as a result of the January 1, 2007 Asset
Swap. Subsequent debt activity
  
 NOTE 6: STOCK-BASED COMPENSATION
   Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Stock options
    
    $
    1.6
    
    
    $
    2.1Stock units
    
    
    0.8
    
    
    
    1.8Other
    
    
    0.4
    
    
    
    0.3Stock-based compensation expense included in operations and maintenance expense
    
    
    2.8
    
    
    
    4.2Income tax benefit
    
    
    1.1
    
    
    
    1.7Total stock-based compensation expense, net of tax
    
    $
    1.7
    
    
    $
    2.5
  15




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Stock Options
  Weighted-Average
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Intrinsic Value (a)Stock Options
    
    
    Price
    
    
    (in millions)Outstanding at December 31, 2006
    
    
    4,670,338
    
    
    $
    16.504Granted
    
    
    11,000
    
    
    $
    48.282Exercised
    
    
    (163,805
    )
    
    $
    27.963Forfeited
    
    
    (51,927
    )
    
    $
    13.389Outstanding at March 31, 2007
    
    
    4,465,606
    
    
    $
    16.198
    
    
    $
    147.1Exercisable at March 31, 2007
    
    
    2,467,171
    
    
    $
    16.362
    
    
    $
    80.9
 
 (a)
    
    Intrinsic value represents the difference between the current market value of Alleghenys
stock and the exercise price of the option.   Stock Units
  Weighted-Average
    
    
    AggregateNumber of
    
    
    Grant Date
    
    
    Intrinsic ValueStock Units
    
    
    Fair Value
    
    
    (in millions)Outstanding at December 31, 2006
    
    
    1,045,966
    
    
    $
    15.29Units converted into 68,477 common shares
    
    
    (107,220
    )
    
    $
    15.30Outstanding at March 31, 2007
    
    
    938,746
    
    
    $
    15.29
    
    
    $
    46.1
    16




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Number ofSharesShares earned but not issued at December 31, 2006
    
    
    64,893Granted
    
    
    8,000Issued
    
    
    (12,400
    )Shares earned but not issued at March 31, 2007
    
    
    60,493
 
 NOTE 7: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
   
 NOTE 8: DISCONTINUED OPERATIONS
  Three MonthsEnded(In millions)
    
    March 31, 2006Operating revenues
    
    $
    Operating expenses
    
    
    (0.4
    )Interest expense
    
    
    (0.9
    )Loss before income taxes
    
    
    (1.3
    )Income tax benefit
    
    
    0.5Loss from discontinued operations, net of tax
    
    $
    (0.8
    )
 17




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 9: BUSINESS SEGMENTS
   Three months ended March 31, 2007
    
    
    Three months ended March 31, 2006Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    754.8
    
    
    $
    92.8
    
    
    $
    
    
    
    $
    847.6
    
    
    $
    700.8
    
    
    $
    144.8
    
    
    $
    
    
    
    $
    845.6Internal operating revenues
    
    
    3.1
    
    
    
    431.7
    
    
    
    (434.8
    )
    
    
    
    
    
    
    1.8
    
    
    
    362.3
    
    
    
    (364.1
    )
    
    
    Total operating revenues
    
    $
    757.9
    
    
    $
    524.5
    
    
    $
    (434.8
    )
    
    $
    847.6
    
    
    $
    702.6
    
    
    $
    507.1
    
    
    $
    (364.1
    )
    
    $
    845.6Depreciation and amortization
    
    $
    40.2
    
    
    $
    31.8
    
    
    $
    
    
    
    $
    72.0
    
    
    $
    37.7
    
    
    $
    30.1
    
    
    $
    
    
    
    $
    67.8Operating income
    
    $
    96.6
    
    
    $
    138.6
    
    
    $
    
    
    
    $
    235.2
    
    
    $
    92.1
    
    
    $
    155.7
    
    
    $
    
    
    
    $
    247.8Interest expense
    
    $
    18.4
    
    
    $
    42.0
    
    
    $
    (1.2
    )
    
    $
    59.2
    
    
    $
    19.7
    
    
    $
    48.1
    
    
    $
    (0.4
    )
    
    $
    67.4Income tax expense from
continuing operations
    
    $
    35.5
    
    
    $
    35.9
    
    
    $
    
    
    
    $
    71.4
    
    
    $
    30.1
    
    
    $
    42.3
    
    
    $
    
    
    
    $
    72.4Income from continuing
operations
    
    $
    45.4
    
    
    $
    64.3
    
    
    $
    
    
    
    $
    109.7
    
    
    $
    46.4
    
    
    $
    67.8
    
    
    $
    
    
    
    $
    114.2Loss from discontinued
operations, net of tax
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (0.8
    )
    
    $
    
    
    
    $
    (0.8
    )Net income
    
    $
    45.4
    
    
    $
    64.3
    
    
    $
    
    
    
    $
    109.7
    
    
    $
    46.4
    
    
    $
    67.0
    
    
    $
    
    
    
    $
    113.4
 
 NOTE 10: GOODWILL AND INTANGIBLE ASSETS
   March 31, 2007
    
    
    December 31, 2006Gross
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Accumulated(In millions)
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationLand easements, amortized
    
    $
    98.5
    
    
    $
    28.7
    
    
    $
    97.9
    
    
    $
    28.4Land easements, unamortized
    
    
    30.7
    
    
    
    
    
    
    
    30.7
    
    
    
    Software
    
    
    85.3
    
    
    
    33.6
    
    
    
    47.0
    
    
    
    31.1Total
    
    $
    214.5
    
    
    $
    62.3
    
    
    $
    175.6
    
    
    $
    59.5
  18




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  (In millions)
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011Annual amortization expense
    
    $
    12.9
    
    
    $
    9.8
    
    
    $
    9.2
    
    
    $
    8.2
    
    
    $
    7.3
 
 NOTE 11: COMPREHENSIVE INCOME
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Net income
    
    $
    109.7
    
    
    $
    113.4Other comprehensive income (loss), net of tax:Unrealized gains (losses) on cash flow hedges for
the period, net of tax of $2.1 and $11.2
    
    
    (3.3
    )
    
    
    17.7Pension and other postretirement employee benefit
amortization, net of tax of $1.1 and $0
    
    
    1.6
    
    
    
    Comprehensive income, net of income taxes
    
    $
    108.0
    
    
    $
    131.1
  March 31,
    
    
    December 31,(In millions)
    
    2007
    
    
    2006Accumulated other comprehensive income (loss) on cash flow hedges, net of tax
    
    $
    (3.1
    )
    
    $
    0.2Net unrecognized pension and other postretirement benefit costs, net of tax
    
    
    (105.8
    )
    
    
    (107.4
    )Total
    
    $
    (108.9
    )
    
    $
    (107.2
    )
 
 NOTE 12: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
  19




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Postretirement Benefits OtherPension Benefits
    
    
    Than PensionsThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Components of net periodic cost:Service cost
    
    $
    5.3
    
    
    $
    5.4
    
    
    $
    1.1
    
    
    $
    1.3Interest cost
    
    
    16.2
    
    
    
    15.4
    
    
    
    4.3
    
    
    
    4.2Expected return on plan assets
    
    
    (18.3
    )
    
    
    (17.4
    )
    
    
    (1.7
    )
    
    
    (1.7
    )Amortization of unrecognized transition obligation
    
    
    0.1
    
    
    
    0.1
    
    
    
    1.4
    
    
    
    1.4Amortization of prior service cost
    
    
    0.8
    
    
    
    0.9
    
    
    
    
    
    
    
    Recognized actuarial loss
    
    
    2.7
    
    
    
    3.1
    
    
    
    0.6
    
    
    
    0.9Net periodic cost
    
    $
    6.8
    
    
    $
    7.5
    
    
    $
    5.7
    
    
    $
    6.1Allocation of net periodic cost:Monongahela
    
    $
    2.0
    
    
    $
    2.0
    
    
    $
    1.7
    
    
    $
    1.7AE Supply
    
    
    1.8
    
    
    
    2.2
    
    
    
    1.1
    
    
    
    1.3West Penn
    
    
    1.7
    
    
    
    1.8
    
    
    
    1.6
    
    
    
    1.7Potomac Edison
    
    
    1.3
    
    
    
    1.4
    
    
    
    1.3
    
    
    
    1.3AE
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Net periodic cost
    
    $
    6.8
    
    
    $
    7.5
    
    
    $
    5.7
    
    
    $
    6.1
     20




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 13: INCOME (LOSS) PER SHARE
  Three Months EndedMarch 31,(In millions, except share amounts)
    
    2007
    
    
    2006Basic Income (Loss) per Share:Numerator:Income from continuing operations, net of tax
    
    $
    109.7
    
    
    $
    114.2Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.8
    )Net income
    
    $
    109.7
    
    
    $
    113.4Denominator:Weighted average common shares outstanding
    
    
    165,494,332
    
    
    
    163,080,312Basic Income per Share:Income from continuing operations, net of tax
    
    $
    0.66
    
    
    $
    0.70Loss from discontinued operations, net of tax
    
    
    
    
    
    
    Net income
    
    $
    0.66
    
    
    $
    0.70Diluted Income (Loss) per Share:Numerator:Income from continuing operations, net of tax
    
    $
    109.7
    
    
    $
    114.2Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.8
    )Net income
    
    $
    109.7
    
    
    $
    113.4Denominator:Weighted average common shares outstanding
    
    
    165,494,332
    
    
    
    163,080,312Effect of dilutive securities:Stock options
    
    
    2,721,411
    
    
    
    2,565,351Stock units
    
    
    885,176
    
    
    
    2,778,116Non-employee stock awards
    
    
    54,559
    
    
    
    33,678Performance shares
    
    
    25,497
    
    
    
    46,180Total shares
    
    
    169,180,975
    
    
    
    168,503,637Diluted
Income (Loss) per Share:Income from continuing operations, net of tax
    
    $
    0.65
    
    
    $
    0.68Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.01
    )Net income
    
    $
    0.65
    
    
    $
    0.67
 21




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 14: ADVERSE POWER PURCHASE COMMITMENT LIABILITY
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Amortization of liability for adverse power purchase commitments
    
    $
    4.3
    
    
    $
    4.3
  
 NOTE 15: REGULATORY ASSETS AND LIABILITIES
  March 31,
    
    
    December 31,(In millions)
    
    2007
    
    
    2006Regulatory assets, including current portion:Income taxes
    
    $
    298.3
    
    
    $
    300.4Pension and other postretirement benefits
    
    
    175.2
    
    
    
    178.2Pennsylvania stranded cost recovery
    
    
    45.6
    
    
    
    55.6Pennsylvania Competitive Transition Charge (CTC) reconciliation
    
    
    110.0
    
    
    
    107.4Unamortized loss on reacquired debt
    
    
    38.5
    
    
    
    39.6Other
    
    
    30.9
    
    
    
    32.0Subtotal
    
    
    698.5
    
    
    
    713.2Regulatory liabilities, including current portion:Net asset removal costs
    
    
    399.5
    
    
    
    421.4Income taxes
    
    
    38.9
    
    
    
    38.9Other
    
    
    5.9
    
    
    
    4.5Subtotal
    
    
    444.3
    
    
    
    464.8Net regulatory assets
    
    $
    254.2
    
    
    $
    248.4
  March 31,
    
    December 31,(In millions)
    
    2007
    
    2006Property, plant and equipment
    
    $
    4,256.0
    
    
    $
    4,338.7Amounts under construction included above
    
    $
    194.7
    
    
    $
    136.6Accumulated depreciation
    
    $
    (1,973.4
    )
    
    $
    (2,054.6
    )
 22




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 16: ASSET RETIREMENT OBLIGATIONS (AROs)
   (In millions)
    
    ARO LiabilityBalance at December 31, 2006
    
    $
    54.8Accretion of the liability
    
    
    1.5Balance at March 31, 2007
    
    $
    56.3
  
 NOTE 17: OTHER INCOME AND EXPENSES, NET
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Interest and dividend income
    
    $
    3.5
    
    
    $
    5.5Tax reimbursement on contributions in aid of construction
    
    
    1.1
    
    
    
    1.5Premium services
    
    
    0.4
    
    
    
    1.4Other
    
    
    0.9
    
    
    
    (0.7
    )Total
    
    $
    5.9
    
    
    $
    7.7
 23




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 18: GUARANTEES AND LETTERS OF CREDIT
  March 31, 2007
    
    
    December 31, 2006Amounts
    
    
    Total
    
    
    Amounts
    
    
    TotalRecorded on
    
    
    Guarantees
    
    
    Recorded on
    
    
    Guaranteesthe Consolidated
    
    
    and Letters
    
    
    the Consolidated
    
    
    and Letters(In millions)
    
    Balance Sheet
    
    
    of Credit
    
    
    Balance Sheet
    
    
    of CreditGuarantees:Loans and other financing-related matters
    
    $
    
    
    
    $
    8.2
    
    
    $
    
    
    
    $
    8.4Lease agreement
    
    
    
    
    
    
    4.8
    
    
    
    
    
    
    
    4.7Purchase, sale, exchange or transportation of wholesale natural gas, electric power and related services
    
    

    
    
    
    20.0
    
    
    
    
    
    
    
    20.4Other
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Total Guarantees
    
    $
    0.2
    
    
    $
    33.2
    
    
    $
    0.2
    
    
    $
    33.7Letters of Credit:Under AEs Revolving Facility (a)
    
    $
    
    
    
    $
    131.8
    
    
    $
    
    
    
    $
    131.8Other (b)
    
    
    
    
    
    
    2.5
    
    
    
    
    
    
    
    2.1Total Letters of Credit
    
    
    
    
    
    
    134.3
    
    
    
    
    
    
    
    133.9Total Guarantees and Letters of Credit
    
    $
    0.2
    
    
    $
    167.5
    
    
    $
    0.2
    
    
    $
    167.6
 
 (a)
    
    The March 31, 2007 and December 31, 2006 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 and a letter of credit for $6.8 million issued due to
a contractual obligation of Allegheny Ventures that expires in July 2007.(b)
    
    These amounts are not issued under either AEs credit facility or AE Supplys credit
facility. 
 NOTE 19: VARIABLE INTEREST ENTITIES (VIE)
     24




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  
 NOTE 20: COMMITMENTS AND CONTINGENCIES
 Environmental Matters and Litigation
  Global Climate Change . 2
 
    
    developing an accurate CO2 emissions inventory;
    
    improving the efficiency of its coal-burning fleet;
    
    following developing technologies for clean-coal based energy and for CO2 emission controls at traditional pulverized coal-fired power plants;
    
    following developing technologies for carbon sequestration;
    
    participating in carbon dioxide sequestration efforts (e.g. reforestation projects)
both domestically and abroad; and analyzing options for future energy investment (e.g.
renewables, clean-coal, etc.).
  Clean Air Act Compliance. 2
  25




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 2 2 2
  2
  2
 Clean Air Act Litigation
 26




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
        Canadian Toxic-Tort Class Action:
 27




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Global Warming Class Action:
 Claims Related to Alleged Asbestos Exposure: ., .
 .,
   Other Litigation
 Nevada Power Contracts.
 28




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Sierra/Nevada.
  Claim by California Parties.
 Litigation Involving Merrill Lynch.
   29




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  .
  Putative Benefit Plan Class Actions.
 Suits Related to the Gleason Generation Facility.
 Harrison Fuel Litigation.
 Ordinary Course of Business.
 30




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 21: SUBSEQUENT EVENT
  31




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended March 31,(In thousands)
    
    2007
    
    
    2006Operating revenues
    
    $
    200,886
    
    
    $
    197,195Operating expenses:Fuel
    
    
    60,447
    
    
    
    45,138Purchased power and transmission
    
    
    38,734
    
    
    
    41,136Deferred energy costs, net
    
    
    (333
    )
    
    
    Operations and maintenance
    
    
    54,809
    
    
    
    40,414Depreciation and amortization
    
    
    17,811
    
    
    
    16,366Taxes other than income taxes
    
    
    12,451
    
    
    
    12,270Total operating expenses
    
    
    183,919
    
    
    
    155,324Operating income
    
    
    16,967
    
    
    
    41,871Other income and expenses, net (Note 10)
    
    
    3,901
    
    
    
    3,658Interest expense
    
    
    8,529
    
    
    
    10,728Income before income taxes
    
    
    12,339
    
    
    
    34,801Income tax expense
    
    
    5,377
    
    
    
    13,071Net income
    
    $
    6,962
    
    
    $
    21,730
  32




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Three Months Ended March 31,(In thousands)
    
    2007
    
    
    2006Cash Flows From Operating Activities:Net income
    
    $
    6,962
    
    
    $
    21,730Adjustments to reconcile net income to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    17,811
    
    
    
    16,366Amortization of power sale liability related to Ohio sale
    
    
    (9,100
    )
    
    
    (10,700
    )Amortization of liability for adverse power purchase commitment
    
    
    1,699
    
    
    
    Deferred income taxes and investment tax credit, net
    
    
    1,237
    
    
    
    15,814Other, net
    
    
    (132
    )
    
    
    1,119Changes in certain assets and liabilities:Accounts receivable, net
    
    
    (1,050
    )
    
    
    15,628Materials, supplies and fuel
    
    
    (6,585
    )
    
    
    967Prepaid taxes
    
    
    480
    
    
    
    3,298Collateral deposits
    
    
    (24,400
    )
    
    
    8,045Prepayments
    
    
    112
    
    
    
    245Other current assets
    
    
    (261
    )
    
    
    122Accounts payable
    
    
    26,968
    
    
    
    (15,254
    )Accounts payable to affiliates, net
    
    
    (19,509
    )
    
    
    (16,573
    )Accrued taxes
    
    
    (28,306
    )
    
    
    (7,144
    )Accrued interest
    
    
    (457
    )
    
    
    5,364Other current liabilities
    
    
    (1,376
    )
    
    
    (5,517
    )Other assets
    
    
    230
    
    
    
    234Other liabilities
    
    
    (190
    )
    
    
    55Net cash provided by (used in) operating activities
    
    
    (35,867
    )
    
    
    33,799Cash Flows From Investing Activities:Capital expenditures
    
    
    (39,014
    )
    
    
    (18,736
    )Notes receivable from affiliates
    
    
    27,337
    
    
    
    (45,381
    )Net cash used in investing activities
    
    
    (11,677
    )
    
    
    (64,117
    )Cash Flows From Financing Activities:Notes payable to affiliates
    
    
    24,352
    
    
    
    Deferred financing costs
    
    
    
    
    
    
    (118
    )Repayment of long-term debt
    
    
    (851
    )
    
    
    Asset Swap
    
    
    1,052
    
    
    
    Intercompany tax sharing agreement benefit
    
    
    3,394
    
    
    
    Cash dividends paid on capital stock:Preferred stock
    
    
    (293
    )
    
    
    (293
    )Common stock
    
    
    
    
    
    
    (10,015
    )Net cash provided by (used in) financing activities
    
    
    27,654
    
    
    
    (10,426
    )Net decrease in cash and cash equivalents
    
    
    (19,890
    )
    
    
    (40,744
    )Cash and cash equivalents at beginning of period
    
    
    22,283
    
    
    
    136,491Cash and cash equivalents at end of period
    
    $
    2,393
    
    
    $
    95,747Supplemental Cash Flow Information:Cash paid for interest (net of amount capitalized)
    
    $
    7,937
    
    
    $
    4,517
  33




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 March 31,
    
    
    December 31,(In thousands)
    
    2007
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,393
    
    
    $
    22,283Accounts receivable:Customer
    
    
    47,868
    
    
    
    38,007Unbilled utility revenue
    
    
    29,174
    
    
    
    33,952Wholesale and other
    
    
    8,077
    
    
    
    12,341Allowance for uncollectible accounts
    
    
    (1,814
    )
    
    
    (2,095
    )Note receivable from affiliate
    
    
    
    
    
    
    27,337Materials and supplies
    
    
    19,334
    
    
    
    15,695Fuel
    
    
    24,453
    
    
    
    17,557Prepaid taxes
    
    
    19,634
    
    
    
    20,114Deferred income taxes
    
    
    5,325
    
    
    
    Collateral deposits
    
    
    24,128
    
    
    
    Regulatory assets
    
    
    6,750
    
    
    
    6,417Other
    
    
    16,822
    
    
    
    8,638Total current assets
    
    
    202,144
    
    
    
    200,246Property, Plant and Equipment, Net:Generation
    
    
    1,101,522
    
    
    
    967,486Transmission
    
    
    294,014
    
    
    
    283,497Distribution
    
    
    976,693
    
    
    
    968,377Other
    
    
    74,114
    
    
    
    74,762Accumulated depreciation
    
    
    (1,070,633
    )
    
    
    (936,098
    )Subtotal
    
    
    1,375,710
    
    
    
    1,358,024Construction work in progress
    
    
    54,126
    
    
    
    38,114Total property, plant and equipment, net
    
    
    1,429,836
    
    
    
    1,396,138Investments and Other Assets:Investment in AGC
    
    
    70,797
    
    
    
    46,765Other
    
    
    2,715
    
    
    
    2,437Total investments and other assets
    
    
    73,512
    
    
    
    49,202Deferred Charges:Regulatory assets
    
    
    86,381
    
    
    
    88,940Other
    
    
    9,566
    
    
    
    9,791Total deferred charges
    
    
    95,947
    
    
    
    98,731Total Assets
    
    $
    1,801,439
    
    
    $
    1,744,317
  34




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
 March 31,
    
    
    December 31,(In thousands, except share data)
    
    2007
    
    
    2006LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Long-term debt due within one year (Note 5)
    
    $
    14,500
    
    
    $
    15,500Accounts payable
    
    
    61,925
    
    
    
    35,844Accounts payable to affiliates, net
    
    
    43,344
    
    
    
    62,853Accrued taxes
    
    
    22,883
    
    
    
    37,836Accrued interest
    
    
    7,236
    
    
    
    7,693Ohio power commitment
    
    
    1,400
    
    
    
    10,500Note payable to affiliate
    
    
    24,352
    
    
    
    Other
    
    
    20,619
    
    
    
    19,558Total current liabilities
    
    
    196,259
    
    
    
    189,784Long-term Debt (Note 5)
    
    
    519,186
    
    
    
    519,145Deferred Credits and Other Liabilities:Non-current affiliated income taxes payable
    
    
    46,046
    
    
    
    45,671Deferred income taxes
    
    
    221,237
    
    
    
    213,987Obligations under capital leases
    
    
    7,968
    
    
    
    7,353Regulatory liabilities
    
    
    214,299
    
    
    
    239,120Other
    
    
    35,206
    
    
    
    32,598Total deferred credits and other liabilities
    
    
    524,756
    
    
    
    538,729Commitments and Contingencies (Note 11)Preferred Stock
    
    
    24,000
    
    
    
    24,000Common Stockholders Equity:Common stock, $50 par value, 8 million shares
authorized and 5,891,000 shares outstanding at March 31,
2007 and December 31, 2006
    
    
    294,550
    
    
    
    294,550Other paid-in capital
    
    
    99,132
    
    
    
    41,468Retained earnings
    
    
    143,553
    
    
    
    136,639Accumulated other comprehensive income
    
    
    3
    
    
    
    2Total common stockholders equity
    
    
    537,238
    
    
    
    472,659Total Liabilities and Stockholders Equity
    
    $
    1,801,439
    
    
    $
    1,744,317
  35




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(unaudited)
 Accumulated
    
    
    TotalOther
    
    
    
    
    
    
    other
    
    
    commonShares
    
    
    Common
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    stockholders(In thousands, except shares)
    
    outstanding
    
    
    stock
    
    
    capital
    
    
    earnings
    
    
    income (loss)
    
    
    equityBalance at December 31, 2006
    
    
    5,891,000
    
    
    $
    294,550
    
    
    $
    41,468
    
    
    $
    136,639
    
    
    $
    2
    
    
    $
    472,659Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,962
    
    
    
    
    
    
    
    6,962Adoption of FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245
    
    
    
    
    
    
    
    245Asset Swap
    
    
    
    
    
    
    
    
    
    
    53,504
    
    
    
    
    
    
    
    
    
    
    
    53,504Intercompany tax sharing
agreement benefit
    
    
    
    
    
    
    
    
    
    
    3,950
    
    
    
    
    
    
    
    
    
    
    
    3,950Pollution control bond
interest paid by AE
Supply
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    60Pollution control bond
retirement
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    150Dividends declared on
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (293
    )
    
    
    
    
    
    
    (293
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Balance at March 31, 2007
    
    
    5,891,000
    
    
    $
    294,550
    
    
    $
    99,132
    
    
    $
    143,553
    
    
    $
    3
    
    
    $
    537,238
  36




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Note No.
    
    
    
    Page No.1
    
    Basis of Presentation
    
    
    382
    
    Recent Accounting Pronouncements
    
    
    393
    
    Asset Swap
    
    
    404
    
    Income Taxes
    
    
    415
    
    Debt
    
    
    426
    
    Business Segments
    
    
    437
    
    Pension Benefits and Postretirement Benefits Other Than Pensions
    
    
    438
    
    Asset Retirement Obligations (AROs)
    
    
    439
    
    Regulatory Assets and Liabilities
    
    
    4410
    
    Other Income and Expenses, Net
    
    
    4411
    
    Commitments and Contingencies
    
    
    4412
    
    Subsequent Event
    
    
    48
 37




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 1: BASIS OF PRESENTATION
          38




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Federal and State Income Taxes
  
 NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
      39




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  
 NOTE 3: ASSET SWAP
      March 31, 2007
    
    December 31, 2006Generation facility
    
    Ownership
    
    Plant
    
    Accumulated
    
    Ownership
    
    Plant
    
    Accumulated(Dollars in millions)
    
    %
    
    Investment
    
    Depreciation
    
    %
    
    Investment
    
    DepreciationAlbright
    
    
    100.0
    
    
    $
    119.2
    
    
    $
    90.7
    
    
    
    57.5
    
    
    $
    68.7
    
    
    $
    46.5Fort Martin
    
    
    100.0
    
    
    $
    460.9
    
    
    $
    269.1
    
    
    
    19.1
    
    
    $
    71.0
    
    
    $
    49.1Harrison
    
    
    20.5
    
    
    $
    286.8
    
    
    $
    165.2
    
    
    
    21.3
    
    
    $
    297.0
    
    
    $
    168.1Hatfields Ferry
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    23.4
    
    
    $
    154.5
    
    
    $
    60.3Pleasants
    
    
    7.7
    
    
    $
    90.2
    
    
    $
    51.3
    
    
    
    21.3
    
    
    $
    249.4
    
    
    $
    140.0Rivesville
    
    
    100.0
    
    
    $
    57.5
    
    
    $
    44.1
    
    
    
    85.1
    
    
    $
    48.9
    
    
    $
    36.9Willow Island
    
    
    100.0
    
    
    $
    106.4
    
    
    $
    71.7
    
    
    
    85.1
    
    
    $
    90.6
    
    
    $
    59.6
 40




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  March 31, 2007
    
    December 31, 2006Generation facility
    
    Ownership
    
    Plant
    
    Accumulated
    
    Ownership
    
    Plant
    
    Accumulated(Dollars in millions)
    
    %
    
    Investment
    
    Depreciation
    
    %
    
    Investment
    
    DepreciationBath County
    
    
    40
    
    
    $
    840.4
    
    
    $
    322.1
    
    
    
    40
    
    
    $
    835.6
    
    
    $
    318.1
 
 NOTE 4: INCOME TAXES
         41




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  
 NOTE 5: DEBT
  (In millions)
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    TotalFirst Mortgage Bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    340.0
    
    
    $
    340.0Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110.0
    
    
    
    
    
    
    
    
    
    
    
    110.0Pollution Control Bonds
    
    
    14.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70.2
    
    
    
    84.7Total
    
    $
    14.5
    
    
    $
    
    
    
    $
    
    
    
    $
    110.0
    
    
    $
    
    
    
    $
    410.2
    
    
    $
    534.7
  Subsequent debt activity
  42




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 6: BUSINESS SEGMENTS
  Three months ended March 31, 2007
    
    
    Three months ended March 31, 2006Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    181.1
    
    
    $
    19.8
    
    
    $
    
    
    
    $
    200.9
    
    
    $
    174.1
    
    
    $
    23.1
    
    
    $
    
    
    
    $
    197.2Internal operating revenues
    
    
    
    
    
    
    97.5
    
    
    
    (97.5
    )
    
    
    
    
    
    
    
    
    
    
    78.0
    
    
    
    (78.0
    )
    
    
    Total operating revenues
    
    $
    181.1
    
    
    $
    117.3
    
    
    $
    (97.5
    )
    
    $
    200.9
    
    
    $
    174.1
    
    
    $
    101.1
    
    
    $
    (78.0
    )
    
    $
    197.2Depreciation and amortization
    
    $
    7.8
    
    
    $
    10.0
    
    
    $
    
    
    
    $
    17.8
    
    
    $
    7.6
    
    
    $
    8.8
    
    
    $
    
    
    
    $
    16.4Operating income (loss)
    
    $
    36.4
    
    
    $
    (19.4
    )
    
    $
    
    
    
    $
    17.0
    
    
    $
    37.2
    
    
    $
    4.7
    
    
    $
    
    
    
    $
    41.9Interest expense
    
    $
    4.7
    
    
    $
    3.9
    
    
    $
    
    
    
    $
    8.6
    
    
    $
    6.2
    
    
    $
    4.6
    
    
    $
    
    
    
    $
    10.8Income tax expense (benefit)
    
    $
    14.2
    
    
    $
    (8.9
    )
    
    $
    
    
    
    $
    5.3
    
    
    $
    12.7
    
    
    $
    0.4
    
    
    $
    
    
    
    $
    13.1Net income (loss)
    
    $
    17.7
    
    
    $
    (10.7
    )
    
    $
    
    
    
    $
    7.0
    
    
    $
    19.8
    
    
    $
    1.9
    
    
    $
    
    
    
    $
    21.7
 
 NOTE 7: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
  Three Months Ended March 31,(In millions)
    
    2007
    
    2006Pension benefits
    
    $
    2.0
    
    
    $
    2.0Postretirement benefits other than pension benefits
    
    $
    1.7
    
    
    $
    1.7
 
 NOTE 8: ASSET RETIREMENT OBLIGATIONS (AROs)
   (In millions)
    
    ARO LiabilityBalance at December 31, 2006
    
    $
    13.7Net transfer of ARO liabilities from AE Supply due to Asset Swap
    
    
    2.5New ARO liability
    
    
    0.3Balance at March 31, 2007
    
    $
    16.5
  43




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 9: REGULATORY ASSETS AND LIABILITIES
  March 31,
    
    
    December 31,(In millions)
    
    2007
    
    
    2006Regulatory assets, including current portion:Income taxes
    
    $
    70.3
    
    
    $
    72.0Unamortized loss on reacquired debt
    
    
    13.8
    
    
    
    14.2Other
    
    
    9.0
    
    
    
    9.1Subtotal
    
    
    93.1
    
    
    
    95.3Regulatory liabilities:Non-legal asset removal costs
    
    
    214.3
    
    
    
    239.1Subtotal
    
    
    214.3
    
    
    
    239.1Net regulatory liabilities
    
    $
    121.2
    
    
    $
    143.8
 
 NOTE 10: OTHER INCOME AND EXPENSES, NET
  Three Months Ended March 31,(In millions)
    
    2007
    
    
    2006Interest income
    
    $
    0.7
    
    
    $
    2.0Equity in earnings of AGC
    
    
    3.0
    
    
    
    1.4Other
    
    
    0.2
    
    
    
    0.3Total
    
    $
    3.9
    
    
    $
    3.7
 
 NOTE 11: COMMITMENTS AND CONTINGENCIES
 Environmental Matters and Litigation
  Global Climate Change . 2
 44




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  
    
    developing an accurate CO2 emissions inventory;
    
    improving the efficiency of its coal-burning fleet;
    
    following developing technologies for clean-coal based energy and for CO2
emission controls at traditional pulverized coal-fired power plants;
    
    following developing technologies for carbon sequestration;
    
    participating in carbon dioxide sequestration efforts (e.g. reforestation projects) both
domestically and abroad; and
analyzing options for future energy investment (e.g. renewables, clean-coal, etc.).
  Clean Air Act Compliance. 2
  2 2 2
  2
 45




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Clean Air Act Litigation
      46




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Canadian Toxic-Tort Class Action:
 Claims Related to Alleged Asbestos Exposure: ., .
 .,
   47




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Other Litigation
 Harrison Fuel Litigation.
 Ordinary Course of Business.
 
 NOTE 12: SUBSEQUENT EVENT
  48




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ALLEGHENY GENERATING COMPANY
STATEMENTS OF OPERATIONS
(unaudited)
 Three Months EndedMarch 31,(In thousands)
    
    2007
    
    
    2006Operating revenues
    
    $
    16,911
    
    
    $
    17,338Operating expenses:Operations and maintenance
    
    
    1,364
    
    
    
    1,507Depreciation
    
    
    4,295
    
    
    
    4,285Taxes other than income taxes
    
    
    794
    
    
    
    799Total operating expenses
    
    
    6,453
    
    
    
    6,591Operating income
    
    
    10,458
    
    
    
    10,747Other income, net
    
    
    70
    
    
    
    45Interest expense
    
    
    1,771
    
    
    
    1,808Income before income taxes
    
    
    8,757
    
    
    
    8,984Income tax expense
    
    
    2,764
    
    
    
    2,849Net income
    
    $
    5,993
    
    
    $
    6,135
  49




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ALLEGHENY GENERATING COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
 Three Months EndedMarch 31,(In thousands)
    
    2007
    
    
    2006Cash Flows From Operating Activities:Net income
    
    $
    5,993
    
    
    $
    6,135Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    4,295
    
    
    
    4,285Deferred income taxes and investment tax credit, net
    
    
    (2,022
    )
    
    
    (1,761
    )Other, net
    
    
    72
    
    
    
    71Changes in certain assets and liabilities:Accounts receivable from/payable to affiliates, net
    
    
    (8,603
    )
    
    
    (3,532
    )Materials and supplies
    
    
    (29
    )
    
    
    (42
    )Taxes receivable/accrued, net
    
    
    7,907
    
    
    
    6,887Prepayments
    
    
    126
    
    
    
    79Other current assets
    
    
    3
    
    
    
    4Accounts payable
    
    
    (1,489
    )
    
    
    (2,685
    )Accrued interest
    
    
    (1,738
    )
    
    
    (1,719
    )Other current liabilities
    
    
    166
    
    
    
    119Other assets
    
    
    
    
    
    
    104Other liabilities
    
    
    
    
    
    
    1Net cash provided by operating activities
    
    
    4,681
    
    
    
    7,946Cash Flows From Investing Activities:Capital expenditures
    
    
    (1,122
    )
    
    
    (763
    )Cash Flows From Financing Activities:Intercompany tax sharing agreement benefit
    
    
    1,348
    
    
    
    Cash dividends paid on common stock
    
    
    (5,000
    )
    
    
    (5,000
    )Net cash used in financing activities
    
    
    (3,652
    )
    
    
    (5,000
    )Net increase (decrease) in cash and cash equivalents
    
    
    (93
    )
    
    
    2,183Cash and cash equivalents at beginning of period
    
    
    2,846
    
    
    
    1,858Cash and cash equivalents at end of period
    
    $
    2,753
    
    
    $
    4,041Supplemental Cash Flow Information:Cash paid for interest
    
    $
    3,438
    
    
    $
    3,455
  50




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ALLEGHENY GENERATING COMPANY
BALANCE SHEETS
(unaudited)
 March 31,
    
    
    December 31,(In thousands)
    
    2007
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,753
    
    
    $
    2,846Accounts receivable from affiliate
    
    
    2,971
    
    
    
    Materials and supplies
    
    
    1,748
    
    
    
    1,720Taxes receivable
    
    
    
    
    
    
    762Other
    
    
    231
    
    
    
    360Total current assets
    
    
    7,703
    
    
    
    5,688Property, Plant and Equipment, Net:Generation
    
    
    782,187
    
    
    
    777,507Transmission
    
    
    55,247
    
    
    
    55,169Other
    
    
    2,943
    
    
    
    2,949Accumulated depreciation
    
    
    (322,079
    )
    
    
    (318,164
    )Subtotal
    
    
    518,298
    
    
    
    517,461Construction work in progress
    
    
    2,953
    
    
    
    6,963Total property, plant and equipment, net
    
    
    521,251
    
    
    
    524,424Deferred Charges:Regulatory assets
    
    
    7,732
    
    
    
    7,842Other
    
    
    90
    
    
    
    92Total deferred charges
    
    
    7,822
    
    
    
    7,934Total Assets
    
    $
    536,776
    
    
    $
    538,046
  51




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##### Table of Contents



ALLEGHENY GENERATING COMPANY
BALANCE SHEETS (continued)
(unaudited)
 March 31,
    
    
    December 31,(In thousands, except share data)
    
    2007
    
    
    2006LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,257
    
    
    $
    2,746Accounts payable to affiliates, net
    
    
    
    
    
    
    5,632Accrued interest
    
    
    554
    
    
    
    2,292Accrued taxes
    
    
    7,145
    
    
    
    Other current liabilities
    
    
    165
    
    
    
    Total current liabilities
    
    
    9,121
    
    
    
    10,670Long-term Debt (Note 2)
    
    
    99,466
    
    
    
    99,458Deferred Credits and Other Liabilities:Investment tax credit
    
    
    35,623
    
    
    
    35,953Non-current affiliated income taxes payable
    
    
    17,544
    
    
    
    17,544Deferred income taxes
    
    
    147,084
    
    
    
    148,824Regulatory liabilities
    
    
    22,018
    
    
    
    22,018Total deferred credits and other liabilities
    
    
    222,269
    
    
    
    224,339Commitments and Contingencies (Note 3)Stockholders Equity:Common stock, $1.00 par value, 5,000 shares
authorized and 1,000 shares outstanding at March 31,
2007 and December 31, 2006
    
    
    1
    
    
    
    1Other paid-in capital
    
    
    174,017
    
    
    
    172,669Retained earnings
    
    
    31,902
    
    
    
    30,909Total stockholders equity
    
    
    205,920
    
    
    
    203,579Total Liabilities and Stockholders Equity
    
    $
    536,776
    
    
    $
    538,046
  52




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ALLEGHENY GENERATING COMPANY
STATEMENT OF STOCKHOLDERS EQUITY
(unaudited)
 Other
    
    
    
    
    
    
    TotalShares
    
    
    Common
    
    
    paid-in
    
    
    Retained
    
    
    stockholders(In thousands, except shares)
    
    outstanding
    
    
    stock
    
    
    capital
    
    
    earnings
    
    
    equityBalance at December 31, 2006
    
    
    1,000
    
    
    $
    1
    
    
    $
    172,669
    
    
    $
    30,909
    
    
    $
    203,579Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,993
    
    
    
    5,993Intercompany tax sharing
agreement benefit
    
    
    
    
    
    
    
    
    
    
    1,348
    
    
    
    
    
    
    
    1,348Dividends declared on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,000
    )
    
    
    (5,000
    )Balance at March 31, 2007
    
    
    1,000
    
    
    $
    1
    
    
    $
    174,017
    
    
    $
    31,902
    
    
    $
    205,920
  53




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##### Table of Contents



ALLEGHENY GENERATING COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 Note No.
    
    
    
    Page No.1
    
    Basis of Presentation
    
    
    552
    
    Debt
    
    
    563
    
    Commitments and Contingencies
    
    
    56
 54




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##### Table of Contents



ALLEGHENY GENERATING COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 1: BASIS OF PRESENTATION
       Federal and State IncomeTaxes
   55




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##### Table of Contents



ALLEGHENY GENERATING COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 2: DEBT
  (In millions)
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    Thereafter
    
    TotalDebentures
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100.0
    
    
    $
    100.0
 
 NOTE 3: COMMITMENTS AND CONTINGENCIES
 Environmental Matters and Litigation
  Canadian Toxic-Tort Class Action:
 Other Litigation
 Ordinary Course of Business.
 56




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##### Table of Contents



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 and
    
    regulatory matters.
   
    
    plant performance and unplanned outages;
    
    volatility and changes in the price of power, coal, natural gas and other energy-related commodities;
    
    general economic and business conditions;
    
    changes in access to capital markets and actions of rating agencies;
 57




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##### Table of Contents




    
    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;
    
    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;
    
    inflationary and interest rate trends;
    
    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 accounting issues facing our organization; and
    
    other risks, including the effects of global instability, terrorism and war.
  58




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ALLEGHENY RESULTS OF OPERATIONS
 Overview
  Key Indicators and Performance Factors
 The Delivery and Services Segment
  Revenue per MWh sold
 Three Months EndedMarch 31,2007
    
    2006Revenue per MWh sold
    
    $
    60.50
    
    
    $
    59.20
 Operations and maintenance costs (O&M).
 Capital expenditures.
 The Generation and Marketing Segment
  kWhs generated.
 Equivalent Availability Factor (EAF).
 Station operations and maintenance costs (Station O&M).
 59




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Three Months Ended March 31,2007
    
    
    2006
    
    
    % ChangeSupercritical Units:EAF
    
    
    89.5
    %
    
    
    91.0
    %
    
    
    (1.5
    )Station O&M (in millions):Base operations (a)
    
    $
    25.0
    
    
    $
    23.1
    
    
    
    8.2Special
    
    
    10.4
    
    
    
    8.4
    
    
    
    23.8Total Station O&M
    
    $
    35.4
    
    
    $
    31.5
    
    
    
    12.4All Generation Units:kWhs generated (in millions)
    
    
    13,092
    
    
    
    13,017
    
    
    
    0.6EAF
    
    
    89.2
    %
    
    
    91.2
    %
    
    
    (2.0
    )Station O&M (in millions):Base operations (a)
    
    $
    38.0
    
    
    $
    38.0
    
    
    
    Special
    
    
    11.4
    
    
    
    9.2
    
    
    
    23.9Total Station O&M
    
    $
    49.4
    
    
    $
    47.2
    
    
    
    4.7
 
 (a)
    
    Reflects the reclassification of certain costs as described in Note 1, Basis of
Presentation, to Alleghenys Consolidated Financial Statements. Operating Statistics
  Three Months EndedMarch 31,2007
    
    2006
    
    % ChangeRetail electricity sales (million kWhs)
    
    
    11,712
    
    
    
    11,182
    
    
    
    4.7HDD (a)
    
    
    2,776
    
    
    
    2,426
    
    
    
    14.4
 
 (a)
    
    Heating degree-days (HDD).The operations of the Distribution Companies are weather
sensitive. Weather conditions directly influence the volume of electricity delivered by the
Distribution Companies representing one of several factors that impact the volume of
electricity. Accordingly, deviations in weather from normal levels can affect Alleghenys
financial performance. HDD is 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. Each degree of
temperature below 65° Fahrenheit is counted as one heating degree-day. Normal (historical) HDD
are 2,841, calculated on a weighted-average basis across the geographic areas served by the
Distribution Companies. 60




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ALLEGHENY ENERGY, INC.CONSOLIDATED RESULTS OF OPERATIONS
 Income Summary
 Three months ended March 31, 2007Delivery
    
    
    Generationand
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    757.9
    
    
    $
    524.5
    
    
    $
    (434.8
    )
    
    $
    847.6Fuel
    
    
    
    
    
    
    232.2
    
    
    
    
    
    
    
    232.2Purchased power and transmission
    
    
    500.8
    
    
    
    24.2
    
    
    
    (431.7
    )
    
    
    93.3Deferred energy costs, net
    
    
    (1.5
    )
    
    
    
    
    
    
    
    
    
    
    (1.5
    )Operations and maintenance
    
    
    86.3
    
    
    
    77.3
    
    
    
    (3.1
    )
    
    
    160.5Depreciation and amortization
    
    
    40.2
    
    
    
    31.8
    
    
    
    
    
    
    
    72.0Taxes other than income taxes
    
    
    35.5
    
    
    
    20.4
    
    
    
    
    
    
    
    55.9Total operating expenses
    
    
    661.3
    
    
    
    385.9
    
    
    
    (434.8
    )
    
    
    612.4Operating income
    
    
    96.6
    
    
    
    138.6
    
    
    
    
    
    
    
    235.2Other income and expenses, net
    
    
    3.0
    
    
    
    4.1
    
    
    
    (1.2
    )
    
    
    5.9Interest expense and preferred dividends
    
    
    18.7
    
    
    
    42.1
    
    
    
    (1.2
    )
    
    
    59.6Income from continuing operations before income taxes and minority interest
    
    
    80.9
    
    
    
    100.6
    
    
    
    
    
    
    
    181.5Income tax expense
    
    
    35.5
    
    
    
    35.9
    
    
    
    
    
    
    
    71.4Minority interest in net income of subsidiaries
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    0.4Net income
    
    $
    45.4
    
    
    $
    64.3
    
    
    $
    
    
    
    $
    109.7
 Three months ended March 31, 2006Delivery
    
    
    Generationand
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    702.6
    
    
    $
    507.1
    
    
    $
    (364.1
    )
    
    $
    845.6Fuel
    
    
    
    
    
    
    218.7
    
    
    
    
    
    
    
    218.7Purchased power and transmission
    
    
    447.7
    
    
    
    15.7
    
    
    
    (362.2
    )
    
    
    101.2Gain on sale of OVEC power agreement and shares
    
    
    
    
    
    
    (5.0
    )
    
    
    
    
    
    
    (5.0
    )Deferred energy costs, net
    
    
    5.0
    
    
    
    
    
    
    
    
    
    
    
    5.0Operations and maintenance
    
    
    86.8
    
    
    
    71.5
    
    
    
    (1.9
    )
    
    
    156.4Depreciation and amortization
    
    
    37.7
    
    
    
    30.1
    
    
    
    
    
    
    
    67.8Taxes other than income taxes
    
    
    33.3
    
    
    
    20.4
    
    
    
    
    
    
    
    53.7Total operating expenses
    
    
    610.5
    
    
    
    351.4
    
    
    
    (364.1
    )
    
    
    597.8Operating income
    
    
    92.1
    
    
    
    155.7
    
    
    
    
    
    
    
    247.8Other income and expenses, net
    
    
    4.3
    
    
    
    3.8
    
    
    
    (0.4
    )
    
    
    7.7Interest expense and preferred dividends
    
    
    19.9
    
    
    
    48.2
    
    
    
    (0.4
    )
    
    
    67.7Income from continuing operations before income taxes and minority interest
    
    
    76.5
    
    
    
    111.3
    
    
    
    
    
    
    
    187.8Income tax expense
    
    
    30.1
    
    
    
    42.3
    
    
    
    
    
    
    
    72.4Minority interest in net income of subsidiaries
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    1.2Income from continuing operations
    
    
    46.4
    
    
    
    67.8
    
    
    
    
    
    
    
    114.2Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.8
    )
    
    
    
    
    
    
    (0.8
    )Net income
    
    $
    46.4
    
    
    $
    67.0
    
    
    $
    
    
    
    $
    113.4
 61




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ALLEGHENY ENERGY, INC.CONSOLIDATED RESULTS
  Operating Revenues
  Operating Income
   
    
    a $13.5 million increase in fuel expense, primarily due to an increase in
the average price of coal and an increase in the amount of coal consumed,
    
    a $5.0 million gain from the release of escrowed proceeds relating to the
sale of the OVEC power agreement and shares, which was recorded during the three
months ended March 31, 2006,
    
    a $4.1 million increase in operations and maintenance expense, primarily
due to the reversal of a guarantee liability in 2006 associated with the Hunlock
Creek Energy Ventures partnership and
    
    a $4.2 million increase in depreciation and amortization expense, primarily
due to net property, plant and equipment additions.
  Income from Continuing Operations Before Income Taxes and Minority Interest
  
    
    the $12.6 million decrease in operating income discussed above,
    
    partially offset by an $8.1 million decrease in interest expense and preferred
dividends, primarily due to lower average debt outstanding.
 62




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Income Tax Expense
   63




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ALLEGHENY ENERGY, INC.DISCUSSION OF SEGMENT RESULTS OF OPERATIONS:
 Delivery and Services
  Three Months EndedMarch 31,2007
    
    2006
    
    % ChangeRetail electricity sales (million kWhs)
    
    
    11,712
    
    
    
    11,182
    
    
    
    4.7HDD (a)
    
    
    2,776
    
    
    
    2,426
    
    
    
    14.4
 
 (a)
    
    Normal (historical) HDD are 2,841, calculated on a weighted-average basis across the
geographic areas served by the Distribution Companies.
 Operating Revenues
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Retail electric:Generation
    
    $
    471.6
    
    
    $
    438.7Transmission
    
    
    43.8
    
    
    
    42.1Distribution
    
    
    193.2
    
    
    
    181.2Total retail electric
    
    
    708.6
    
    
    
    662.0Transmission services and bulk power
    
    
    38.5
    
    
    
    35.7Other affiliated and nonaffiliated energy services
    
    
    10.8
    
    
    
    4.9Total Delivery and Services operating revenues
    
    $
    757.9
    
    
    $
    702.6
  
    
    a $32.9 million increase in generation revenues due to greater customer usage due to
colder weather and from the addition of new customers, as well as the effect of a January
1, 2007 rate increase arising from a settlement approved by the Pennsylvania PUC and
    
    a $13.7 million increase in T&D revenues as a result of increased customer usage due
to colder weather and the addition of new customers.
  
    
    a $3.8 million increase in bulk power revenues, primarily due to a scheduled
maintenance outage at the AES Warrior Run generation facility during the three months
ended March 31, 2006 that did not recur during the three months ended March 31, 2007,
    
    partially offset by a $1.2 million decrease in bulk power revenues related to a fixed
price power supply agreement to serve Monongahelas former Ohio service territory.
  64




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Operating Expenses
 Purchased Power and Transmission:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Other purchased power and transmission
    
    $
    461.6
    
    
    $
    401.5From PURPA generation (a)
    
    
    39.2
    
    
    
    46.2Total purchased power and transmission
    
    $
    500.8
    
    
    $
    447.7
 
 a) PURPA cost (cents per kWh)
    
    
    5.5
    
    
    
    5.2
    
    
    an increase in other purchased power as a result of colder weather, the addition of
new customers and increased prices,
    
    an approximate $11 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 as a result of a January 1, 2007 rate increase due to a settlement
approved by the Pennsylvania PUC and
    
    a $4.2 million increase in other purchased power and transmission related to a
contract to supply power for Monongahelas former Ohio electric service territory through
May 2007.
  65




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Deferred energy costs, Net:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Deferred energy costs, net
    
    $
    (1.5
    )
    
    $
    5.0
  AES Warrior Run PURPA Generation
  Grant Town PURPA Generation facility
  Market-based Generation Costs
   66




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Depreciation and Amortization:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Depreciation and amortization
    
    $
    40.2
    
    
    $
    37.7
  Taxes Other Than Income Taxes:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Taxes other than income taxes
    
    $
    35.5
    
    
    $
    33.3
  Other Income and Expenses, Net
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Other income and expenses, net
    
    $
    3.0
    
    
    $
    4.3
   Interest Expense and Preferred Dividends:
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Interest expense and preferred dividends
    
    $
    18.7
    
    
    $
    19.9
  67




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Income Tax Expense
   Generation and Marketing
  Three Months EndedMarch 31,2007
    
    2006
    
    ChangeGeneration (million kWhs)
    
    
    13,092
    
    
    
    13,017
    
    
    
    0.6
    %
 Operating Revenues
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Revenue from affiliates
    
    $
    431.7
    
    
    $
    362.3Wholesale and other, net (a)
    
    
    92.8
    
    
    
    144.8Total revenues
    
    $
    524.5
    
    
    $
    507.1
 
 (a)
    
    Amounts are net of energy trading gains and losses as
described in Note 7, Derivative Instruments and
Hedging Activities. Energy trading gains (losses) are
presented in the wholesale and other revenues table
below. Revenue from affiliates:
   68




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
    
    a $19.2 million increase due to an increase in sales volume and price reflecting the
transfer of Monongahelas PURPA contracts to the Generation and Marketing segment from the
Delivery and Services segment, causing a corresponding increase in both revenues and
purchased power,
    
    a $15.1 million increase related to the assignment, in connection with the Asset Swap, of
AE Supplys below-market power supply agreement to serve Potomac Edisons West Virginia load
obligations, as a result of which, Potomac Edison now purchases the power necessary to
service its West Virginia customers from Monongahela at a prorated share of overall
Monongahela generation costs and associated revenue,
    
    increased sales volumes as a result of colder weather,
    
    a $14.0 million increase, primarily related to higher generation rates charged to
Pennsylvania customers, effective January 1, 2007, as a result of a West Penn settlement
approved by the Pennsylvania PUC, which are passed on to AE Supply under the terms of a
power supply agreement between West Penn and AE Supply and
    
    a $16.5 million increase related to higher contractual rates with increased sales volumes
for certain of Potomac Edisons customers in Maryland,
    
    partially offset by a $3.0 million decrease in ancillary service revenues from the
Delivery and Services segment due to a contract expiration.
 Wholesale and other revenues, net:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006PJM Revenue:Generation sold into PJM
    
    $
    629.5
    
    
    $
    581.9Power purchased from PJM
    
    
    (539.4
    )
    
    
    (453.8
    )Net
    
    
    90.1
    
    
    
    128.1Cash flow hedges and trading activities:Realized gains (losses)
    
    
    (3.9
    )
    
    
    3.6Unrealized gains (losses)
    
    
    2.4
    
    
    
    13.0Net
    
    
    (1.5
    )
    
    
    16.6Other revenues
    
    
    4.2
    
    
    
    0.1Total wholesale and other revenues
    
    $
    92.8
    
    
    $
    144.8
  
    
    a decrease in net PJM revenues of $38.0 million and
    
    an $18.1 million decrease in cash flow hedges and trading revenues, primarily related to
the settlement of cash flow hedges that were transacted during a period of high prices
during the first quarter of 2006,
 69




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
    
    partially offset by a $4.1 million increase in other revenues, primarily due to sales of
certain other power supply contracts within the Allegheny Power service territory and
proceeds from the annual U.S. Environmental Protection Agencys (EPA) emissions allowance
auction.
  Fair Value of Contracts :
   Fair value of contracts at March 31, 2007Classification of contractsby source of fair value(In millions)
    
    Settlement by:2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    TotalPrices actively quoted
    
    $
    (7.3
    )
    
    $
    (5.8
    )
    
    $
    (5.5
    )
    
    $
    (5.3
    )
    
    $
    (1.7
    )
    
    $
    (25.6
    )Prices provided by other external sources
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Prices based on models
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    (7.3
    )
    
    $
    (5.8
    )
    
    $
    (5.5
    )
    
    $
    (5.3
    )
    
    $
    (1.7
    )
    
    $
    (25.6
    )
   70




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Changes in Fair Value :
 Three Months EndedMarch 31,(In millions)
    
    2007Net fair value of derivative contract liabilities at January 1
    
    $
    (22.5
    )Changes in fair value of cash flow hedges
    
    
    (5.5
    )Unrealized gains on contracts, net
    
    
    2.4Net fair value of derivative contract liabilities at March 31
    
    $
    (25.6
    )
  Operating Expenses
 Fuel:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Fuel
    
    $
    232.2
    
    
    $
    218.7
  Purchased Power and Transmission:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Purchased power and transmission expenses
    
    $
    24.2
    
    
    $
    15.7
  Gain on Sale of OVEC Power Agreement and Shares:
 71




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Operations and Maintenance:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Operations and maintenance
    
    $
    77.3
    
    
    $
    71.5
  
    
    a $6.4 million reversal of a guarantee liability associated with the Hunlock Creek
Energy Ventures partnership during the three months ended March 31, 2006 that did not
recur during the three months ended March 31, 2007 and
    
    a $4.1 million increase in contract work expense, primarily due to maintenance
performed during a scheduled outage at Fort Martin Unit No. 1 which occurred during the
three months ended March 31, 2007, partially offset by a maintenance outage at the
Harrison generation facility during the three months ended March 31, 2006 that did not
recur during the three months ended March 31, 2007,
    
    partially offset by a $1.9 million decrease in materials and supplies expense due to
decreased base maintenance expenditures at several Allegheny generation facilities and a
$1.3 million decrease in insurance expense, primarily due to decreased claims.
 Depreciation and Amortization:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Depreciation and amortization
    
    $
    31.8
    
    
    $
    30.1
  Interest Expense and Preferred Dividends
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Interest expense and preferred dividends
    
    $
    42.1
    
    
    $
    48.2
  Income Tax Expense
  72




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MONONGAHELA POWER COMPANY AND SUBSIDIARIESCONSOLIDATED RESULTS OF OPERATIONS
 Income (Loss) Summary
 Three months ended March 31, 2007Delivery
    
    
    Generationand
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    181.1
    
    
    $
    117.3
    
    
    $
    (97.5
    )
    
    $
    200.9Fuel
    
    
    
    
    
    
    60.4
    
    
    
    
    
    
    
    60.4Purchased power and transmission
    
    
    107.6
    
    
    
    28.6
    
    
    
    (97.5
    )
    
    
    38.7Deferred energy costs, net
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    (0.3
    )Operations and maintenance
    
    
    24.1
    
    
    
    30.7
    
    
    
    
    
    
    
    54.8Depreciation and amortization
    
    
    7.8
    
    
    
    10.0
    
    
    
    
    
    
    
    17.8Taxes other than income taxes
    
    
    5.5
    
    
    
    7.0
    
    
    
    
    
    
    
    12.5Total operating expenses
    
    
    144.7
    
    
    
    136.7
    
    
    
    (97.5
    )
    
    
    183.9Operating income (loss)
    
    
    36.4
    
    
    
    (19.4
    )
    
    
    
    
    
    
    17.0Other income and expenses, net
    
    
    0.2
    
    
    
    3.7
    
    
    
    
    
    
    
    3.9Interest expense
    
    
    4.7
    
    
    
    3.9
    
    
    
    
    
    
    
    8.6Income (loss) before income taxes
    
    
    31.9
    
    
    
    (19.6
    )
    
    
    
    
    
    
    12.3Income tax expense (benefit)
    
    
    14.2
    
    
    
    (8.9
    )
    
    
    
    
    
    
    5.3Net income (loss)
    
    $
    17.7
    
    
    $
    (10.7
    )
    
    $
    
    
    
    $
    7.0
 Three months ended March 31, 2006Delivery
    
    
    Generationand
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    174.1
    
    
    $
    101.1
    
    
    $
    (78.0
    )
    
    $
    197.2Fuel
    
    
    
    
    
    
    45.1
    
    
    
    
    
    
    
    45.1Purchased power and transmission
    
    
    98.7
    
    
    
    20.4
    
    
    
    (78.0
    )
    
    
    41.1Operations and maintenance
    
    
    24.3
    
    
    
    16.2
    
    
    
    
    
    
    
    40.5Depreciation and amortization
    
    
    7.6
    
    
    
    8.8
    
    
    
    
    
    
    
    16.4Taxes other than income taxes
    
    
    6.3
    
    
    
    5.9
    
    
    
    
    
    
    
    12.2Total operating expenses
    
    
    136.9
    
    
    
    96.4
    
    
    
    (78.0
    )
    
    
    155.3Operating income
    
    
    37.2
    
    
    
    4.7
    
    
    
    
    
    
    
    41.9Other income and expenses, net
    
    
    1.5
    
    
    
    2.2
    
    
    
    
    
    
    
    3.7Interest expense
    
    
    6.2
    
    
    
    4.6
    
    
    
    
    
    
    
    10.8Income before income taxes
    
    
    32.5
    
    
    
    2.3
    
    
    
    
    
    
    
    34.8Income tax expense
    
    
    12.7
    
    
    
    0.4
    
    
    
    
    
    
    
    13.1Net income
    
    $
    19.8
    
    
    $
    1.9
    
    
    $
    
    
    
    $
    21.7
 74




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MONONGAHELA POWER COMPANYCONSOLIDATED RESULTS
  Operating Revenues
  Operating Income
   
    
    a $15.3 million increase in fuel expense, primarily due to an increase in
the average price of coal and an increase in the amount of coal consumed and
    
    a $14.3 million increase in operations and maintenance expenses, primarily
due to an increase in contract work due to a planned maintenance outage in the first
quarter of 2007 and an increase in salaries and wages due to the January 1, 2007
Asset Swap.
  Income Before Income Taxes
  Income Tax Expense
   75




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MONONGAHELA POWER COMPANY-DISCUSSION OF SEGMENT RESULTS OF OPERATIONS:
 Delivery and Services
  Three Months EndedMarch 31,2007
    
    2006
    
    % ChangeRetail electricity sales (million kWhs)
    
    
    2,783
    
    
    
    2,653
    
    
    
    4.9HDD (a)
    
    
    2,617
    
    
    
    2,147
    
    
    
    21.9
 
 (a)
    
    Normal (historical) Heating Degree Days (HDD) are 2,765, calculated on a
weighted-average basis across the geographic areas served by Monongahela. Operating Revenues
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Retail electric:Generation
    
    $
    95.3
    
    
    $
    90.6Transmission
    
    
    9.1
    
    
    
    8.6Distribution
    
    
    52.5
    
    
    
    49.5Total retail electric
    
    
    156.9
    
    
    
    148.7Transmission services and bulk power
    
    
    21.7
    
    
    
    22.8Other affiliated and non-affiliated energy services
    
    
    2.5
    
    
    
    2.6Total Delivery and Services revenues
    
    $
    181.1
    
    
    $
    174.1
  
    
    a $4.7 million increase in generation revenues due to load growth from increased
customer usage due to colder weather and the addition of new customers and
    
    a $3.5 million increase in T&D revenues as a result of increased customer usage due
to colder weather and the addition of new customers.
  76




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##### Table of Contents



Operating Expenses
 Purchased Power and Transmission:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Other purchased power and transmission
    
    $
    107.6
    
    
    $
    83.9From PURPA generation (a)
    
    
    
    
    
    
    14.8Total purchased power and transmission
    
    $
    107.6
    
    
    $
    98.7
 
 (a) PURPA cost (cents per kWh)
    
    
    
    
    
    
    4.3
    Other Income and Expenses, Net
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Other income and expenses, net
    
    $
    0.2
    
    
    $
    1.5
  Interest Expense:
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Interest expense
    
    $
    4.7
    
    
    $
    6.2
  77




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Income Tax Expense
   Generation and Marketing
  Three Months EndedMarch 31,2007
    
    2006
    
    % ChangeGeneration (million kWhs)
    
    
    3,234
    
    
    
    2,816
    
    
    
    14.8
 Operating Revenues
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Revenue from affiliates
    
    $
    144.8
    
    
    $
    77.2Wholesale and other, net
    
    
    (27.5
    )
    
    
    23.9Total operating revenues
    
    $
    117.3
    
    
    $
    101.1
    
    
    an increase in affiliated sales volume and price reflecting the transfer of Monongahelas
PURPA contracts to the Generation and Marketing segment from the Delivery and Services
segment, causing a corresponding increase in both revenues and purchased power and
    
    an increase in affiliated revenues related to the assignment to Monongahela, in
connection with the Asset Swap, of AE Supplys below-market power supply agreement to serve
Potomac Edisons West Virginia load obligations, as a result
 78




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##### Table of Contents




    
    of which, Potomac Edison now purchases the power necessary to service its West Virginia
customers from Monongahela at a prorated share of overall Monongahela generation costs and
associated revenue,
    
    partially offset by a decrease in wholesale and other revenue as a result of changes to
the contractual obligations discussed above.
  Operating Expenses
 Fuel:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Fuel
    
    $
    60.4
    
    
    $
    45.1
  Purchased Power and Transmission:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Purchased power and transmission
    
    $
    28.6
    
    
    $
    20.4
  
    
    a $16.3 million increase from the transfer of Monongahelas PURPA contracts to the
Generation and Marketing segment from the Delivery and Services segment and
    
    a $3.0 million increase in capacity purchased from AGC due to Monongahelas increased
ownership interest in AGC as a result of the January 1, 2007 Asset Swap,
    
    partially offset by an $11.6 million decrease in affiliated purchased power due to
the termination of an AE Supply contract as part of the January 1, 2007 Asset Swap as
described above in Operating Revenues.
  Operations and Maintenance:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Operations and maintenance
    
    $
    30.7
    
    
    $
    16.2
  79




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##### Table of Contents




    
    a $7.6 million increase in contract work expense, primarily due to maintenance
performed during a scheduled outage at Fort Martin Unit No. 1 in the three months ended
March 31, 2007, partially offset by maintenance outages at the Harrison generation
facility during the three months ended March 31, 2006 that did not recur during the three
months ended March 31, 2007,
    
    a $3.0 million increase in salaries and wages expense, primarily due to the January
1, 2007 Asset Swap and a scheduled outage at Fort Martin Unit No. 1 and
    
    a $1.3 million increase in materials and supplies expense, primarily due to the
change in Monongahelas ownership of certain generation facilities as a result of the
January 1, 2007 Asset Swap.
  Depreciation and Amortization:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Depreciation and amortization
    
    $
    10.0
    
    
    $
    8.8
   Taxes Other Than Income Taxes:
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Taxes other than income taxes
    
    $
    7.0
    
    
    $
    5.9
   Other Income and Expenses, Net
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Other income and expenses, net
    
    $
    3.7
    
    
    $
    2.2
   80




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Income Tax Expense
   81




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##### Table of Contents



ALLEGHENY GENERATING COMPANYRESULTS OF OPERATIONS
 Income Summary
 Three Months EndedMarch 31,(In millions)
    
    2007
    
    2006Operating revenues
    
    $
    16.9
    
    
    $
    17.3Operating income
    
    $
    10.5
    
    
    $
    10.7Income before income taxes
    
    $
    8.8
    
    
    $
    9.0Net income
    
    $
    6.0
    
    
    $
    6.1
  Income Tax Expense
  82




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FINANCIAL CONDITION, REQUIREMENTS AND RESOURCES
 Liquidity and Capital RequirementsAllegheny
    Total
    
    
    
    
    
    
    LOCs
    
    
    Available(In millions)
    
    Capacity
    
    
    Borrowed
    
    
    Issued
    
    
    CapacityAE Revolving Credit Facility (a)
    
    $
    400.0
    
    
    $
    
    
    
    $
    131.8
    (b)
    
    $
    268.2AE Supply Revolving Facility
    
    
    200.0
    
    
    
    
    
    
    
    
    
    
    
    200.0Total
    
    $
    600.0
    
    
    $
    
    
    
    $
    131.8
    
    
    $
    468.2
 
 (a)
    
    Allegheny has agreed to maintain $35 million of availability under AEs revolving credit
facility to stay enforcement of the judgment in its litigation against Merrill Lynch while an
appeal is pending.(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 and
a letter of credit for $6.8 million issued due to an Allegheny Ventures contractual obligation
that expires in July 2007. AE Supply also has a $2.5 million letter of credit outstanding that
expires in February 2008, is collateralized by cash and was not issued under either AEs
revolving credit facility or AE Supplys revolving credit facility.  March 31, 2007
    
    
    December 31, 2006(In millions)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Debt
    
    $
    3,550.8
    
    
    
    61.8
    
    
    $
    3,585.2
    
    
    
    63.0Common equity
    
    
    2,177.0
    
    
    
    37.8
    
    
    
    2,080.4
    
    
    
    36.6Preferred equity
    
    
    24.0
    
    
    
    0.4
    
    
    
    24.0
    
    
    
    0.4Total
    
    $
    5,751.8
    
    
    
    100.0
    
    
    $
    5,689.6
    
    
    
    100.0
 Subsequent debt activity
  83




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Long-Term Debt and Contractual Obligations
   Off-Balance Sheet Arrangements
  Allegheny Cash Flows
 Operating Activities
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Net income
    
    $
    109.7
    
    
    $
    113.4Loss from discontinued operations, net of tax
    
    
    
    
    
    
    0.8Non-cash items included in earnings
    
    
    150.5
    
    
    
    140.9Pension and other postretirement employee benefit contributions
    
    
    (39.3
    )
    
    
    (62.5
    )Changes in certain assets and liabilities
    
    
    (67.1
    )
    
    
    (81.1
    )Net cash used in operating activities of discontinued operations
    
    
    
    
    
    
    (1.3
    )Net cash provided by operating activities
    
    $
    153.8
    
    
    $
    110.2
   84




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Investing Activities
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Capital expenditures
    
    $
    (168.4
    )
    
    $
    (94.8
    )Proceeds from sale of assets
    
    
    0.3
    
    
    
    Purchase of minority interest in Hunlock Creek Energy Ventures
    
    
    
    
    
    
    (13.9
    )Decrease in restricted funds
    
    
    1.3
    
    
    
    5.3Other investments
    
    
    (1.0
    )
    
    
    (1.7
    )Net cash used in investing activities
    
    $
    (167.8
    )
    
    $
    (105.1
    )
   Financing Activities
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Repayment of long-term debt
    
    $
    (36.1
    )
    
    $
    (51.8
    )Proceeds from the exercise of stock options
    
    
    4.6
    
    
    
    8.5Deferred financing costs
    
    
    
    
    
    
    (0.2
    )Cash dividends paid to minority shareholder in Hunlock Creek Energy Ventures
    
    
    
    
    
    
    (0.4
    )Net cash used in financing activities
    
    $
    (31.5
    )
    
    $
    (43.9
    )
   Monongahela Cash Flows
 Operating Activities
  85




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Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Net income
    
    $
    7.0
    
    
    $
    21.7Non-cash items included in earnings
    
    
    11.5
    
    
    
    22.6Changes in certain assets and liabilities
    
    
    (54.4
    )
    
    
    (10.5
    )Net cash provided by (used in) operating activities
    
    $
    (35.9
    )
    
    $
    33.8
   Investing Activities
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Capital expenditures
    
    $
    (39.0
    )
    
    $
    (18.7
    )Notes receivable from affiliates
    
    
    27.3
    
    
    
    (45.4
    )Net cash used in investing activities
    
    $
    (11.7
    )
    
    $
    (64.1
    )
   86




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Financing Activities
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Notes payable to affiliates
    
    $
    24.4
    
    
    $
    Repayment of long-term debt
    
    
    (0.9
    )
    
    
    Intercompany tax sharing agreement benefit
    
    
    3.4
    
    
    
    Cash payment
from AE Supply related to Asset Swap
    
    
    1.1
    
    
    
    Deferred financing costs
    
    
    
    
    
    
    (0.1
    )Cash dividends paid on preferred stock
    
    
    (0.3
    )
    
    
    (0.3
    )Cash dividends paid on common stock
    
    
    
    
    
    
    (10.0
    )Net cash provided by (used in) financing activities
    
    $
    27.7
    
    
    $
    (10.4
    )
   AGC Cash Flows
 Operating Activities
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Net income
    
    $
    6.0
    
    
    $
    6.1Non-cash items included in earnings
    
    
    2.3
    
    
    
    2.6Changes in certain assets and liabilities
    
    
    (3.6
    )
    
    
    (0.8
    )Net cash provided by operating activities
    
    $
    4.7
    
    
    $
    7.9
   87




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Investing Activities
  Financing Activities
  Three Months EndedMarch 31,(In millions)
    
    2007
    
    
    2006Intercompany tax sharing agreement benefit
    
    $
    1.3
    
    
    $
    Cash dividends paid on common stock
    
    
    (5.0
    )
    
    
    (5.0
    )Net cash used in financing activities
    
    $
    (3.7
    )
    
    $
    (5.0
    )
  88




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##### Table of Contents



Credit Ratings
  Moodys
    
    S & P
    
    FitchOutlook
    
    Stable (1)
    
    Stable
    
    Stable (2)AE:Corporate Credit Rating
    
    Ba2(3)
    
    BBB-
    
    NR(5)Senior Unsecured Debt
    
    Ba2
    
    BB+
    
    BB+Short-term Rating
    
    SGL-2(4)
    
    A-3
    
    NR(5)AE Supply:Senior Secured Debt
    
    Baa3
    
    BBB
    
    BBB-Senior Unsecured Debt
    
    Ba3
    
    BB+
    
    BB+Pollution Control Bonds
    
    NR(5)
    
    NR(5)
    
    AAAMonongahela:First Mortgage Bonds
    
    Baa2
    
    BBB
    
    BBB+Senior Unsecured Debt
    
    Baa3
    
    BB+
    
    BBB-Preferred Stock
    
    Ba3
    
    BB
    
    BB+Environmental Control Bonds
    
    Aaa
    
    AAA
    
    AAAPotomac Edison:First Mortgage Bonds
    
    Baa2
    
    BBB
    
    BBB+Senior Unsecured Debt
    
    Baa3
    
    BB+
    
    BBB-Environmental Control Bonds
    
    Aaa
    
    AAA
    
    AAAWest Penn:Transition Bonds
    
    Aaa
    
    AAA
    
    AAAFirst Mortgage Bonds
    
    Baa2
    
    BBB
    
    BBB+Senior Unsecured Debt
    
    Baa3
    
    BBB-
    
    BBB-AGC:Senior Unsecured Debt
    
    Ba3
    
    BBB-
    
    BB+
 
 (1)
    
    Moodys outlook for Potomac Edison is negative(2)
    
    Fitchs outlook for Monongahela is negative(3)
    
    Corporate family rating for AE only, which excludes all of its subsidiaries(4)
    
    Liquidity rating(5)
    
    Not rated 89




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##### Table of Contents



OTHER MATTERS
 Critical Accounting Policies
  Recent Accounting Pronouncements
  REGULATORY MATTERS
  Federal Legislation, Regulation and Rate Matters
 Transmission Rate Design.
   90




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Transmission Expansion.
  91




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State Legislation, Regulation and Rate Matters
 Pennsylvania
 Transmission Expansion.
 West Virginia
 Transmission Expansion.
 92




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Rate Case.
 Securitization and Scrubber Project.
    93




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##### Table of Contents



Maryland
 Rate Stabilization.
  Virginia
 Transmission Expansion.
   94




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95




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##### Table of Contents



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
 96




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 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
   
 ITEM 5. OTHER INFORMATION
  97




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##### Table of Contents



ITEM 6. EXHIBITS
 EXHIBIT INDEX
 Allegheny Energy, Inc.
 Documents10.1*
    
    Alliance Agreement for Engineering, Construction and Project Management
for the Trans-Allegheny Interstate Line Project, dated February 28, 2007,
by and between Trans-Allegheny Interstate Line Company and Kenny
Construction Company31.1
    
    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
 
 *
    
    Confidential treatment has been requested from the Commission for portions of this document. 98




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##### Table of Contents



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
 99




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##### Table of Contents



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
 100




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SIGNATURE
  ALLEGHENY ENERGY, INC.Date: May 8, 2007
    
    By:
    
    /s/ Philip L. GouldingPhilip L. GouldingSenior Vice President andChief Financial OfficerMONONGAHELA POWER COMPANYDate: May 8, 2007
    
    By:
    
    /s/ Philip L. GouldingPhilip L. GouldingVice President andPrincipal Financial OfficerALLEGHENY GENERATING COMPANY.Date: May 8, 2007
    
    By:
    
    /s/ Philip L. GouldingPhilip L. GouldingVice President andPrincipal Financial Officer
 101