##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 Name of RegistrantState of IncorporationAddress of PrincipalCommission
    
    Executive
    
    IRS EmployerFile Number
    
    Offices and Telephone Number
    
    Identification Number1-267
    
    ALLEGHENY ENERGY, INC.
    
    13-5531602(A Maryland Corporation)800 Cabin Hill DriveGreensburg, Pennsylvania 15601Telephone (724) 837-30001-5164
    
    MONONGAHELA POWER COMPANY
    
    13-5229392(An Ohio Corporation)1310 Fairmont AvenueFairmont, West Virginia 26554Telephone (304) 366-30000-14688
    
    ALLEGHENY
    
    13-3079675GENERATING COMPANY(A Virginia Corporation)800 Cabin Hill DriveGreensburg, Pennsylvania 15601Telephone (724) 837-3000
 
  þ o
  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.
    
    
    166,072,015
    
    
    ($1.25 par value)Monongahela Power Company
    
    
    5,891,000
    
    
    ($50.00 par value)Allegheny Generating Company
    
    
    1,000
    
    
    ($1.00 par value)




---



##### Table of Contents



TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Allegheny Energy, Inc. and Subsidiaries
    
    
    4Monongahela Power Company and Subsidiaries
    
    
    31Allegheny 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
    
    
    103Item 4. Controls and Procedures
    
    
    104PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    105Item 1A. Risk Factors
    
    
    105Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    106Item 3. Defaults Upon Senior Securities
    
    
    106Item 4. Submission of Matters to a Vote of Security Holders
    
    
    107Item 5. Other Information
    
    
    108Item 6. Exhibits
    
    
    109Signatures
    
    
    112Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
 2




---



##### Table of Contents



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
    
    Monongahela, Potomac Edison and West Penn, which collectively 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




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In thousands, except per share data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Operating revenues
    
    $
    826,482
    
    
    $
    722,235
    
    
    $
    1,674,107
    
    
    $
    1,567,881Operating expenses:Fuel
    
    
    231,330
    
    
    
    191,765
    
    
    
    463,555
    
    
    
    410,452Purchased power and transmission
    
    
    106,407
    
    
    
    95,097
    
    
    
    199,673
    
    
    
    196,329Gain on sale of OVEC power agreement and shares
    
    
    
    
    
    
    (1,124
    )
    
    
    
    
    
    
    (6,124
    )Deferred energy costs, net
    
    
    (8,245
    )
    
    
    413
    
    
    
    (9,700
    )
    
    
    5,406Operations and maintenance
    
    
    190,514
    
    
    
    200,291
    
    
    
    351,058
    
    
    
    356,674Depreciation and amortization
    
    
    70,726
    
    
    
    68,169
    
    
    
    142,707
    
    
    
    136,011Taxes other than income taxes
    
    
    48,868
    
    
    
    52,201
    
    
    
    104,758
    
    
    
    105,868Total operating expenses
    
    
    639,600
    
    
    
    606,812
    
    
    
    1,252,051
    
    
    
    1,204,616Operating income
    
    
    186,882
    
    
    
    115,423
    
    
    
    422,056
    
    
    
    363,265Other income and expenses, net
    
    
    6,905
    
    
    
    10,258
    
    
    
    12,767
    
    
    
    17,929Interest expense and preferred dividends:Interest expense
    
    
    62,919
    
    
    
    76,425
    
    
    
    122,155
    
    
    
    143,813Preferred dividends of subsidiary
    
    
    293
    
    
    
    293
    
    
    
    586
    
    
    
    586Total interest expense and preferred dividends
    
    
    63,212
    
    
    
    76,718
    
    
    
    122,741
    
    
    
    144,399Income from continuing operations before income taxes
and minority interest
    
    
    130,575
    
    
    
    48,963
    
    
    
    312,082
    
    
    
    236,795Income tax expense
    
    
    52,878
    
    
    
    16,741
    
    
    
    124,256
    
    
    
    89,245Minority interest in net income of subsidiaries
    
    
    653
    
    
    
    191
    
    
    
    1,040
    
    
    
    1,369Income from continuing operations
    
    
    77,044
    
    
    
    32,031
    
    
    
    186,786
    
    
    
    146,181Loss from discontinued operations, net of tax (Note 11)
    
    
    
    
    
    
    (898
    )
    
    
    
    
    
    
    (1,664
    )Net income
    
    $
    77,044
    
    
    $
    31,133
    
    
    $
    186,786
    
    
    $
    144,517Common share data:Weighted average common shares outstanding:Basic
    
    
    165,794
    
    
    
    163,526
    
    
    
    165,645
    
    
    
    163,304Diluted
    
    
    169,469
    
    
    
    168,608
    
    
    
    169,326
    
    
    
    168,557Basic income (loss) per common share:Income from continuing operations
    
    $
    0.46
    
    
    $
    0.20
    
    
    $
    1.13
    
    
    $
    0.89Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Net income per common share
    
    $
    0.46
    
    
    $
    0.19
    
    
    $
    1.13
    
    
    $
    0.88Diluted income (loss) per common share:Income from continuing operations
    
    $
    0.45
    
    
    $
    0.19
    
    
    $
    1.10
    
    
    $
    0.87Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Net income per common share
    
    $
    0.45
    
    
    $
    0.18
    
    
    $
    1.10
    
    
    $
    0.86
  4




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Six Months EndedJune 30,(In thousands)
    
    2007
    
    
    2006Cash Flows From Operating Activities:Net income
    
    $
    186,786
    
    
    $
    144,517Loss from discontinued operations, net of tax
    
    
    
    
    
    
    1,664Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    142,707
    
    
    
    136,011Amortization of debt issuance costs
    
    
    5,051
    
    
    
    16,171Amortization of power sale liability related to Ohio sale
    
    
    (10,500
    )
    
    
    (15,500
    )Amortization of liability for adverse power purchase commitment
    
    
    (8,644
    )
    
    
    (8,577
    )Amortization of Pennsylvania stranded cost recovery asset
    
    
    8,833
    
    
    
    7,468Loss (gain) on asset sales and disposals
    
    
    15
    
    
    
    (1,023
    )Minority interest in net income of subsidiaries
    
    
    1,040
    
    
    
    1,369Deferred income taxes and investment tax credit, net
    
    
    123,319
    
    
    
    89,628Deferred energy costs, net
    
    
    (9,700
    )
    
    
    5,405Stock-based compensation expense
    
    
    5,559
    
    
    
    7,928Unrealized gains on commodity contracts, net
    
    
    (1,607
    )
    
    
    (18,301
    )Pension and other postretirement employee benefit plan expense
    
    
    18,115
    
    
    
    21,193Pension and other postretirement employee benefit plan contributions
    
    
    (42,174
    )
    
    
    (65,381
    )Deferred revenue  Fort Martin scrubber project
    
    
    8,005
    
    
    
    Other, net
    
    
    2,421
    
    
    
    10,161Changes in certain assets and liabilities:Accounts receivable, net
    
    
    (54,017
    )
    
    
    46,303Materials, supplies and fuel
    
    
    (7,983
    )
    
    
    (23,558
    )Prepaid taxes
    
    
    (7,361
    )
    
    
    (7,596
    )Collateral deposits
    
    
    (203
    )
    
    
    94,895Prepayments
    
    
    (1,161
    )
    
    
    272Other current assets
    
    
    8,137
    
    
    
    (108
    )Accounts payable
    
    
    40,430
    
    
    
    (111,169
    )Accrued taxes
    
    
    (12,324
    )
    
    
    (16,054
    )Accrued interest
    
    
    8,142
    
    
    
    5,429Other current liabilities
    
    
    (2,521
    )
    
    
    1,841Other assets
    
    
    1,366
    
    
    
    8,615Deferred income taxes
    
    
    (12,190
    )
    
    
    (7,002
    )Other liabilities
    
    
    5,368
    
    
    
    (3,647
    )Net cash used in operating activities of discontinued operations
    
    
    
    
    
    
    (2,138
    )Net cash provided by operating activities
    
    
    394,909
    
    
    
    318,816Cash Flows From Investing Activities:Capital expenditures
    
    
    (351,259
    )
    
    
    (196,757
    )Proceeds from sale of assets
    
    
    268
    
    
    
    2,081Purchase of minority interest in Hunlock Creek Energy Ventures
    
    
    
    
    
    
    (13,900
    )Decrease (increase) in restricted funds
    
    
    (417,871
    )
    
    
    7,282Other investments
    
    
    (1,259
    )
    
    
    (1,701
    )Net cash provided by investing activities of discontinued operations
    
    
    
    
    
    
    27,401Net cash used in investing activities
    
    
    (770,121
    )
    
    
    (175,594
    )Cash Flows From Financing Activities:Issuance of long-term debt
    
    
    451,189
    
    
    
    1,142,076Repayment of long-term debt
    
    
    (56,404
    )
    
    
    (1,352,056
    )Payments on capital lease obligations
    
    
    (2
    )
    
    
    (29
    )Exercise of stock options
    
    
    9,044
    
    
    
    10,244Cash dividends paid to minority shareholder in Hunlock Creek Energy Ventures
    
    
    
    
    
    
    (400
    )Net cash provided by (used in) financing activities
    
    
    403,827
    
    
    
    (200,165
    )Net increase (decrease) in cash and cash equivalents
    
    
    28,615
    
    
    
    (56,943
    )Cash and cash equivalents at beginning of period
    
    
    114,138
    
    
    
    262,212Cash and cash equivalents at end of period
    
    $
    142,753
    
    
    $
    205,269Supplemental Cash Flow Information:Cash paid for interest (net of amount capitalized)
    
    $
    108,850
    
    
    $
    126,549
  5




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 June 30,
    
    
    December 31,(In thousands)
    
    2007
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    142,753
    
    
    $
    114,138Accounts receivable:Customer
    
    
    194,414
    
    
    
    167,792Unbilled utility revenue
    
    
    101,632
    
    
    
    117,977Wholesale and other
    
    
    99,267
    
    
    
    63,894Allowance for uncollectible accounts
    
    
    (14,139
    )
    
    
    (14,591
    )Materials and supplies
    
    
    101,478
    
    
    
    96,117Fuel
    
    
    77,573
    
    
    
    74,951Deferred income taxes
    
    
    125,432
    
    
    
    127,531Prepaid taxes
    
    
    51,964
    
    
    
    44,603Collateral deposits
    
    
    52,465
    
    
    
    39,399Commodity contracts
    
    
    6,054
    
    
    
    1,430Restricted funds
    
    
    19,527
    
    
    
    12,923Regulatory assets
    
    
    49,442
    
    
    
    39,128Other
    
    
    19,341
    
    
    
    24,130Total current assets
    
    
    1,027,203
    
    
    
    909,422Property, Plant and Equipment, Net:Generation
    
    
    5,858,768
    
    
    
    5,820,278Transmission
    
    
    1,060,809
    
    
    
    1,056,759Distribution
    
    
    3,674,609
    
    
    
    3,597,405Other
    
    
    457,944
    
    
    
    412,894Accumulated depreciation
    
    
    (4,759,201
    )
    
    
    (4,636,972
    )Subtotal
    
    
    6,292,929
    
    
    
    6,250,364Construction work in progress
    
    
    420,540
    
    
    
    262,529Total property, plant and equipment, net
    
    
    6,713,469
    
    
    
    6,512,893Investments and Other Assets:Restricted funds  Fort Martin scrubber project
    
    
    411,267
    
    
    
    Goodwill
    
    
    367,287
    
    
    
    367,287Investments in unconsolidated affiliates
    
    
    27,868
    
    
    
    28,259Other
    
    
    13,464
    
    
    
    27,932Total investments and other assets
    
    
    819,886
    
    
    
    423,478Deferred Charges:Regulatory assets
    
    
    732,135
    
    
    
    674,095Other
    
    
    40,650
    
    
    
    32,558Total deferred charges
    
    
    772,785
    
    
    
    706,653Total Assets
    
    $
    9,333,343
    
    
    $
    8,552,446
  6




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
 June 30,
    
    
    December 31,(In thousands, except share amounts)
    
    2007
    
    
    2006LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Long-term debt due within one year (Note 5)
    
    $
    201,410
    
    
    $
    201,189Accounts payable
    
    
    288,143
    
    
    
    236,706Accrued taxes
    
    
    103,139
    
    
    
    136,216Commodity contracts
    
    
    5,936
    
    
    
    5,984Accrued interest
    
    
    107,996
    
    
    
    99,854Other
    
    
    127,752
    
    
    
    140,830Total current liabilities
    
    
    834,376
    
    
    
    820,779Long-term Debt (Note 5)
    
    
    3,790,080
    
    
    
    3,383,986Deferred Credits and Other Liabilities:Commodity contracts
    
    
    15,924
    
    
    
    17,982Income taxes payable
    
    
    59,903
    
    
    
    Investment tax credit
    
    
    71,146
    
    
    
    72,938Deferred income taxes
    
    
    1,058,246
    
    
    
    936,911Obligations under capital leases
    
    
    29,536
    
    
    
    26,007Regulatory liabilities
    
    
    449,194
    
    
    
    464,092Adverse power purchase commitment
    
    
    158,368
    
    
    
    166,937Other
    
    
    525,619
    
    
    
    547,706Total deferred credits and other liabilities
    
    
    2,367,936
    
    
    
    2,232,573Commitments and Contingencies (Note 16)Minority Interest
    
    
    11,753
    
    
    
    10,713Preferred Stock of Subsidiary
    
    
    24,000
    
    
    
    24,000Common Stockholders Equity:Common stock$1.25 par value per share, 260
million shares authorized and 166,117,768 and
165,409,908 shares issued at June 30, 2007 and
December 31, 2006, respectively
    
    
    207,647
    
    
    
    206,762Other paid-in capital
    
    
    1,905,441
    
    
    
    1,907,879Retained earnings
    
    
    243,762
    
    
    
    74,698Treasury stock at cost; 49,493 shares
    
    
    (1,756
    )
    
    
    (1,756
    )Accumulated other comprehensive loss
    
    
    (49,896
    )
    
    
    (107,188
    )Total common stockholders equity
    
    
    2,305,198
    
    
    
    2,080,395Total Liabilities and Stockholders Equity
    
    $
    9,333,343
    
    
    $
    8,552,446
  7




---



##### Table of Contents



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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186,786
    
    
    
    
    
    
    
    
    
    
    
    186,786Adoption of FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,722
    )
    
    
    
    
    
    
    
    
    
    
    (17,722
    )Pension and other postretirement employee benefit amortization, net
of tax of $1,140
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,801
    
    
    
    1,801Unrealized losses on available-for-sale securities, net of tax of $1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Unrealized gains on cash flow hedges for the period, net of tax of
$2,022
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,186
    
    
    
    3,186Stock-based compensation expense:Stock units
    
    
    
    
    
    
    
    
    
    
    1,510
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,510Non-employee stock awards
    
    
    13,800
    
    
    
    17
    
    
    
    666
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    683Stock options
    
    
    
    
    
    
    
    
    
    
    3,365
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,365Exercise of stock options
    
    
    378,053
    
    
    
    473
    
    
    
    8,572
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,045Conversion of stock units
    
    
    316,007
    
    
    
    395
    
    
    
    (8,245
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,850
    )Effects of West Virginia Rate Order:Establishment of regulatory asset related to pension obligation,
net of tax of $35,663
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,306
    
    
    
    52,306Adjustment related to 2005 SO2 allowance sale, net of
tax of $5,777
    
    
    
    
    
    
    
    
    
    
    (8,306
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,306
    )Balance at June 30, 2007
    
    
    166,068,275
    
    
    $
    207,647
    
    
    $
    1,905,441
    
    
    $
    243,762
    
    
    $
    (1,756
    )
    
    $
    (49,896
    )
    
    $
    2,305,198
  8




---



##### Table of Contents



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
    
    Rates and Regulation
    
    167
    
    Regulatory Assets and Liabilities
    
    188
    
    Stock-Based Compensation
    
    189
    
    Pension Benefits and Postretirement Benefits Other Than Pensions
    
    2010
    
    Derivative Instruments and Hedging Activities
    
    2211
    
    Discontinued Operations
    
    2212
    
    Business Segments
    
    2313
    
    Comprehensive Income
    
    2314
    
    Income (Loss) Per Share
    
    2415
    
    Other Income and Expenses, Net
    
    2516
    
    Commitments and Contingencies
    
    2517
    
    Subsequent Event
    
    30
 9




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 1: BASIS OF PRESENTATION
 Business Description
     Financial Statement Presentation
     Deferred Energy Costs, Net.
 10




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 5: DEBT
     
    
    ECC revenues will be recorded as billed;
    
    Interest expense on the bonds will be recorded as incurred;
    
    Depreciation will be recorded over the estimated useful life of the Scrubbers after they are placed in service; and
    
    A regulatory liability will be recognized with an offsetting charge against revenues to
the extent that ECC revenue exceeds interest and depreciation expense. This liability will
decrease, with an offsetting credit to revenue over the remaining useful life of the
Scrubbers, after the ECC ends and the bonds have been repaid.
  Six Months EndedJune 30, 2007(In millions)
    
    Issuances
    
    
    RepaymentsMonongahela:Environmental Control Bonds
    
    $
    344.5
    
    
    $
    Pollution Control Bonds
    
    
    
    
    
    
    1.0Potomac Edison:Environmental Control Bonds
    
    
    114.8
    
    
    
    West Penn:Transition Bonds (a)
    
    
    2.8
    
    
    
    41.0AE Supply:Pollution Control Bonds
    
    
    7.0
    
    
    
    15.6Eliminations (b)
    
    
    (7.0
    )
    
    
    (1.2
    )Consolidated Total
    
    $
    462.1
    
    
    $
    56.4
 
 (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 certain pollution control bonds for which Monongahela and AE
Supply are co-obligors. 14




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Long-Term 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
    
    
    
    
    
    
    
    
    
    
    
    110.0Environmental Control Bonds
    
    
    
    
    
    
    15.0
    
    
    
    10.5
    
    
    
    11.1
    
    
    
    11.6
    
    
    
    296.3
    
    
    
    344.5Pollution Control Bonds
    
    
    14.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70.2
    
    
    
    84.7Total Monongahela
    
    $
    14.5
    
    
    $
    15.0
    
    
    $
    10.5
    
    
    $
    121.1
    
    
    $
    11.6
    
    
    $
    706.5
    
    
    $
    879.2Potomac Edison:First Mortgage Bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    420.0
    
    
    $
    420.0Environmental Control Bonds
    
    
    
    
    
    
    4.9
    
    
    
    3.5
    
    
    
    3.7
    
    
    
    3.8
    
    
    
    98.9
    
    
    
    114.8Total Potomac Edison
    
    $
    
    
    
    $
    4.9
    
    
    $
    3.5
    
    
    $
    3.7
    
    
    $
    3.8
    
    
    $
    518.9
    
    
    $
    534.8West Penn:Transition Bonds
    
    $
    38.9
    
    
    $
    76.9
    
    
    $
    76.4
    
    
    $
    15.3
    
    
    $
    
    
    
    $
    
    
    
    $
    207.5First Mortgage Bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145.0
    
    
    
    145.0MediumTerm Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80.0
    
    
    
    80.0Total West Penn
    
    $
    38.9
    
    
    $
    76.9
    
    
    $
    76.4
    
    
    $
    15.3
    
    
    $
    
    
    
    $
    225.0
    
    
    $
    432.5AGC:Debentures
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100.0
    
    
    $
    100.0Total AGC
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100.0
    
    
    $
    100.0Unamortized debt
discounts, premiums and
terminated interest rate
swaps
    
    
    (0.6
    )
    
    
    (1.4
    )
    
    
    (1.4
    )
    
    
    (1.3
    )
    
    
    (1.0
    )
    
    
    (2.2
    )
    
    
    (7.9
    )Eliminations (a)
    
    
    (4.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114.4
    )
    
    
    (118.5
    )Total consolidated debt
    
    $
    144.1
    
    
    $
    95.4
    
    
    $
    89.0
    
    
    $
    138.8
    
    
    $
    1,161.4
    
    
    $
    2,362.8
    
    
    $
    3,991.5
 
 (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 are co-obligors.  15




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 6: RATES AND REGULATION
 West Virginia
   
    
    The West Virginia Rate Order establishes an annual ENEC method of recovering net power
supply costs, including fuel costs, purchased power costs and other related expenses, net
of related revenue. Under the ENEC, actual costs and revenues will be tracked for under
and/or over recoveries, and new ENEC rate filings will be made on an annual basis. Any
under and/or over recovery of costs, net of related revenues, will be deferred as a
regulatory asset or regulatory liability, for subsequent recovery and/or refund, with the
corresponding impact on the Consolidated Statements of Operations reflected within
Deferred energy costs, net.
    
    In December 2005, Monongahela sold sulfur dioxide (SO2) allowances to AE
Supply for $14.8 million in cash and recorded the $14.7 million difference between the
carrying value of the allowances and the cash received as a credit to Other paid-in
capital in the amount of $8.8 million, net of the income tax effects of $5.9 million. The
West Virginia Rate Order requires Monongahela to reduce its rate base by $14.7 million, and
requires the subsequent amortization of this amount, net of amortization for the period
from the December 2005 sale date through the effective date of the West Virginia Rate
Order, as a credit to cost of service over a period of approximately 29 years. As a
result, Monongahela reclassified $14.0 million, $8.3 million net of tax, from other paid-in
capital to a Regulatory liability. In addition, Monongahela recorded a related deferred
tax asset in the amount of $5.8 million during the second quarter of 2007. The regulatory
liability will be amortized to revenue, and the deferred tax asset will be amortized to
income tax expense over a period of approximately 29 years.
    
    The West Virginia Rate Order provides for the recovery of pension expense on an accrual
basis. Monongahela and Potomac Edison previously recovered pension costs on a cash basis
in West Virginia, and, therefore, Allegheny did not record a regulatory asset related to
the portion of pension obligations allocable to the West Virginia jurisdiction when it
adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plansan amendment of FASB Statements No. 87, 88, 106 and 132R (SFAS No.
158) on December 31, 2006. As a result of the West Virginia Rate Order, in the second
quarter of 2007, Alleghenys service subsidiary, AESC, established a regulatory asset
related to pension obligations recorded upon adoption of SFAS No. 158, in the amount of
$88.0 million, with a corresponding credit to Other comprehensive income, net of income
tax effect.
 Virginia
   16




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
    Maryland
      17




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 7: REGULATORY ASSETS AND LIABILITIES
  June 30,
    
    
    December 31,(In millions)
    
    2007
    
    
    2006Regulatory assets, including current portion:Income taxes
    
    $
    298.3
    
    
    $
    300.4Pension benefits and postretirement benefits other than pension
    
    
    257.9
    
    
    
    178.2Pennsylvania stranded cost recovery
    
    
    37.1
    
    
    
    55.6Pennsylvania Competitive Transition Charge (CTC) reconciliation
    
    
    112.1
    
    
    
    107.4Unamortized loss on reacquired debt
    
    
    37.4
    
    
    
    39.6Deferred ENEC charges
    
    
    8.2
    
    
    
    Other
    
    
    30.6
    
    
    
    32.0Subtotal
    
    
    781.6
    
    
    
    713.2Regulatory liabilities, including current portion:Net asset removal costs
    
    
    388.5
    
    
    
    421.4Income taxes
    
    
    37.9
    
    
    
    38.9S02 allowances
    
    
    14.0
    
    
    
    Fort Martin scrubber project
    
    
    8.0
    
    
    
    Other
    
    
    1.3
    
    
    
    4.5Subtotal
    
    
    449.7
    
    
    
    464.8Net regulatory assets
    
    $
    331.9
    
    
    $
    248.4
  June 30,
    
    December 31,(In millions)
    
    2007
    
    2006Property, plant and equipment
    
    $
    4,347.6
    
    
    $
    4,338.7Amounts under construction included above
    
    $
    278.2
    
    
    $
    136.6Accumulated depreciation
    
    $
    (1,981.5
    )
    
    $
    (2,054.6
    )
 
 NOTE 8: STOCK-BASED COMPENSATION
  18




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Stock options
    
    $
    1.7
    
    
    $
    1.9
    
    
    $
    3.4
    
    
    $
    4.0Stock units
    
    
    0.7
    
    
    
    1.5
    
    
    
    1.5
    
    
    
    3.3Other
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.7
    
    
    
    0.6Stock-based compensation expense included in
operations and maintenance expense
    
    
    2.7
    
    
    
    3.7
    
    
    
    5.6
    
    
    
    7.9Income tax benefit
    
    
    1.1
    
    
    
    1.5
    
    
    
    2.3
    
    
    
    3.2Total stock-based compensation expense, net of tax
    
    $
    1.6
    
    
    $
    2.2
    
    
    $
    3.3
    
    
    $
    4.7
  Stock Options
  AggregateWeighted-
    
    
    IntrinsicNumber of
    
    
    Average
    
    
    ValueStock Options
    
    
    Exercise Price
    
    
    (in millions)Outstanding at March 31, 2007
    
    
    4,465,606
    
    
    $
    16.198Granted
    
    
    14,000
    
    
    $
    54.544Exercised
    
    
    (214,248
    )
    
    $
    20.835Forfeited
    
    
    (2,400
    )
    
    $
    13.350Outstanding at June 30, 2007
    
    
    4,262,958
    
    
    $
    16.092
    
    
    $
    152.0Exercisable at June 30, 2007
    
    
    2,583,723
    
    
    $
    15.646
    
    
    $
    93.3
  AggregateWeighted-
    
    
    IntrinsicNumber of
    
    
    Average
    
    
    ValueStock Options
    
    
    Exercise Price
    
    
    (in millions)Outstanding at December 31, 2006
    
    
    4,670,338
    
    
    $
    16.504Granted
    
    
    25,000
    
    
    $
    51.789Exercised
    
    
    (378,053
    )
    
    $
    23.923Forfeited
    
    
    (54,327
    )
    
    $
    13.388Outstanding at June 30, 2007
    
    
    4,262,958
    
    
    $
    16.092
    
    
    $
    152.0Exercisable at June 30, 2007
    
    
    2,583,723
    
    
    $
    15.646
    
    
    $
    93.3
    19




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Stock Units
  Number ofStock UnitsOutstanding at December 31, 2006
    
    
    1,045,966Units converted into 68,477 common shares
    
    
    (107,220
    )Outstanding at March 31, 2007
    
    
    938,746Units converted into 247,530 common shares
    
    
    (409,888
    )Outstanding at June 30, 2007
    
    
    528,858
    Non-Employee Director Stock Plan
  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
    
    
    60,493Granted
    
    
    5,600Issued
    
    
    (1,400
    )Shares earned but not issued at June 30, 2007
    
    
    64,693
 
 NOTE 9: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
  20




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Pension BenefitsThree Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Components of net periodic cost:Service cost
    
    $
    5.3
    
    
    $
    5.5
    
    
    $
    10.7
    
    
    $
    10.9Interest cost
    
    
    16.2
    
    
    
    15.3
    
    
    
    32.3
    
    
    
    30.7Expected return on plan assets
    
    
    (18.3
    )
    
    
    (17.4
    )
    
    
    (36.5
    )
    
    
    (34.8
    )Amortization of unrecognized transition obligation
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2Amortization of prior service cost
    
    
    0.8
    
    
    
    0.9
    
    
    
    1.6
    
    
    
    1.8Recognized actuarial loss
    
    
    2.7
    
    
    
    3.1
    
    
    
    5.3
    
    
    
    6.2Net periodic cost
    
    $
    6.8
    
    
    $
    7.5
    
    
    $
    13.6
    
    
    $
    15.0Allocation of net periodic cost:Monongahela
    
    $
    2.3
    
    
    $
    1.9
    
    
    $
    4.3
    
    
    $
    3.9AE Supply
    
    
    1.4
    
    
    
    2.3
    
    
    
    3.3
    
    
    
    4.5West Penn
    
    
    1.7
    
    
    
    1.9
    
    
    
    3.4
    
    
    
    3.7Potomac Edison
    
    
    1.3
    
    
    
    1.3
    
    
    
    2.5
    
    
    
    2.7AE
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2Net periodic cost
    
    $
    6.8
    
    
    $
    7.5
    
    
    $
    13.6
    
    
    $
    15.0
 Postretirement Benefits Other Than PensionsThree Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Components of net periodic cost:Service cost
    
    $
    1.1
    
    
    $
    1.3
    
    
    $
    2.3
    
    
    $
    2.6Interest cost
    
    
    4.3
    
    
    
    4.2
    
    
    
    8.5
    
    
    
    8.4Expected return on plan assets
    
    
    (1.7
    )
    
    
    (1.8
    )
    
    
    (3.4
    )
    
    
    (3.5
    )Amortization of unrecognized transition obligation
    
    
    1.4
    
    
    
    1.5
    
    
    
    2.8
    
    
    
    2.9Recognized actuarial loss
    
    
    0.6
    
    
    
    1.0
    
    
    
    1.2
    
    
    
    1.9Net periodic cost
    
    $
    5.7
    
    
    $
    6.2
    
    
    $
    11.4
    
    
    $
    12.3Allocation of net periodic cost:Monongahela
    
    $
    1.7
    
    
    $
    1.7
    
    
    $
    3.5
    
    
    $
    3.4West Penn
    
    
    1.6
    
    
    
    1.7
    
    
    
    3.1
    
    
    
    3.4Potomac Edison
    
    
    1.3
    
    
    
    1.3
    
    
    
    2.6
    
    
    
    2.6AE Supply
    
    
    1.1
    
    
    
    1.5
    
    
    
    2.2
    
    
    
    2.8AE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Net periodic cost
    
    $
    5.7
    
    
    $
    6.2
    
    
    $
    11.4
    
    
    $
    12.3
   21




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   
 NOTE 10: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
    Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Amounts included in operating revenues:Net unrealized gains
    
    $
    (0.8
    )
    
    $
    5.3
    
    
    $
    1.6
    
    
    $
    18.3Net realized gains (losses)
    
    $
    2.8
    
    
    $
    (8.2
    )
    
    $
    (1.1
    )
    
    $
    (4.6
    )
 
 NOTE 11: DISCONTINUED OPERATIONS
  Three Months
    
    
    Six MonthsEnded
    
    
    Ended(In millions)
    
    June 30, 2006
    
    
    June 30, 2006Operating revenues
    
    $
    
    
    
    $
    Operating expenses
    
    
    (0.4
    )
    
    
    (0.8
    )Interest expense
    
    
    (0.9
    )
    
    
    (1.8
    )Loss before income taxes
    
    
    (1.3
    )
    
    
    (2.6
    )Income tax benefit
    
    
    0.5
    
    
    
    1.0Impairment charge, net of tax
    
    
    (0.1
    )
    
    
    (0.1
    )Loss from discontinued operations, net of tax.
    
    $
    (0.9
    )
    
    $
    (1.7
    )
  22




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 12: BUSINESS SEGMENTS
  Three Months Ended June 30, 2007
    
    
    Three Months Ended June 30, 2006Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    676.3
    
    
    $
    150.2
    
    
    $
    
    
    
    $
    826.5
    
    
    $
    630.6
    
    
    $
    91.7
    
    
    $
    
    
    
    $
    722.3Internal operating revenues
    
    
    2.2
    
    
    
    375.1
    
    
    
    (377.3
    )
    
    
    
    
    
    
    1.9
    
    
    
    322.4
    
    
    
    (324.3
    )
    
    
    Total operating revenues
    
    $
    678.5
    
    
    $
    525.3
    
    
    $
    (377.3
    )
    
    $
    826.5
    
    
    $
    632.5
    
    
    $
    414.1
    
    
    $
    (324.3
    )
    
    $
    722.3Depreciation and amortization
    
    $
    41.1
    
    
    $
    29.6
    
    
    $
    
    
    
    $
    70.7
    
    
    $
    37.9
    
    
    $
    30.3
    
    
    $
    
    
    
    $
    68.2Operating income
    
    $
    69.9
    
    
    $
    116.9
    
    
    $
    
    
    
    $
    186.8
    
    
    $
    54.3
    
    
    $
    61.2
    
    
    $
    
    
    
    $
    115.5Interest expense
    
    $
    18.5
    
    
    $
    46.1
    
    
    $
    (1.6
    )
    
    $
    63.0
    
    
    $
    22.1
    
    
    $
    55.3
    
    
    $
    (1.0
    )
    
    $
    76.4Income from continuing operations
    
    $
    33.4
    
    
    $
    43.6
    
    
    $
    
    
    
    $
    77.0
    
    
    $
    23.3
    
    
    $
    8.7
    
    
    $
    
    
    
    $
    32.0Loss from discontinued
operations, net of tax
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (0.9
    )
    
    $
    
    
    
    $
    (0.9
    )Net income
    
    $
    33.4
    
    
    $
    43.6
    
    
    $
    
    
    
    $
    77.0
    
    
    $
    23.3
    
    
    $
    7.8
    
    
    $
    
    
    
    $
    31.1
 Six Months Ended June 30, 2007
    
    
    Six Months Ended June 30, 2006Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    1,431.1
    
    
    $
    243.0
    
    
    $
    
    
    
    $
    1,674.1
    
    
    $
    1,331.4
    
    
    $
    236.5
    
    
    $
    
    
    
    $
    1,567.9Internal operating revenues
    
    
    5.3
    
    
    
    806.8
    
    
    
    (812.1
    )
    
    
    
    
    
    
    3.7
    
    
    
    684.7
    
    
    
    (688.4
    )
    
    
    Total operating revenues
    
    $
    1,436.4
    
    
    $
    1,049.8
    
    
    $
    (812.1
    )
    
    $
    1,674.1
    
    
    $
    1,335.1
    
    
    $
    921.2
    
    
    $
    (688.4
    )
    
    $
    1,567.9Depreciation and amortization
    
    $
    81.3
    
    
    $
    61.4
    
    
    $
    
    
    
    $
    142.7
    
    
    $
    75.6
    
    
    $
    60.4
    
    
    $
    
    
    
    $
    136.0Operating income
    
    $
    166.5
    
    
    $
    255.5
    
    
    $
    
    
    
    $
    422.0
    
    
    $
    146.4
    
    
    $
    216.9
    
    
    $
    
    
    
    $
    363.3Interest expense
    
    $
    36.9
    
    
    $
    88.1
    
    
    $
    (2.8
    )
    
    $
    122.2
    
    
    $
    41.8
    
    
    $
    103.4
    
    
    $
    (1.4
    )
    
    $
    143.8Income from continuing operations
    
    $
    78.9
    
    
    $
    107.9
    
    
    $
    
    
    
    $
    186.8
    
    
    $
    69.7
    
    
    $
    76.5
    
    
    $
    
    
    
    $
    146.2Loss from discontinued
operations, net of tax
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (1.7
    )
    
    $
    
    
    
    $
    (1.7
    )Net income
    
    $
    78.9
    
    
    $
    107.9
    
    
    $
    
    
    
    $
    186.8
    
    
    $
    69.7
    
    
    $
    74.8
    
    
    $
    
    
    
    $
    144.5
 
 NOTE 13: COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    77.0
    
    
    $
    31.1
    
    
    $
    186.8
    
    
    $
    144.5Other comprehensive income:Unrealized gains on cash flow hedges, net of tax
    
    
    6.5
    
    
    
    6.2
    
    
    
    3.2
    
    
    
    23.9West Virginia Rate Order  establishment of
regulatory asset related to pension obligation,
net of tax
    
    
    52.3
    
    
    
    
    
    
    
    52.3
    
    
    
    Pension and other postretirement employee
benefit amortization, net of tax
    
    
    0.2
    
    
    
    
    
    
    
    1.8
    
    
    
    Comprehensive income
    
    $
    136.0
    
    
    $
    37.3
    
    
    $
    244.1
    
    
    $
    168.4
 23




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  June 30,
    
    
    December 31,(In millions)
    
    2007
    
    
    2006Cash flow hedges, net of tax
    
    $
    3.4
    
    
    $
    0.2Net unrecognized pension and other postretirement benefit costs, net of tax
    
    
    (53.3
    )
    
    
    (107.4
    )Total
    
    $
    (49.9
    )
    
    $
    (107.2
    )
 
 NOTE 14: INCOME (LOSS) PER SHARE
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions, except share amounts)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Basic Income (Loss) per Share:Numerator:Income from continuing operations, net of tax
    
    $
    77.0
    
    
    $
    32.0
    
    
    $
    186.8
    
    
    $
    146.2Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.9
    )
    
    
    
    
    
    
    (1.7
    )Net income
    
    $
    77.0
    
    
    $
    31.1
    
    
    $
    186.8
    
    
    $
    144.5Denominator:Weighted average common shares outstanding
    
    
    165,794,012
    
    
    
    163,526,221
    
    
    
    165,645,000
    
    
    
    163,304,498Basic Income (Loss) per Share:Income from continuing operations, net of tax
    
    $
    0.46
    
    
    $
    0.20
    
    
    $
    1.13
    
    
    $
    0.89Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Net income
    
    $
    0.46
    
    
    $
    0.19
    
    
    $
    1.13
    
    
    $
    0.88Diluted Income (Loss) per Share:Numerator:Income from continuing operations, net of tax
    
    $
    77.0
    
    
    $
    32.0
    
    
    $
    186.8
    
    
    $
    146.2Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.9
    )
    
    
    
    
    
    
    (1.7
    )Net income
    
    $
    77.0
    
    
    $
    31.1
    
    
    $
    186.8
    
    
    $
    144.5Denominator:Weighted average common shares outstanding
    
    
    165,794,012
    
    
    
    163,526,221
    
    
    
    165,645,000
    
    
    
    163,304,498Effect of dilutive securities:Stock options
    
    
    2,784,081
    
    
    
    2,599,683
    
    
    
    2,752,745
    
    
    
    2,582,517Stock units
    
    
    805,342
    
    
    
    2,415,780
    
    
    
    845,259
    
    
    
    2,596,948Non-employee stock awards
    
    
    60,539
    
    
    
    40,677
    
    
    
    57,550
    
    
    
    37,177Performance shares
    
    
    25,497
    
    
    
    25,497
    
    
    
    25,497
    
    
    
    35,839Total shares
    
    
    169,469,471
    
    
    
    168,607,858
    
    
    
    169,326,051
    
    
    
    168,556,979Diluted Income (Loss) per Share:Income from continuing operations, net of tax
    
    $
    0.45
    
    
    $
    0.19
    
    
    $
    1.10
    
    
    $
    0.87Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Net income
    
    $
    0.45
    
    
    $
    0.18
    
    
    $
    1.10
    
    
    $
    0.86
 24




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 15: OTHER INCOME AND EXPENSES, NET
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Interest and dividend income
    
    $
    3.9
    
    
    $
    5.3
    
    
    $
    7.4
    
    
    $
    10.8Tax reimbursement on contributions in aid of construction
    
    
    1.7
    
    
    
    1.6
    
    
    
    2.8
    
    
    
    3.1Premium services
    
    
    0.7
    
    
    
    0.6
    
    
    
    1.1
    
    
    
    2.0Coal brokering income
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    0.9Gain on sale of land
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    0.8Gain on sale of investments
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    0.3Other
    
    
    0.6
    
    
    
    0.7
    
    
    
    1.5
    
    
    
    Total
    
    $
    6.9
    
    
    $
    10.2
    
    
    $
    12.8
    
    
    $
    17.9
 
 NOTE 16: COMMITMENTS AND CONTINGENCIES
 Environmental Matters and Litigation
  Global Climate Change . 2
 
    
    developing an accurate CO2 emissions inventory;
    
    improving the efficiency of its existing coal-burning generation fleet;
    
    following developing technologies for clean-coal energy and for CO2 emission controls at coal-fired power plants;
    
    following developing technologies for carbon sequestration;
    
    participating in carbon dioxide sequestration efforts (e.g. reforestation projects) both domestically and abroad;
    
    analyzing options for future energy investment (e.g. renewables, clean-coal, etc.); and
    
    improving demand-side efficiency programs.
  25




---



##### Table of Contents



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




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Clean Air Act Litigation
       27




---



##### Table of Contents



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




---



##### 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




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  .
  Putative Benefit Plan Class Actions.
 Harrison Fuel Litigation.
 Ordinary Course of Business.
 
 NOTE 17: SUBSEQUENT EVENT
  30




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Operating revenues
    
    $
    206,687
    
    
    $
    177,421
    
    
    $
    407,573
    
    
    $
    374,616Operating expenses:Fuel
    
    
    62,597
    
    
    
    41,753
    
    
    
    123,044
    
    
    
    86,890Purchased power and transmission
    
    
    44,120
    
    
    
    42,696
    
    
    
    82,854
    
    
    
    83,832Deferred energy costs, net
    
    
    (6,460
    )
    
    
    (623
    )
    
    
    (6,793
    )
    
    
    (623
    )Operations and maintenance
    
    
    55,457
    
    
    
    47,980
    
    
    
    110,266
    
    
    
    88,395Depreciation and amortization
    
    
    15,742
    
    
    
    16,354
    
    
    
    33,553
    
    
    
    32,720Taxes other than income taxes
    
    
    11,920
    
    
    
    11,813
    
    
    
    24,371
    
    
    
    24,083Total operating expenses
    
    
    183,376
    
    
    
    159,973
    
    
    
    367,295
    
    
    
    315,297Operating income
    
    
    23,311
    
    
    
    17,448
    
    
    
    40,278
    
    
    
    59,319Other income and expenses, net
    
    
    3,955
    
    
    
    4,179
    
    
    
    7,856
    
    
    
    7,837Interest expense
    
    
    12,922
    
    
    
    10,583
    
    
    
    21,451
    
    
    
    21,311Income before income taxes
    
    
    14,344
    
    
    
    11,044
    
    
    
    26,683
    
    
    
    45,845Income tax expense
    
    
    6,805
    
    
    
    4,185
    
    
    
    12,182
    
    
    
    17,256Net income
    
    $
    7,539
    
    
    $
    6,859
    
    
    $
    14,501
    
    
    $
    28,589
  31




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Six Months EndedJune 30,(In thousands)
    
    2007
    
    
    2006Cash Flows From Operating Activities:Net income
    
    $
    14,501
    
    
    $
    28,589Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    33,553
    
    
    
    32,720Amortization of power sale liability related to Ohio sale
    
    
    (10,500
    )
    
    
    (15,500
    )Amortization of liability for adverse power purchase commitment
    
    
    1,133
    
    
    
    Loss (gain) on asset sales
    
    
    2
    
    
    
    (72
    )Deferred income taxes and investment tax credit, net
    
    
    11,813
    
    
    
    15,965Deferred energy costs, net
    
    
    (6,793
    )
    
    
    (623
    )Deferred revenue  Fort Martin scrubber project
    
    
    7,248
    
    
    
    Other, net
    
    
    792
    
    
    
    3,658Changes in certain assets and liabilities:Accounts receivable, net
    
    
    3,601
    
    
    
    18,935Materials, supplies and fuel
    
    
    (1,685
    )
    
    
    (4,015
    )Taxes receivable/accrued, net
    
    
    (37,202
    )
    
    
    (4,317
    )Prepaid taxes
    
    
    4,353
    
    
    
    6,592Collateral deposits
    
    
    (22,293
    )
    
    
    11,417Prepayments
    
    
    (851
    )
    
    
    245Other current assets
    
    
    (1,862
    )
    
    
    (494
    )Accounts payable
    
    
    7,282
    
    
    
    (8,812
    )Accounts payable to affiliates, net
    
    
    (18,835
    )
    
    
    (2,038
    )Accrued interest
    
    
    4,046
    
    
    
    (81
    )Other current liabilities
    
    
    (1,338
    )
    
    
    (6,368
    )Other assets
    
    
    705
    
    
    
    6,214Unearned revenue  Potomac Edison purchased power
    
    
    112,336
    
    
    
    Other liabilities
    
    
    (513
    )
    
    
    (5,291
    )Net cash provided by operating activities
    
    
    99,493
    
    
    
    76,724Cash Flows From Investing Activities:Capital expenditures
    
    
    (86,121
    )
    
    
    (40,963
    )Proceeds from asset sales
    
    
    
    
    
    
    129Notes receivable from affiliates
    
    
    27,337
    
    
    
    (60,756
    )Increase in restricted funds
    
    
    (417,199
    )
    
    
    Net cash used in investing activities
    
    
    (475,983
    )
    
    
    (101,590
    )Cash Flows From Financing Activities:Notes payable to affiliates
    
    
    17,504
    
    
    
    Issuance of long-term debt
    
    
    338,753
    
    
    
    (135
    )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
    
    
    (586
    )
    
    
    (586
    )Common stock
    
    
    (2,999
    )
    
    
    (10,015
    )Net cash provided by (used in) financing activities
    
    
    356,267
    
    
    
    (10,736
    )Net decrease in cash and cash equivalents
    
    
    (20,223
    )
    
    
    (35,602
    )Cash and cash equivalents at beginning of period
    
    
    22,283
    
    
    
    136,491Cash and cash equivalents at end of period
    
    $
    2,060
    
    
    $
    100,889Supplemental Cash Flow Information:Cash paid for interest (net of amount capitalized)
    
    $
    15,726
    
    
    $
    19,440
  32




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 June 30,
    
    
    December 31,(In thousands)
    
    2007
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,060
    
    
    $
    22,283Accounts receivable:Customer
    
    
    43,486
    
    
    
    38,007Unbilled utility revenue
    
    
    28,229
    
    
    
    33,952Wholesale and other
    
    
    9,255
    
    
    
    12,341Allowance for uncollectible accounts
    
    
    (1,651
    )
    
    
    (2,095
    )Note receivable from affiliate
    
    
    
    
    
    
    27,337Materials and supplies
    
    
    19,009
    
    
    
    15,695Fuel
    
    
    19,878
    
    
    
    17,557Prepaid taxes
    
    
    15,761
    
    
    
    20,114Collateral deposits
    
    
    24,447
    
    
    
    Restricted funds
    
    
    5,932
    
    
    
    Regulatory assets
    
    
    12,610
    
    
    
    6,417Other
    
    
    33,842
    
    
    
    8,638Total current assets
    
    
    212,858
    
    
    
    200,246Property, Plant and Equipment, Net:Generation
    
    
    1,119,004
    
    
    
    967,486Transmission
    
    
    294,750
    
    
    
    283,497Distribution
    
    
    986,616
    
    
    
    968,377Other
    
    
    77,391
    
    
    
    74,762Accumulated depreciation
    
    
    (1,087,061
    )
    
    
    (936,098
    )Subtotal
    
    
    1,390,700
    
    
    
    1,358,024Construction work in progress
    
    
    68,879
    
    
    
    38,114Total property, plant and equipment, net
    
    
    1,459,579
    
    
    
    1,396,138Investments and Other Assets:Restricted funds  Fort Martin scrubber project
    
    
    411,267
    
    
    
    Investment in AGC
    
    
    70,626
    
    
    
    46,765Other
    
    
    6
    
    
    
    2,437Total investments and other assets
    
    
    481,899
    
    
    
    49,202Deferred Charges:Regulatory assets
    
    
    86,132
    
    
    
    88,940Other
    
    
    14,526
    
    
    
    9,791Total deferred charges
    
    
    100,658
    
    
    
    98,731Total Assets
    
    $
    2,254,994
    
    
    $
    1,744,317
  33




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
 June 30,
    
    
    December 31,(In thousands, except share data)
    
    2007
    
    
    2006LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Long-term debt due within one year (Note 5)
    
    $
    23,937
    
    
    $
    15,500Accounts payable
    
    
    46,822
    
    
    
    35,844Accounts payable to affiliates, net
    
    
    43,418
    
    
    
    62,853Accrued taxes
    
    
    23,269
    
    
    
    37,836Accrued interest
    
    
    11,739
    
    
    
    7,693Ohio power commitment
    
    
    
    
    
    
    10,500Note payable to affiliate
    
    
    17,504
    
    
    
    Other
    
    
    20,399
    
    
    
    19,558Total current liabilities
    
    
    187,088
    
    
    
    189,784Long-term Debt (Note 5)
    
    
    854,264
    
    
    
    519,145Deferred Credits and Other Liabilities:Non-current affiliated income taxes payable
    
    
    46,048
    
    
    
    45,671Deferred income taxes
    
    
    226,036
    
    
    
    213,987Obligations under capital leases
    
    
    9,305
    
    
    
    7,353Regulatory liabilities
    
    
    225,725
    
    
    
    239,120Unearned revenue  Potomac Edison purchased power
    
    
    112,336
    
    
    
    Other
    
    
    36,593
    
    
    
    32,598Total deferred credits and other liabilities
    
    
    656,043
    
    
    
    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
June 30, 2007 and December 31, 2006
    
    
    294,550
    
    
    
    294,550Other paid-in capital
    
    
    91,248
    
    
    
    41,468Retained earnings
    
    
    147,800
    
    
    
    136,639Accumulated other comprehensive income
    
    
    1
    
    
    
    2Total common stockholders equity
    
    
    533,599
    
    
    
    472,659Total Liabilities and Stockholders Equity
    
    $
    2,254,994
    
    
    $
    1,744,317
  34




---



##### 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,501
    
    
    
    
    
    
    
    14,501Adoption 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
    
    
    
    
    
    
    
    
    
    
    482
    
    
    
    
    
    
    
    
    
    
    
    482Pollution control bond retirement
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    150Dividends declared on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (586
    )
    
    
    
    
    
    
    (586
    )Dividends declared on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,999
    )
    
    
    
    
    
    
    (2,999
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Adjustment related to 2005 SO2 allowance sale,
net of tax of $5,777 in accordance with the West
Virginia Rate Order
    
    
    
    
    
    
    
    
    
    
    (8,306
    )
    
    
    
    
    
    
    
    
    
    
    (8,306
    )Balance at June 30, 2007
    
    
    5,891,000
    
    
    $
    294,550
    
    
    $
    91,248
    
    
    $
    147,800
    
    
    $
    1
    
    
    $
    533,599
  35




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Note No.
    
    
    
    Page No.1
    
    
    Basis of Presentation
    
    
    372
    
    
    Recent Accounting Pronouncements
    
    
    383
    
    
    Asset Swap
    
    
    394
    
    
    Income Taxes
    
    
    405
    
    
    Debt
    
    
    416
    
    
    Rates and Regulation
    
    
    427
    
    
    Regulatory Assets and Liabilities
    
    
    438
    
    
    Pension Benefits and Postretirement Benefits Other Than Pensions
    
    
    439
    
    
    Business Segments
    
    
    4410
    
    
    Other Income and Expenses, Net
    
    
    4411
    
    
    Commitments and Contingencies
    
    
    4512
    
    
    Subsequent Event
    
    
    48
 36




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 1: BASIS OF PRESENTATION
 Business Description
     Financial Statement Presentation
     Deferred Energy Costs, Net.
 Restricted Funds.
 37




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (unaudited)
 
 NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
      38




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (unaudited)
 
 NOTE 3: ASSET SWAP
      June 30, 2007
    
    December 31, 2006Generation facility
    
    
    
    
    
    Plant
    
    Accumulated
    
    
    
    
    
    Plant
    
    Accumulated(Dollars in millions)
    
    Ownership
    
    Investment
    
    Depreciation
    
    Ownership
    
    Investment
    
    DepreciationAlbright
    
    
    100.0
    %
    
    $
    119.1
    
    
    $
    91.4
    
    
    
    57.5
    %
    
    $
    68.7
    
    
    $
    46.5Fort Martin
    
    
    100.0
    %
    
    $
    477.2
    
    
    $
    266.6
    
    
    
    19.1
    %
    
    $
    71.0
    
    
    $
    49.1Harrison
    
    
    20.5
    %
    
    $
    289.0
    
    
    $
    166.3
    
    
    
    21.3
    %
    
    $
    297.0
    
    
    $
    168.1Hatfields Ferry
    
    
    
    %
    
    $
    
    
    
    $
    
    
    
    
    23.4
    %
    
    $
    154.5
    
    
    $
    60.3Pleasants
    
    
    7.7
    %
    
    $
    90.2
    
    
    $
    51.8
    
    
    
    21.3
    %
    
    $
    249.4
    
    
    $
    140.0Rivesville
    
    
    100.0
    %
    
    $
    57.5
    
    
    $
    44.5
    
    
    
    85.1
    %
    
    $
    48.9
    
    
    $
    36.9Willow Island
    
    
    100.0
    %
    
    $
    106.4
    
    
    $
    72.5
    
    
    
    85.1
    %
    
    $
    90.6
    
    
    $
    59.6
  June 30, 2007
    
    December 31, 2006Generation facility
    
    
    
    
    
    Plant
    
    Accumulated
    
    
    
    
    
    Plant
    
    Accumulated(Dollars in millions)
    
    Ownership
    
    Investment
    
    Depreciation
    
    Ownership
    
    Investment
    
    DepreciationBath County
    
    
    40
    %
    
    $
    836.7
    
    
    $
    322.4
    
    
    
    40
    %
    
    $
    835.6
    
    
    $
    318.1
 39




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 4: INCOME TAXES
         40




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (unaudited)
 
 NOTE 5: DEBT
      
    
    ECC revenues will be recorded as billed;
    
    Interest expense on the bonds will be recorded as incurred;
    
    Depreciation will be recorded over the estimated useful life of the Scrubbers after they are placed in service; and
    
    A regulatory liability will be recognized with an offsetting charge against revenues to
the extent that ECC revenue exceeds interest and depreciation expense. This liability will
decrease, with an offsetting credit to revenue over the remaining useful life of the
Scrubbers, after the ECC ends and the bonds have been repaid.
 Long-Term Debt
  (In millions)
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    TotalFirst Mortgage Bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    340.0
    
    
    $
    340.0MediumTerm Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110.0
    
    
    
    
    
    
    
    
    
    
    
    110.0Environmental Control Bonds
    
    
    
    
    
    
    15.0
    
    
    
    10.5
    
    
    
    11.1
    
    
    
    11.6
    
    
    
    296.3
    
    
    
    344.5Pollution Control Bonds
    
    
    14.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70.2
    
    
    
    84.7Total Monongahela
    
    $
    14.5
    
    
    $
    15.0
    
    
    $
    10.5
    
    
    $
    121.1
    
    
    $
    11.6
    
    
    $
    706.5
    
    
    $
    879.2
  41




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (unaudited)
 
 NOTE 6: RATES AND REGULATION
   
    
    The West Virginia Rate Order establishes an annual Expanded Net Energy Cost (ENEC)
method of recovering net power supply costs, including fuel costs, purchased power costs
and other related expenses, net of related revenue. Under the ENEC, actual costs and
revenues will be tracked for under and/or over recoveries, and new ENEC rate filings will
be made on an annual basis. Any under and/or over recovery of costs, net of related
revenues, will be deferred as a regulatory asset or regulatory liability, for subsequent
recovery and/or refund with the corresponding impact on the Consolidated Statements of
Operations reflected within Deferred energy costs, net.
    
    In December 2005, Monongahela sold sulfur dioxide (SO2) allowances to AE
Supply for $14.8 million in cash and recorded the $14.7 million difference between the
carrying value of the allowances and the cash received as a credit to Other paid-in
capital in the amount of $8.8 million, net of the income tax effects of $5.9 million. The
West Virginia Rate Order requires Monongahela to reduce its rate base by $14.7 million, and
requires the subsequent amortization of this amount, net of amortization for the period
from the December 2005 sale date through the effective date of the West Virginia Rate
Order, as a credit to cost of service over a period of approximately 29 years. As a
result, Monongahela reclassified $14.0 million, $8.3 million net of tax, from other paid-in
capital to a Regulatory liability. In addition, Monongahela recorded a related deferred
tax asset in the amount of $5.8 million during the second quarter of 2007. The regulatory
liability will be amortized to revenue, and the deferred tax asset will be amortized to
income tax expense over a period of approximately 29 years.
    
    The West Virginia Rate Order provides for the recovery of pension expense on an accrual
basis. Monongahela and Potomac Edison previously recovered pension costs on a cash basis
in West Virginia, and, therefore, Allegheny did not record a regulatory asset related to
the portion of pension obligations allocable to the West Virginia jurisdiction when it
adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plansan amendment of FASB Statements No. 87, 88, 106 and 132R (SFAS No.
158) on December 31, 2006. As a result of the West Virginia Rate Order, in the second
quarter of 2007, Alleghenys service subsidiary, AESC, established a regulatory asset
related to Monongahelas pension obligations recorded upon adoption of SFAS No. 158, in the
amount of approximately $75 million, with a corresponding credit to Other comprehensive
income, net of income tax effect.
  42




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (unaudited)
 
 NOTE 7: REGULATORY ASSETS AND LIABILITIES
  June 30,
    
    
    December 31,(In millions)
    
    2007
    
    
    2006Regulatory assets, including current portion:Income taxes
    
    $
    70.3
    
    
    $
    72.0Unamortized loss on reacquired debt
    
    
    13.4
    
    
    
    14.2Deferred ENEC charges
    
    
    8.2
    
    
    
    Other
    
    
    6.8
    
    
    
    9.1Subtotal
    
    
    98.7
    
    
    
    95.3Regulatory liabilities, including current portion:Non-legal asset removal costs
    
    
    205.0
    
    
    
    239.1SO2 Allowances
    
    
    14.0
    
    
    
    Fort Martin scrubber project
    
    
    7.2
    
    
    
    Subtotal
    
    
    226.2
    
    
    
    239.1Net regulatory liabilities
    
    $
    127.5
    
    
    $
    143.8
 
 NOTE 8: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Pension benefits
    
    $
    2.3
    
    
    $
    1.9
    
    
    $
    4.3
    
    
    $
    3.9Postretirement benefits other than pension benefits
    
    $
    1.7
    
    
    $
    1.7
    
    
    $
    3.5
    
    
    $
    3.4
 43




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 9: BUSINESS SEGMENTS
  Three months ended June 30, 2007
    
    
    Three months ended June 30, 2006Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    160.8
    
    
    $
    45.9
    
    
    $
    
    
    
    $
    206.7
    
    
    $
    156.7
    
    
    $
    20.7
    
    
    $
    
    
    
    $
    177.4Internal operating revenues
    
    
    
    
    
    
    94.0
    
    
    
    (94.0
    )
    
    
    
    
    
    
    
    
    
    
    69.6
    
    
    
    (69.6
    )
    
    
    Total operating revenues
    
    $
    160.8
    
    
    $
    139.9
    
    
    $
    (94.0
    )
    
    $
    206.7
    
    
    $
    156.7
    
    
    $
    90.3
    
    
    $
    (69.6
    )
    
    $
    177.4Depreciation and amortization
    
    $
    8.1
    
    
    $
    7.6
    
    
    $
    
    
    
    $
    15.7
    
    
    $
    7.5
    
    
    $
    8.8
    
    
    $
    
    
    
    $
    16.3Operating income (loss)
    
    $
    18.0
    
    
    $
    5.3
    
    
    $
    
    
    
    $
    23.3
    
    
    $
    19.5
    
    
    $
    (2.1
    )
    
    $
    
    
    
    $
    17.4Interest expense
    
    $
    4.8
    
    
    $
    8.1
    
    
    $
    
    
    
    $
    12.9
    
    
    $
    6.0
    
    
    $
    4.5
    
    
    $
    
    
    
    $
    10.5Net income (loss)
    
    $
    7.4
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    7.5
    
    
    $
    8.6
    
    
    $
    (1.7
    )
    
    $
    
    
    
    $
    6.9
 Six months ended June 30, 2007
    
    
    Six months ended June 30, 2006Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    341.9
    
    
    $
    65.7
    
    
    $
    
    
    
    $
    407.6
    
    
    $
    330.8
    
    
    $
    43.8
    
    
    $
    
    
    
    $
    374.6Internal operating revenues
    
    
    
    
    
    
    191.5
    
    
    
    (191.5
    )
    
    
    
    
    
    
    
    
    
    
    147.6
    
    
    
    (147.6
    )
    
    
    Total operating revenues
    
    $
    341.9
    
    
    $
    257.2
    
    
    $
    (191.5
    )
    
    $
    407.6
    
    
    $
    330.8
    
    
    $
    191.4
    
    
    $
    (147.6
    )
    
    $
    374.6Depreciation and amortization
    
    $
    15.9
    
    
    $
    17.6
    
    
    $
    
    
    
    $
    33.5
    
    
    $
    15.1
    
    
    $
    17.6
    
    
    $
    
    
    
    $
    32.7Operating income (loss)
    
    $
    54.4
    
    
    $
    (14.1
    )
    
    $
    
    
    
    $
    40.3
    
    
    $
    56.7
    
    
    $
    2.6
    
    
    $
    
    
    
    $
    59.3Interest expense
    
    $
    9.5
    
    
    $
    12.0
    
    
    $
    
    
    
    $
    21.5
    
    
    $
    12.2
    
    
    $
    9.1
    
    
    $
    
    
    
    $
    21.3Net income (loss)
    
    $
    25.1
    
    
    $
    (10.6
    )
    
    $
    
    
    
    $
    14.5
    
    
    $
    28.4
    
    
    $
    0.2
    
    
    $
    
    
    
    $
    28.6
 
 NOTE 10: OTHER INCOME AND EXPENSES, NET
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Equity in earnings of AGC
    
    $
    3.2
    
    
    $
    1.6
    
    
    $
    6.2
    
    
    $
    3.0Interest income
    
    
    0.4
    
    
    
    2.1
    
    
    
    1.1
    
    
    
    4.1Premium services
    
    
    (0.1
    )
    
    
    0.2
    
    
    
    (0.4
    )
    
    
    0.4Other
    
    
    0.5
    
    
    
    0.2
    
    
    
    1.0
    
    
    
    0.3Total
    
    $
    4.0
    
    
    $
    4.1
    
    
    $
    7.9
    
    
    $
    7.8
 44




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 11: COMMITMENTS AND CONTINGENCIES
 Environmental Matters and Litigation
  Global Climate Change . 2
 
    
    developing an accurate CO2 emissions inventory;
    
    improving the efficiency of its existing coal-burning generation fleet;
    
    following developing technologies for clean-coal energy and for CO2 emission controls at coal-fired power plants;
    
    following developing technologies for carbon sequestration;
    
    participating in carbon dioxide sequestration efforts (e.g. reforestation projects) both domestically and abroad;
    
    analyzing options for future energy investment (e.g. renewables, clean-coal, etc.); and
    
    improving demand-side efficiency programs.
  Clean Air Act Compliance. 2
  2 2 2
 45




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (unaudited)
   2
  Clean Air Act Litigation
    46




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



ALLEGHENY GENERATING COMPANY
STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Operating revenues
    
    $
    17,082
    
    
    $
    13,901
    
    
    $
    33,993
    
    
    $
    31,239Operating expenses:Operations and maintenance
    
    
    1,236
    
    
    
    1,055
    
    
    
    2,600
    
    
    
    2,562Depreciation
    
    
    4,322
    
    
    
    4,290
    
    
    
    8,617
    
    
    
    8,575Taxes other than income taxes
    
    
    794
    
    
    
    798
    
    
    
    1,588
    
    
    
    1,597Total operating expenses
    
    
    6,352
    
    
    
    6,143
    
    
    
    12,805
    
    
    
    12,734Operating income
    
    
    10,730
    
    
    
    7,758
    
    
    
    21,188
    
    
    
    18,505Other income and expenses, net
    
    
    106
    
    
    
    701
    
    
    
    176
    
    
    
    746Interest expense
    
    
    1,791
    
    
    
    1,790
    
    
    
    3,562
    
    
    
    3,598Income before income taxes
    
    
    9,045
    
    
    
    6,669
    
    
    
    17,802
    
    
    
    15,653Income tax expense (benefit)
    
    
    2,833
    
    
    
    (77
    )
    
    
    5,597
    
    
    
    2,772Net income
    
    $
    6,212
    
    
    $
    6,746
    
    
    $
    12,205
    
    
    $
    12,881
  49




---



##### Table of Contents



ALLEGHENY GENERATING COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
 Six Months EndedJune 30,(In thousands)
    
    2007
    
    
    2006Cash Flows From Operating Activities:Net income
    
    $
    12,205
    
    
    $
    12,881Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    8,617
    
    
    
    8,575Deferred income taxes and investment tax credit, net
    
    
    (3,461
    )
    
    
    (3,526
    )Other, net
    
    
    144
    
    
    
    143Changes in certain assets and liabilities:Materials and supplies
    
    
    (26
    )
    
    
    (107
    )Taxes receivable/accrued, net
    
    
    2,078
    
    
    
    2,853Prepayments
    
    
    253
    
    
    
    157Other current assets
    
    
    (29
    )
    
    
    (507
    )Accounts payable
    
    
    (890
    )
    
    
    (2,685
    )Accrued interest
    
    
    (19
    )
    
    
    Accounts payable to affiliates, net
    
    
    (1,520
    )
    
    
    471Other current liabilities
    
    
    332
    
    
    
    234Deferred income taxes
    
    
    
    
    
    
    (3,162
    )Other liabilities
    
    
    
    
    
    
    1Net cash provided by operating activities
    
    
    17,684
    
    
    
    15,328Cash Flows From Investing Activities:Capital expenditures
    
    
    (2,662
    )
    
    
    (1,367
    )Cash Flows From Financing Activities:Intercompany tax sharing agreement benefit
    
    
    1,348
    
    
    
    Cash dividends paid on common stock
    
    
    (13,000
    )
    
    
    (13,000
    )Net cash used in financing activities
    
    
    (11,652
    )
    
    
    (13,000
    )Net increase in cash and cash equivalents
    
    
    3,370
    
    
    
    961Cash and cash equivalents at beginning of period
    
    
    2,846
    
    
    
    1,858Cash and cash equivalents at end of period
    
    $
    6,216
    
    
    $
    2,819Supplemental Cash Flow Information:Cash paid for interest
    
    $
    3,438
    
    
    $
    3,455
  50




---



##### Table of Contents



ALLEGHENY GENERATING COMPANY
BALANCE SHEETS
(unaudited)
 June 30,
    
    
    December 31,(In thousands)
    
    2007
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    6,216
    
    
    $
    2,846Materials and supplies
    
    
    1,746
    
    
    
    1,720Taxes receivable
    
    
    
    
    
    
    762Other
    
    
    136
    
    
    
    360Total current assets
    
    
    8,098
    
    
    
    5,688Property, Plant and Equipment, Net:Generation
    
    
    782,280
    
    
    
    777,507Transmission
    
    
    51,443
    
    
    
    55,169Other
    
    
    2,943
    
    
    
    2,949Accumulated depreciation
    
    
    (322,422
    )
    
    
    (318,164
    )Subtotal
    
    
    514,244
    
    
    
    517,461Construction work in progress
    
    
    3,665
    
    
    
    6,963Total property, plant and equipment, net
    
    
    517,909
    
    
    
    524,424Deferred Charges:Regulatory assets
    
    
    7,669
    
    
    
    7,842Other
    
    
    89
    
    
    
    92Total deferred charges
    
    
    7,758
    
    
    
    7,934Total Assets
    
    $
    533,765
    
    
    $
    538,046
  51




---



##### Table of Contents



ALLEGHENY GENERATING COMPANY
BALANCE SHEETS (continued)
(unaudited)
 June 30,
    
    
    December 31,(In thousands, except share data)
    
    2007
    
    
    2006LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,296
    
    
    $
    2,746Accounts payable to affiliates, net
    
    
    4,112
    
    
    
    5,632Accrued interest
    
    
    2,273
    
    
    
    2,292Accrued taxes
    
    
    1,316
    
    
    
    Other current liabilities
    
    
    332
    
    
    
    Total current liabilities
    
    
    9,329
    
    
    
    10,670Long-term Debt
    
    
    99,474
    
    
    
    99,458Deferred Credits and Other Liabilities:Investment tax credit
    
    
    35,293
    
    
    
    35,953Non-current affiliated income taxes payable
    
    
    17,544
    
    
    
    17,544Deferred income taxes
    
    
    146,358
    
    
    
    148,824Regulatory liabilities
    
    
    21,634
    
    
    
    22,018Total deferred credits and other liabilities
    
    
    220,829
    
    
    
    224,339Commitments and Contingencies (Note 2)Stockholders Equity:Common stock, $1.00 par value, 5,000 shares
authorized and 1,000 shares outstanding at
June 30, 2007 and December 31, 2006
    
    
    1
    
    
    
    1Other paid-in capital
    
    
    174,017
    
    
    
    172,669Retained earnings
    
    
    30,115
    
    
    
    30,909Total stockholders equity
    
    
    204,133
    
    
    
    203,579Total Liabilities and Stockholders Equity
    
    $
    533,765
    
    
    $
    538,046
  52




---



##### Table of Contents



ALLEGHENY GENERATING COMPANY
STATEMENT OF STOCKHOLDERS EQUITY
(unaudited)
 Other
    
    
    
    
    
    
    TotalShares
    
    
    Common
    
    
    paid-in
    
    
    Retained
    
    
    stockholders(In thousands, except share data)
    
    outstanding
    
    
    stock
    
    
    capital
    
    
    earnings
    
    
    equityBalance at December 31, 2006
    
    
    1,000
    
    
    $
    1
    
    
    $
    172,669
    
    
    $
    30,909
    
    
    $
    203,579Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,205
    
    
    
    12,205Intercompany tax sharing agreement benefit
    
    
    
    
    
    
    
    
    
    
    1,348
    
    
    
    
    
    
    
    1,348Dividends declared on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,000
    )
    
    
    (13,000
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Balance at June 30, 2007
    
    
    1,000
    
    
    $
    1
    
    
    $
    174,017
    
    
    $
    30,115
    
    
    $
    204,133
  53




---



##### Table of Contents



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




---



##### Table of Contents



ALLEGHENY GENERATING COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 1: BASIS OF PRESENTATION
 Business Description
    Financial Statement Presentation
    Federal and State Income Taxes
   55




---



##### Table of Contents



ALLEGHENY GENERATING COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 2: COMMITMENTS AND CONTINGENCIES
 Environmental Matters and Litigation
  Canadian Toxic-Tort Class Action:
 Other Litigation
 Ordinary Course of Business.
 56




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 ITEM 2.
  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;
    
    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;
 57




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
    
    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




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
  Key Indicators and Performance Factors
 The Delivery and Services Segment
  Revenue per MWh sold
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Revenue per MWh sold
    
    $
    59.29
    
    
    $
    58.06
    
    
    $
    59.93
    
    
    $
    58.66
 Operations and maintenance costs (O&M).
 Capital expenditures.
  Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeDelivery and Services:Retail electricity sales
(million kWhs)
    
    
    10,666
    
    
    
    10,049
    
    
    
    6.1
    %
    
    
    22,377
    
    
    
    21,231
    
    
    
    5.4
    %HDD (a)
    
    
    599
    
    
    
    530
    
    
    
    13.0
    %
    
    
    3,375
    
    
    
    2,956
    
    
    
    14.2
    %CDD (a)
    
    
    276
    
    
    
    172
    
    
    
    60.5
    %
    
    
    278
    
    
    
    172
    
    
    
    61.6
    %
 
 (a)
    
    Heating degree-days (HDD ) and cooling degree-days (CDD).The operations of the
Distribution Companies are weather sensitive. Weather conditions directly influence the volume
of electricity delivered by the Distribution Companies representing one of several factors
that impact the volume of electricity delivered. Accordingly, deviations in weather from
normal levels can affect Alleghenys financial performance. HDD and CDD are most likely to
impact the usage of Alleghenys residential and commercial customers. Industrial customers are
less weather sensitive. Degree-day data is used to estimate amounts of energy required to
maintain comfortable indoor temperature levels based on each days average temperature. HDD is
the measure of the variation in the weather based on the extent to which the average daily
temperature falls below 65° Fahrenheit, and CDD is the measure of the variation in the weather
based on the extent to which the average daily temperature rises above 65° Fahrenheit. Each
degree of temperature above 65° Fahrenheit is counted as one cooling degree-day, and each
degree of temperature below 65° Fahrenheit is counted as one heating degree-day. Normal
(historical) HDDs are 656 and 3,497 for the three and six months ended June 30, respectively
and normal (historical) CDDs are 205 and 206 for the three and six months ended June 30,
respectively, calculated on a weighted-average basis across the geographic areas served by the
Distribution Companies. 59




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The Generation and Marketing Segment
  kWhs generated.
 Equivalent Availability Factor (EAF).
 Station operations and maintenance costs (Station O&M).
 60




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Three Months Ended
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    
    June 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSupercritical Units:kWhs generated (in millions)
    
    
    9,311
    
    
    
    9,185
    
    
    
    1.4
    %
    
    
    20,060
    
    
    
    19,734
    
    
    
    1.7
    %EAF
    
    
    79.4
    %
    
    
    77.8
    %
    
    
    1.6
    %
    
    
    84.5
    %
    
    
    84.5
    %
    
    
    
    %Station O&M (in millions):Base operations (a)
    
    $
    31.4
    
    
    $
    23.4
    
    
    
    34.2
    %
    
    $
    56.5
    
    
    $
    46.0
    
    
    
    22.8
    %Special
    
    
    29.9
    
    
    
    34.4
    
    
    
    (13.1
    )%
    
    
    40.3
    
    
    
    42.5
    
    
    
    (5.2
    )%Total Station O&M
    
    $
    61.3
    
    
    $
    57.8
    
    
    
    6.1
    %
    
    $
    96.8
    
    
    $
    88.5
    
    
    
    9.4
    %All Generation Units:kWhs generated (in millions)
    
    
    11,759
    
    
    
    11,234
    
    
    
    4.7
    %
    
    
    24,851
    
    
    
    24,251
    
    
    
    2.5
    %EAF
    
    
    82.0
    %
    
    
    83.4
    %
    
    
    (1.4
    )%
    
    
    85.5
    %
    
    
    87.3
    %
    
    
    (1.8
    )%Station O&M (in millions):Base operations (a)
    
    $
    47.1
    
    
    $
    40.6
    
    
    
    16.0
    %
    
    $
    85.2
    
    
    $
    78.5
    
    
    
    8.5
    %Special
    
    
    36.1
    
    
    
    42.5
    
    
    
    (15.1
    )%
    
    
    47.5
    
    
    
    51.7
    
    
    
    (8.1
    )%Total Station O&M
    
    $
    83.2
    
    
    $
    83.1
    
    
    
    0.1
    %
    
    $
    132.7
    
    
    $
    130.2
    
    
    
    1.9
    %
 
 (a)
    
    Reflects the reclassification of certain costs as described in Note 1, Basis of
Presentation, to Alleghenys Consolidated Financial Statements. 61




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CONSOLIDATED RESULTS OF OPERATIONS
 Income (Loss) Summary
 Three Months Ended
    
    
    Three Months EndedJune 30, 2007
    
    
    June 30, 2006Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    678.5
    
    
    $
    525.3
    
    
    $
    (377.3
    )
    
    $
    826.5
    
    
    $
    632.5
    
    
    $
    414.1
    
    
    $
    (324.3
    )
    
    $
    722.3Fuel
    
    
    
    
    
    
    231.4
    
    
    
    
    
    
    
    231.4
    
    
    
    
    
    
    
    191.8
    
    
    
    
    
    
    
    191.8Purchased power and transmission
    
    
    454.1
    
    
    
    27.4
    
    
    
    (375.1
    )
    
    
    106.4
    
    
    
    414.9
    
    
    
    2.7
    
    
    
    (322.5
    )
    
    
    95.1Gain on sale of OVEC power agreement
and shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.1
    )Deferred energy costs, net
    
    
    (1.3
    )
    
    
    (6.9
    )
    
    
    
    
    
    
    (8.2
    )
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    0.4Operations and maintenance
    
    
    84.6
    
    
    
    108.2
    
    
    
    (2.2
    )
    
    
    190.6
    
    
    
    93.1
    
    
    
    108.9
    
    
    
    (1.8
    )
    
    
    200.2Depreciation and amortization
    
    
    41.1
    
    
    
    29.6
    
    
    
    
    
    
    
    70.7
    
    
    
    37.9
    
    
    
    30.3
    
    
    
    
    
    
    
    68.2Taxes other than income taxes
    
    
    30.1
    
    
    
    18.7
    
    
    
    
    
    
    
    48.8
    
    
    
    31.9
    
    
    
    20.3
    
    
    
    
    
    
    
    52.2Total operating expenses
    
    
    608.6
    
    
    
    408.4
    
    
    
    (377.3
    )
    
    
    639.7
    
    
    
    578.2
    
    
    
    352.9
    
    
    
    (324.3
    )
    
    
    606.8Operating income
    
    
    69.9
    
    
    
    116.9
    
    
    
    
    
    
    
    186.8
    
    
    
    54.3
    
    
    
    61.2
    
    
    
    
    
    
    
    115.5Other income and expenses, net
    
    
    4.4
    
    
    
    4.1
    
    
    
    (1.6
    )
    
    
    6.9
    
    
    
    6.9
    
    
    
    4.3
    
    
    
    (1.0
    )
    
    
    10.2Interest expense and preferred dividends
    
    
    18.6
    
    
    
    46.2
    
    
    
    (1.6
    )
    
    
    63.2
    
    
    
    22.3
    
    
    
    55.4
    
    
    
    (1.0
    )
    
    
    76.7Income from continuing operations
before income taxes and minority
interest
    
    
    55.7
    
    
    
    74.8
    
    
    
    
    
    
    
    130.5
    
    
    
    38.9
    
    
    
    10.1
    
    
    
    
    
    
    
    49.0Income tax expense from continuing
operations
    
    
    22.3
    
    
    
    30.6
    
    
    
    
    
    
    
    52.9
    
    
    
    15.6
    
    
    
    1.2
    
    
    
    
    
    
    
    16.8Minority interest
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2Income from continuing operations
    
    
    33.4
    
    
    
    43.6
    
    
    
    
    
    
    
    77.0
    
    
    
    23.3
    
    
    
    8.7
    
    
    
    
    
    
    
    32.0Loss from discontinued operations, net
of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.9
    )
    
    
    
    
    
    
    (0.9
    )Net income
    
    $
    33.4
    
    
    $
    43.6
    
    
    $
    
    
    
    $
    77.0
    
    
    $
    23.3
    
    
    $
    7.8
    
    
    $
    
    
    
    $
    31.1
 Six Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    June 30, 2006Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    1,436.4
    
    
    $
    1,049.8
    
    
    $
    (812.1
    )
    
    $
    1,674.1
    
    
    $
    1,335.1
    
    
    $
    921.2
    
    
    $
    (688.4
    )
    
    $
    1,567.9Fuel
    
    
    
    
    
    
    463.6
    
    
    
    
    
    
    
    463.6
    
    
    
    
    
    
    
    410.5
    
    
    
    
    
    
    
    410.5Purchased power and transmission
    
    
    954.9
    
    
    
    51.6
    
    
    
    (806.8
    )
    
    
    199.7
    
    
    
    862.6
    
    
    
    18.4
    
    
    
    (684.7
    )
    
    
    196.3Gain on sale of OVEC power agreement
and shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.1
    )
    
    
    
    
    
    
    (6.1
    )Deferred energy costs, net
    
    
    (2.8
    )
    
    
    (6.9
    )
    
    
    
    
    
    
    (9.7
    )
    
    
    5.4
    
    
    
    
    
    
    
    
    
    
    
    5.4Operations and maintenance
    
    
    170.9
    
    
    
    185.5
    
    
    
    (5.3
    )
    
    
    351.1
    
    
    
    179.9
    
    
    
    180.4
    
    
    
    (3.7
    )
    
    
    356.6Depreciation and amortization
    
    
    81.3
    
    
    
    61.4
    
    
    
    
    
    
    
    142.7
    
    
    
    75.6
    
    
    
    60.4
    
    
    
    
    
    
    
    136.0Taxes other than income taxes
    
    
    65.6
    
    
    
    39.1
    
    
    
    
    
    
    
    104.7
    
    
    
    65.2
    
    
    
    40.7
    
    
    
    
    
    
    
    105.9Total operating expenses
    
    
    1,269.9
    
    
    
    794.3
    
    
    
    (812.1
    )
    
    
    1,252.1
    
    
    
    1,188.7
    
    
    
    704.3
    
    
    
    (688.4
    )
    
    
    1,204.6Operating income
    
    
    166.5
    
    
    
    255.5
    
    
    
    
    
    
    
    422.0
    
    
    
    146.4
    
    
    
    216.9
    
    
    
    
    
    
    
    363.3Other income and expenses, net
    
    
    7.4
    
    
    
    8.2
    
    
    
    (2.8
    )
    
    
    12.8
    
    
    
    11.2
    
    
    
    8.1
    
    
    
    (1.4
    )
    
    
    17.9Interest expense and preferred dividends
    
    
    37.2
    
    
    
    88.3
    
    
    
    (2.8
    )
    
    
    122.7
    
    
    
    42.2
    
    
    
    103.6
    
    
    
    (1.4
    )
    
    
    144.4Income from continuing operations
before income taxes and minority
interest
    
    
    136.7
    
    
    
    175.4
    
    
    
    
    
    
    
    312.1
    
    
    
    115.4
    
    
    
    121.4
    
    
    
    
    
    
    
    236.8Income tax expense from continuing
operations
    
    
    57.8
    
    
    
    66.5
    
    
    
    
    
    
    
    124.3
    
    
    
    45.7
    
    
    
    43.5
    
    
    
    
    
    
    
    89.2Minority interest
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    1.4Income from continuing operations
    
    
    78.9
    
    
    
    107.9
    
    
    
    
    
    
    
    186.8
    
    
    
    69.7
    
    
    
    76.5
    
    
    
    
    
    
    
    146.2Loss from discontinued operations, net
of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.7
    )
    
    
    
    
    
    
    (1.7
    )Net income
    
    $
    78.9
    
    
    $
    107.9
    
    
    $
    
    
    
    $
    186.8
    
    
    $
    69.7
    
    
    $
    74.8
    
    
    $
    
    
    
    $
    144.5
 62




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CONSOLIDATED RESULTS
  Operating Revenues
  
    
    an increase in average market prices in Alleghenys region of the PJM market from $45.37
per MWh for the three months ended June 30, 2006 to $54.79 per MWh for the three months
ended June 30, 2007,
    
    increased MWhs generated,
    
    higher generation rates charged to Pennsylvania customers as a result of a rate
settlement approved by the Pennsylvania Public Utility Commission (the Pennsylvania PUC)
and
    
    increased transmission and distribution revenues due to increases in HDD and CDD and
increased customer load.
  
    
    an increase in average market prices in Alleghenys region of the PJM market from $47.83
per MWh for the six months ended June 30, 2006 to $54.33 per MWh for the six months ended
June 30, 2007,
    
    increased MWhs generated,
    
    higher generation rates charged to Pennsylvania customers as a result of a rate
settlement approved by the Pennsylvania PUC and
    
    increased transmission and distribution revenues due to increases in HDD and CDD and
increased customer load,
    
    partially offset by gains on hedging activities during the first quarter of 2006 that did
not recur during the six months ended June 30, 2007 and reduced revenues due to the March
2006 assignment of AE Supplys rights to generation from the Ohio Valley Electric
Corporation (OVEC) in connection with the December 31, 2004 sale of a portion of AEs
equity interest in OVEC.
 Operating Income
  
    
    the $104.2 million increase in operating revenues discussed above,
    
    a $9.6 million decrease in operations and maintenance expenses due to decreases in
certain outside contractor costs and decreased claim reserves and
    
    an $8.6 million change in deferred energy costs, net, representing a greater net credit
to expense for energy costs incurred but not yet recovered in rates, related primarily to
the West Virginia regulatory order (the West Virginia Rate Order) that, effective May 23, 2007,
allows certain costs to be
deferred and recovered in future customer rates,
 63




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
    
    partially offset by a $39.6 million increase in fuel expense, primarily due to higher natural gas costs
relating to an increase in the amount of natural gas burned as a result of an increase in
the dispatch of gas-fired generation facilities resulting from higher market prices for
power, as well as higher coal cost, primarily due to an increase in the average price of
coal and
    
    an $11.3 million increase in purchased power and transmission expense due to purchased
power from PURPA as a result of outages during the three months ended June 30, 2006 that did
not recur during the three months ended June 30, 2007 and a refund received on certain
transmission charges during the three months ended June 30, 2006 that did not recur during
the three months ended June 30, 2007.
   
    
    the $106.2 million increase in operating revenues discussed above and
    
    a $15.1 million change in deferred energy costs representing a greater net credit to
expense for energy costs incurred but not yet recovered in rates, related primarily to the
West Virginia Rate Order that, effective May 23, 2007, allows certain costs to be deferred
and recovered in future customer rates, and a greater net credit to expense for deferred
energy costs related to the AES Warrior Run generation facility,
    
    partially offset by a $53.1 million increase in fuel expense, primarily relating to
higher natural gas costs due to an increase in the amount of natural gas burned as a result
of an increase in the dispatch of gas-fired generation facilities resulting from higher
market prices for power as well as higher coal cost, primarily due to an increase in the
average price of coal.
  Income from Continuing Operations Before Income Taxes and Minority Interest
   Income Tax Expense
    64




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  65




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 DISCUSSION OF SEGMENT RESULTS OF OPERATIONS:
 Delivery and Services
  Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeRetail
electricity sales
(million kWhs)
    
    
    10,666
    
    
    
    10,049
    
    
    
    6.1
    %
    
    
    22,377
    
    
    
    21,231
    
    
    
    5.4
    %HDD (a)
    
    
    599
    
    
    
    530
    
    
    
    13.0
    %
    
    
    3,375
    
    
    
    2,956
    
    
    
    14.2
    %CDD (a)
    
    
    276
    
    
    
    172
    
    
    
    60.5
    %
    
    
    278
    
    
    
    172
    
    
    
    61.6
    %
 
 (a)
    
    Normal (historical) HDDs are 656 and 3,497 for the three and six months ended June 30,
respectively, and normal (historical) CDDs are 205 and 206 for the three and six months ended
June 30, respectively, calculated on a weighted-average basis across the geographic areas
served by the Distribution Companies. Operating Revenues
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Retail electric:Generation
    
    $
    428.9
    
    
    $
    392.6
    
    
    $
    900.4
    
    
    $
    831.2Transmission
    
    
    39.0
    
    
    
    37.0
    
    
    
    82.9
    
    
    
    79.2Distribution
    
    
    164.5
    
    
    
    153.8
    
    
    
    357.7
    
    
    
    335.0Total retail electric
    
    
    632.4
    
    
    
    583.4
    
    
    
    1,341.0
    
    
    
    1,245.4Transmission services and bulk power
    
    
    35.8
    
    
    
    38.2
    
    
    
    74.3
    
    
    
    73.8Other affiliated and nonaffiliated energy services
    
    
    10.3
    
    
    
    10.9
    
    
    
    21.1
    
    
    
    15.9Total operating revenues
    
    $
    678.5
    
    
    $
    632.5
    
    
    $
    1,436.4
    
    
    $
    1,335.1
  
    
    a $36.3 million increase in generation revenues due to greater customer usage resulting
from increases in HDD and CDD, increased customer load, the effect of a January 1, 2007 rate
increase arising from a settlement approved by the Pennsylvania PUC and the May 22, 2007
West Virginia Rate Order and
    
    a $12.7 million increase in T&D revenues due to greater customer usage resulting from
increases in HDD and CDD and increased customer load, partially offset by decreased T&D
rates as a result of the May 22, 2007 West Virginia Rate Order.
  
    
    a $69.2 million increase in generation revenues due to greater customer usage resulting
from increases in HDD and CDD, increased customer load, the effect of a January 1, 2007 rate
increase arising from a settlement approved by the Pennsylvania PUC and the May 22, 2007
West Virginia Rate Order and
    
    a $26.4 million increase in T&D revenues due to increased customer usage resulting from
increases in HDD and CDD and increased customer load, partially offset by decreased T&D
rates as a result of the May 22, 2007 West Virginia Rate Order.
 66




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
    
    a $5.7 million decrease in bulk power revenues related to the May 2007 expiration of a
fixed price power supply agreement to serve Monongahelas former Ohio service territory,
    
    partially offset by a $2.3 million increase due to a PJM refund received during the
second quarter of 2007 in connection with excess congestion related to the 2006-2007 planning year.
  Operating Expenses
 Purchased Power and Transmission:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)

    
    
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Other purchased power and transmission
    
    $
    411.0
    
    
    $
    361.8
    
    
    $
    872.6
    
    
    $
    763.4From PURPA generation (a)
    
    
    43.1
    
    
    
    53.1
    
    
    
    82.3
    
    
    
    99.2Total purchased power and transmission
    
    $
    454.1
    
    
    $
    414.9
    
    
    $
    954.9
    
    
    $
    862.6a)     PURPA cost (cents per kWh sold)
    
    
    6.1
    
    
    
    5.6
    
    
    
    5.8
    
    
    
    5.4
    
    
    a $24.2 million increase, primarily due to increased power sales volume as a result of
increases in HDD and CDD and increased customer load,
    
    a $14.0 million increase, 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 due to the January 1, 2007 power supply agreement between Potomac
Edison and Monongahela discussed above.
 67




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
    
    a $56.0 million increase, primarily due to increased power sales volume as a result of
increases in HDD and CDD and increased customer load,
    
    a $25.6 million increase, 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,
    
    a $16.6 million increase due to the January 1, 2007 power supply agreement between
Potomac Edison and Monongahela discussed above and
    
    a $4.8 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.
   Deferred Energy Costs, Net:
 AES Warrior Run PURPA Generation
  Market-based Generation Costs
  68




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Deferred energy costs, net
    
    $
    (1.3
    )
    
    $
    0.4
    
    
    $
    (2.8
    )
    
    $
    5.4
   Operations and Maintenance:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Operations and maintenance
    
    $
    84.6
    
    
    $
    93.1
    
    
    $
    170.9
    
    
    $
    179.9
  
    
    a $2.4 million decrease due to reduced claim reserves,
    
    a $2.2 million decrease in contractor services,
    
    a $1.8 million decrease in outside services expense due to lower legal and consulting fees and
    
    a $1.6 million decrease in benefits expense due to an increase in capitalized labor expense.
  
    
    a $4.2 million decrease in contractor services,
    
    a $2.4 million decrease in contract work expense due to reserves established for an
environmental matter during the six months ended June 30, 2006 that did not recur during the
six months ended June 30, 2007 and a reduction in pole inspection expenses and
    
    a $2.0 million decrease in benefits expense due to an increase in capitalized labor
expense.
 Depreciation and Amortization:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Depreciation and amortization
    
    $
    41.1
    
    
    $
    37.9
    
    
    $
    81.3
    
    
    $
    75.6
  69




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Taxes Other Than Income Taxes
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Taxes other than income taxes
    
    $
    30.1
    
    
    $
    31.9
    
    
    $
    65.6
    
    
    $
    65.2
  Other Income and Expenses, Net
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Other income and expenses, net
    
    $
    4.4
    
    
    $
    6.9
    
    
    $
    7.4
    
    
    $
    11.2
   Interest Expense and Preferred Dividends:
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Interest expense and preferred dividends
    
    $
    18.6
    
    
    $
    22.3
    
    
    $
    37.2
    
    
    $
    42.2
  70




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Income Tax Expense
     Generation and Marketing
  Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeGeneration (million kWhs)
    
    
    11,759
    
    
    
    11,234
    
    
    
    4.7
    %
    
    
    24,851
    
    
    
    24,251
    
    
    
    2.5
    %
 Operating Revenues
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue from affiliates
    
    $
    375.1
    
    
    $
    322.4
    
    
    $
    806.8
    
    
    $
    684.7Wholesale and other revenue, net (a)
    
    
    150.2
    
    
    
    91.7
    
    
    
    243.0
    
    
    
    236.5Total revenues
    
    $
    525.3
    
    
    $
    414.1
    
    
    $
    1,049.8
    
    
    $
    921.2
 
 (a)
    
    Amounts are net of energy trading gains and losses as described in Note 10, Derivative
Instruments and Hedging Activities. Energy trading gains (losses) are presented in the
wholesale and other revenues table below. Revenue from affiliates:
   71




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     
    
    a $24.4 million increase in Monongahela Powers West Virginia affiliated revenues due to
an increase in sales volume and price, including a $17.7 million increase 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 $7.3 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 increases in HDD and CDD and increased customer
load,
    
    an approximate $14.0 million increase due 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 $5.3 million increase related to higher contractual rates with increased sales volumes
for certain of Potomac Edisons customers in Maryland,
    
    partially offset by a $4.5 million decrease in ancillary service revenues from the
Delivery and Services segment due to a contract expiration.
  
    
    a $43.6 million increase in Monongahela Powers West Virginia affiliated revenues due to
an increase in sales volume and price, including a $34.0 million increase 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 $22.4 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 increases in HDD and CDD and increased customer
load,
    
    an approximate $25.6 million increase due 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
 72




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
    
    a $21.9 million increase related to higher contractual rates with increased sales volumes
for certain of Potomac Edisons customers in Maryland,
    
    partially offset by a $7.5 million decrease in ancillary service revenues from the
Delivery and Services segment due to a contract expiration.
 Wholesale and other revenues, net:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006PJM Revenue:Generation sold into PJM
    
    $
    609.1
    
    
    $
    468.8
    
    
    $
    1,238.6
    
    
    $
    1,050.8Power purchased from PJM
    
    
    (469.0
    )
    
    
    (378.2
    )
    
    
    (1,008.4
    )
    
    
    (832.1
    )Net
    
    
    140.1
    
    
    
    90.6
    
    
    
    230.2
    
    
    
    218.7Cash flow hedges and trading activities:Realized gains (losses)
    
    
    2.8
    
    
    
    (8.2
    )
    
    
    (1.1
    )
    
    
    (4.6
    )Unrealized gains (losses)
    
    
    (0.8
    )
    
    
    5.3
    
    
    
    1.6
    
    
    
    18.3Net
    
    
    2.0
    
    
    
    (2.9
    )
    
    
    0.5
    
    
    
    13.7Fort Martin Scrubber Securitization
    
    
    5.5
    
    
    
    
    
    
    
    5.5
    
    
    
    Other revenues
    
    
    2.6
    
    
    
    4.0
    
    
    
    6.8
    
    
    
    4.1Total wholesale and other revenues
    
    $
    150.2
    
    
    $
    91.7
    
    
    $
    243.0
    
    
    $
    236.5
  
    
    an increase in net PJM revenues of $49.5 million and
    
    $5.5 million of Fort Martin Scrubber Securitization revenues collected during the second
quarter of 2007 relating to an environmental control surcharge collected from the West
Virginia customers of Monongahela and Potomac Edison following the April 2007 Fort Martin
Scrubber financing. See Note 5, Debt for additional information regarding the debt
issuance.
   
    
    an increase in net PJM revenues of $11.5 million and
    
    $5.5 million of Fort Martin Scrubber Securitization revenues collected during the second
quarter of 2007 relating to an environmental control surcharge collected from the West
Virginia customers of Monongahela and Potomac Edison following the April 2007 Fort Martin
Scrubber financing. See Note 5, Debt for additional information regarding the debt
issuance,
    
    partially offset by a $13.2 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.
  73




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Fair Value of Contracts :
   Fair value of contracts at June 30, 2007Settlement by:Classification of contracts by source of fair value (In millions)
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    TotalPrices actively quoted
    
    $
    3.1
    
    
    $
    (5.9
    )
    
    $
    (5.6
    )
    
    $
    (5.6
    )
    
    $
    (1.8
    )
    
    $
    (15.8
    )Prices provided by other external sources
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Prices based on models
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    3.1
    
    
    $
    (5.9
    )
    
    $
    (5.6
    )
    
    $
    (5.6
    )
    
    $
    (1.8
    )
    
    $
    (15.8
    )
   Changes in Fair Value :
 Three Months Ended
    
    
    Six Months Ended(In millions)
    
    June 30, 2007
    
    
    June 30, 2007Net fair value of derivative contract liabilities at April 1 and January 1, respectively
    
    $
    (25.6
    )
    
    $
    (22.5
    )Changes in fair value of cash flow hedges
    
    
    10.6
    
    
    
    5.1Unrealized gains on contracts, net
    
    
    (0.8
    )
    
    
    1.6Net fair value of derivative contract liabilities at June 30
    
    $
    (15.8
    )
    
    $
    (15.8
    )
  74




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Operating Expenses
 Fuel:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Fuel
    
    $
    231.4
    
    
    $
    191.8
    
    
    $
    463.6
    
    
    $
    410.5
   Purchased Power and Transmission:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Purchased power and transmission expenses
    
    $
    27.4
    
    
    $
    2.7
    
    
    $
    51.6
    
    
    $
    18.4
   Gain on Sale of OVEC Power Agreement and Shares:
 75




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Deferred Energy Costs, Net:
 Expanded Net Energy Cost (ENEC)
  Grant Town PURPA generation facility
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Deferred energy costs, net
    
    $
    (6.9
    )
    
    $
    
    
    
    $
    (6.9
    )
    
    $
    
  Operations and Maintenance:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Operations and maintenance
    
    $
    108.2
    
    
    $
    108.9
    
    
    $
    185.5
    
    
    $
    180.4
  76




---



##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Taxes Other than Income Taxes:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Taxes other than income taxes
    
    $
    18.7
    
    
    $
    20.3
    
    
    $
    39.1
    
    
    $
    40.7
  Interest Expense and Preferred Dividends
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Interest expense and preferred dividends
    
    $
    46.2
    
    
    $
    55.4
    
    
    $
    88.3
    
    
    $
    103.6
  Income Tax Expense
     Minority Interest
  77




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CONSOLIDATED RESULTS OF OPERATIONS
 Income (Loss) Summary
 Three Months Ended
    
    
    Three Months EndedJune 30, 2007
    
    
    June 30, 2006Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    160.8
    
    
    $
    139.9
    
    
    $
    (94.0
    )
    
    $
    206.7
    
    
    $
    156.7
    
    
    $
    90.3
    
    
    $
    (69.6
    )
    
    $
    177.4Fuel
    
    
    
    
    
    
    62.6
    
    
    
    
    
    
    
    62.6
    
    
    
    
    
    
    
    41.8
    
    
    
    
    
    
    
    41.8Purchased power and transmission
    
    
    107.3
    
    
    
    30.9
    
    
    
    (94.0
    )
    
    
    44.2
    
    
    
    98.4
    
    
    
    13.9
    
    
    
    (69.6
    )
    
    
    42.7Deferred energy costs, net
    
    
    0.4
    
    
    
    (6.9
    )
    
    
    
    
    
    
    (6.5
    )
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )Operations and maintenance
    
    
    22.1
    
    
    
    33.4
    
    
    
    
    
    
    
    55.5
    
    
    
    25.9
    
    
    
    22.0
    
    
    
    
    
    
    
    47.9Depreciation and amortization
    
    
    8.1
    
    
    
    7.6
    
    
    
    
    
    
    
    15.7
    
    
    
    7.5
    
    
    
    8.8
    
    
    
    
    
    
    
    16.3Taxes other than income taxes
    
    
    4.9
    
    
    
    7.0
    
    
    
    
    
    
    
    11.9
    
    
    
    6.0
    
    
    
    5.9
    
    
    
    
    
    
    
    11.9Total operating expenses
    
    
    142.8
    
    
    
    134.6
    
    
    
    (94.0
    )
    
    
    183.4
    
    
    
    137.2
    
    
    
    92.4
    
    
    
    (69.6
    )
    
    
    160.0Operating income (loss)
    
    
    18.0
    
    
    
    5.3
    
    
    
    
    
    
    
    23.3
    
    
    
    19.5
    
    
    
    (2.1
    )
    
    
    
    
    
    
    17.4Other income and expenses, net
    
    
    0.2
    
    
    
    3.8
    
    
    
    
    
    
    
    4.0
    
    
    
    1.5
    
    
    
    2.6
    
    
    
    
    
    
    
    4.1Interest expense
    
    
    4.8
    
    
    
    8.1
    
    
    
    
    
    
    
    12.9
    
    
    
    6.0
    
    
    
    4.5
    
    
    
    
    
    
    
    10.5Income (loss) before income taxes
    
    
    13.4
    
    
    
    1.0
    
    
    
    
    
    
    
    14.4
    
    
    
    15.0
    
    
    
    (4.0
    )
    
    
    
    
    
    
    11.0Income tax expense (benefit)
    
    
    6.0
    
    
    
    0.9
    
    
    
    
    
    
    
    6.9
    
    
    
    6.4
    
    
    
    (2.3
    )
    
    
    
    
    
    
    4.1Net income (loss)
    
    $
    7.4
    
    
    $
    0.1
    
    
    
    
    
    
    $
    7.5
    
    
    $
    8.6
    
    
    $
    (1.7
    )
    
    
    
    
    
    $
    6.9
 Six Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    June 30, 2006Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    341.9
    
    
    $
    257.2
    
    
    $
    (191.5
    )
    
    $
    407.6
    
    
    $
    330.8
    
    
    $
    191.4
    
    
    $
    (147.6
    )
    
    $
    374.6Fuel
    
    
    
    
    
    
    123.0
    
    
    
    
    
    
    
    123.0
    
    
    
    
    
    
    
    86.9
    
    
    
    
    
    
    
    86.9Purchased power and transmission
    
    
    214.9
    
    
    
    59.5
    
    
    
    (191.5
    )
    
    
    82.9
    
    
    
    197.1
    
    
    
    34.3
    
    
    
    (147.6
    )
    
    
    83.8Deferred energy costs, net
    
    
    0.1
    
    
    
    (6.9
    )
    
    
    
    
    
    
    (6.8
    )
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )Operations and maintenance
    
    
    46.2
    
    
    
    64.1
    
    
    
    
    
    
    
    110.3
    
    
    
    50.2
    
    
    
    38.2
    
    
    
    
    
    
    
    88.4Depreciation and amortization
    
    
    15.9
    
    
    
    17.6
    
    
    
    
    
    
    
    33.5
    
    
    
    15.1
    
    
    
    17.6
    
    
    
    
    
    
    
    32.7Taxes other than income taxes
    
    
    10.4
    
    
    
    14.0
    
    
    
    
    
    
    
    24.4
    
    
    
    12.3
    
    
    
    11.8
    
    
    
    
    
    
    
    24.1Total operating expenses
    
    
    287.5
    
    
    
    271.3
    
    
    
    (191.5
    )
    
    
    367.3
    
    
    
    274.1
    
    
    
    188.8
    
    
    
    (147.6
    )
    
    
    315.3Operating income (loss)
    
    
    54.4
    
    
    
    (14.1
    )
    
    
    
    
    
    
    40.3
    
    
    
    56.7
    
    
    
    2.6
    
    
    
    
    
    
    
    59.3Other income and expenses, net
    
    
    0.4
    
    
    
    7.5
    
    
    
    
    
    
    
    7.9
    
    
    
    3.0
    
    
    
    4.8
    
    
    
    
    
    
    
    7.8Interest expense
    
    
    9.5
    
    
    
    12.0
    
    
    
    
    
    
    
    21.5
    
    
    
    12.2
    
    
    
    9.1
    
    
    
    
    
    
    
    21.3Income (loss) before income taxes
    
    
    45.3
    
    
    
    (18.6
    )
    
    
    
    
    
    
    26.7
    
    
    
    47.5
    
    
    
    (1.7
    )
    
    
    
    
    
    
    45.8Income tax expense (benefit)
    
    
    20.2
    
    
    
    (8.0
    )
    
    
    
    
    
    
    12.2
    
    
    
    19.1
    
    
    
    (1.9
    )
    
    
    
    
    
    
    17.2Net income (loss)
    
    $
    25.1
    
    
    $
    (10.6
    )
    
    $
    
    
    
    $
    14.5
    
    
    $
    28.4
    
    
    $
    0.2
    
    
    $
    
    
    
    $
    28.6
 78




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CONSOLIDATED RESULTS
  Operating Revenues
  
    
    increased generation revenue as a result of additional MWhs generated,
    
    increased revenues related to Monongahelas agreement to provide power to Columbus
Southern Power Company (Columbus Southern), a subsidiary of American Electric Power that
serves Monongahelas former Ohio service territory as of January 1, 2006, under a fixed
price power supply agreement, at a higher rate per kWh, net of lost T&D revenues and
    
    increased retail revenue resulting from increases in HDD and CDD and higher rates.
 Operating Income
  
    
    the $29.3 million increase in operating revenues discussed above and
    
    a $5.9 million change in deferred energy costs, net, representing a greater net credit to
expense for energy costs incurred but not yet recovered in rates, related primarily to the
West Virginia Rate Order that, effective May 23, 2007, allows certain costs to be deferred
and recovered in future customer rates,
 
    
    partially offset by a $23.4 million increase in operating expenses, primarily due to a $20.8 million increase
in fuel expense resulting from an increase in the average price of coal and an increase in
the amount of coal consumed as a result of the Asset Swap and
    
    a $7.6 million increase in operations and maintenance expenses, primarily due to an
increase in contract work as a result of a planned maintenance outage in the first quarter
of 2007 as well as an increase in salaries and wages due to the Asset Swap.
    
    
    a $36.1 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 as a result of the Asset Swap
and
    
    a $21.9 million increase in operations and maintenance expenses, primarily due to an
increase in contract work as a result of a planned maintenance outage in the first quarter
of 2007 as well as an increase in salaries and wages due to the Asset Swap,
    
    partially offset by a $6.2 million change in deferred energy costs, net, representing a
greater net credit to expense for energy costs incurred but not yet recovered in rates,
related primarily to the West Virginia Rate Order that, effective
May 23, 2007, allows certain costs to be deferred and recovered in future customer rates.
  79




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Income Before Income Taxes
   Income Tax Expense
     80




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 DISCUSSION OF SEGMENT RESULTS OF OPERATIONS:
 Delivery and Services
  Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeRetail
electricity sales
(million kWhs)
    
    
    2,600
    
    
    
    2,402
    
    
    
    8.2
    %
    
    
    5,383
    
    
    
    5,054
    
    
    
    6.5
    %HDD (a)
    
    
    535
    
    
    
    452
    
    
    
    18.4
    %
    
    
    3,152
    
    
    
    2,599
    
    
    
    21.3
    %CDD (a)
    
    
    265
    
    
    
    177
    
    
    
    49.7
    %
    
    
    269
    
    
    
    178
    
    
    
    51.1
    %
 
 (a)
    
    Normal (historical) HDD are 663 and 3,428 for the three and six months ended June 30,
respectively, and normal (historical) CDD are 193 for both the three and six months ended June
30, calculated on a weighted-average basis across the geographic areas served by Monongahela. Operating Revenues
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Retail electric:Generation
    
    $
    92.5
    
    
    $
    83.3
    
    
    $
    187.8
    
    
    $
    173.8Transmission
    
    
    8.4
    
    
    
    7.8
    
    
    
    17.6
    
    
    
    16.5Distribution
    
    
    39.9
    
    
    
    41.1
    
    
    
    92.3
    
    
    
    90.5Total retail electric
    
    
    140.8
    
    
    
    132.2
    
    
    
    297.7
    
    
    
    280.8Transmission services and bulk power
    
    
    17.0
    
    
    
    21.5
    
    
    
    38.7
    
    
    
    44.4Other affiliated and non-affiliated energy services
    
    
    3.0
    
    
    
    3.0
    
    
    
    5.5
    
    
    
    5.6Total Delivery and Services revenues
    
    $
    160.8
    
    
    $
    156.7
    
    
    $
    341.9
    
    
    $
    330.8
    81




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Operating Expenses
 Purchased Power and Transmission:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Other purchased power and transmission
    
    $
    107.3
    
    
    $
    82.8
    
    
    $
    214.9
    
    
    $
    166.7From PURPA generation (a)
    
    
    
    
    
    
    15.6
    
    
    
    
    
    
    
    30.4Total purchased power and transmission
    
    $
    107.3
    
    
    $
    98.4
    
    
    $
    214.9
    
    
    $
    197.1(a) PURPA cost (cents per kWh sold)
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    4.4
    Deferred Energy Costs, Net:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Deferred energy costs, net
    
    $
    0.4
    
    
    $
    (0.6
    )
    
    $
    0.1
    
    
    $
    (0.6
    )
  Operations and Maintenance:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Operations and maintenance
    
    $
    22.1
    
    
    $
    25.9
    
    
    $
    46.2
    
    
    $
    50.2
  82




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
    
    a $1.9 million decrease in contractor services and
    
    decreases in uncollectible expenses due to improved collections and recoveries, contract
work as a result of the timing of pole inspections and employee benefit expenses due to an
increase in capitalized labor expenses.
 Taxes Other Than Income Taxes
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Taxes other than income taxes
    
    $
    4.9
    
    
    $
    6.0
    
    
    $
    10.4
    
    
    $
    12.3
   Other Income and Expenses, Net
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Other income and expenses, net
    
    $
    0.2
    
    
    $
    1.5
    
    
    $
    0.4
    
    
    $
    3.0
   83




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Interest Expense:
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Interest expense
    
    $
    4.8
    
    
    $
    6.0
    
    
    $
    9.5
    
    
    $
    12.2
  Income Tax Expense
     Generation and Marketing
  Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeGeneration (million kWhs)
    
    
    3,210
    
    
    
    2,646
    
    
    
    21.3
    %
    
    
    6,445
    
    
    
    5,412
    
    
    
    19.1
    %
 Operating Revenues
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue from affiliates
    
    $
    128.2
    
    
    $
    71.6
    
    
    $
    273.0
    
    
    $
    148.7Wholesale and other, net
    
    
    11.7
    
    
    
    18.7
    
    
    
    (15.8
    )
    
    
    42.7Total revenues
    
    $
    139.9
    
    
    $
    90.3
    
    
    $
    257.2
    
    
    $
    191.4
   84




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   
    
    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,
    
    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 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 and
    
    Fort Martin Scrubber Securitization revenues collected during the second quarter of 2007
relating to an environmental control surcharge collected from the West Virginia customers of
Monongahela following the April 2007 Fort Martin Scrubber financing. See Note 5, Debt for
additional information regarding the debt issuance,
    
    partially offset by a decrease in wholesale and other revenue as a result of changes to the
contractual obligations discussed above.
  
    
    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 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 and
    
    Fort Martin Scrubber Securitization revenues collected during the second quarter of 2007
relating to an environmental control surcharge collected from the West Virginia customers of
Monongahela following the April 2007 Fort Martin Scrubber financing. See Note 5, Debt for
additional information regarding the debt issuance,
    
    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 Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Fuel
    
    $
    62.6
    
    
    $
    41.8
    
    
    $
    123.0
    
    
    $
    86.9
  85




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Purchased Power and Transmission:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Purchased power and transmission
    
    $
    30.9
    
    
    $
    13.9
    
    
    $
    59.5
    
    
    $
    34.3
  
    
    a $17.7 million increase from the transfer of Monongahelas PURPA contracts to the
Generation and Marketing segment from the Delivery and Services segment and
    
    a $3.8 million increase in capacity purchased from AGC, primarily due to Monongahelas
increased ownership interest in AGC as a result of the Asset Swap,
    
    partially offset by a $6.2 million decrease in affiliated purchased power due to the
termination of an AE Supply contract as part of the Asset Swap as described above in
Operating Revenues.
  
    
    a $34.0 million increase from the transfer of Monongahelas PURPA contracts to the
Generation and Marketing segment from the Delivery and Services segment and
    
    a $6.8 million increase in capacity purchased from AGC, primarily due to Monongahelas
increased ownership interest in AGC as a result of the Asset Swap,
    
    partially offset by a $17.8 million decrease in affiliated purchased power due to the
termination of an AE Supply contract as part of the Asset Swap as described above in
Operating Revenues.
  Deferred Energy Costs, Net:
 Expanded Net Energy Cost (ENEC)
  Grant Town PURPA generation facility
  86




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Deferred energy costs, net
    
    $
    (6.9
    )
    
    $
    
    
    
    $
    (6.9
    )
    
    $
    
  Operations and Maintenance:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Operations and maintenance
    
    $
    33.4
    
    
    $
    22.0
    
    
    $
    64.1
    
    
    $
    38.2
  
    
    a $6.5 million increase in contract work expense, primarily due to maintenance performed
during a scheduled outage at Fort Martin Unit No. 1 in 2007, partially offset by maintenance
outages at the Hatfield generation facility during the three months ended June 30, 2006 that
did not recur during the three months ended June 30, 2007 and
    
    a $2.9 million increase in salaries and wages expense, primarily due to the Asset Swap
and a scheduled outage at Fort Martin Unit No. 1.
   
    
    a $14.1 million increase in contract work expense, primarily due to maintenance performed
during a scheduled outage at Fort Martin Unit No. 1 in 2007, partially offset by maintenance
outages at the Hatfield generation facility during the six months ended June 30, 2006 that
did not recur during the six months ended June 30, 2007,
    
    a $5.9 million increase in salaries and wages expense, primarily due to the Asset Swap
and a scheduled outage at Fort Martin Unit No. 1 and
    
    a $1.7 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 Asset Swap.
  87




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Depreciation and Amortization:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Depreciation and Amortization
    
    $
    7.6
    
    
    $
    8.8
    
    
    $
    17.6
    
    
    $
    17.6
   Taxes Other Than Income Taxes:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Taxes other than income taxes
    
    $
    7.0
    
    
    $
    5.9
    
    
    $
    14.0
    
    
    $
    11.8
   Other Income and Expenses, Net
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Other income and expenses, net
    
    $
    3.8
    
    
    $
    2.6
    
    
    $
    7.5
    
    
    $
    4.8
    88




---



##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Interest Expense
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Interest expense
    
    $
    8.1
    
    
    $
    4.5
    
    
    $
    12.0
    
    
    $
    9.1
  Income Tax Expense
     89




---



##### Table of Contents



ALLEGHENY GENERATING COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 RESULTS OF OPERATIONS
 Income Summary
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Operating revenues
    
    $
    17.1
    
    
    $
    13.9
    
    
    $
    34.0
    
    
    $
    31.2Operating income
    
    $
    10.7
    
    
    $
    7.8
    
    
    $
    21.2
    
    
    $
    18.5Income before income taxes
    
    $
    9.0
    
    
    $
    6.7
    
    
    $
    17.8
    
    
    $
    15.7Net income
    
    $
    6.2
    
    
    $
    6.7
    
    
    $
    12.2
    
    
    $
    12.9
 Operating Revenues and Expenses
   Operating Revenues:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Operating revenues
    
    $
    17.1
    
    
    $
    13.9
    
    
    $
    34.0
    
    
    $
    31.2
  Income Tax Expense
     90




---



##### Table of Contents



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 2008,
which was issued 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 in connection with an Allegheny Ventures contractual obligation
that expires in July 2008. 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.  June 30, 2007
    
    
    December 31, 2006(In millions)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Debt
    
    $
    3,991.5
    
    
    
    63.1
    
    
    $
    3,585.2
    
    
    
    63.0Common equity
    
    
    2,305.2
    
    
    
    36.5
    
    
    
    2,080.4
    
    
    
    36.6Preferred equity
    
    
    24.0
    
    
    
    0.4
    
    
    
    24.0
    
    
    
    0.4Total
    
    $
    6,320.7
    
    
    
    100.0
    
    
    
    5,689.6
    
    
    
    100.0
 Long-Term Debt and Contractual Obligations
  91




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Allegheny Cash Flows
 Operating Activities
  Six Months EndedJune 30,(In millions)
    
    2007
    
    
    2006Net income
    
    $
    186.8
    
    
    $
    144.5Loss from discontinued operations, net of tax
    
    
    
    
    
    
    1.7Non-cash items included in earnings
    
    
    284.6
    
    
    
    251.9Pension and other postretirement employee benefit contributions
    
    
    (42.2
    )
    
    
    (65.4
    )Changes in certain assets and liabilities
    
    
    (34.3
    )
    
    
    (11.8
    )Net cash used in operating activities of discontinued operations
    
    
    
    
    
    
    (2.1
    )Net cash provided by operating activities
    
    $
    394.9
    
    
    $
    318.8
   92




---



##### Table of Contents



Investing Activities
  Six Months EndedJune 30,(In millions)
    
    2007
    
    
    2006Capital expenditures
    
    $
    (351.3
    )
    
    $
    (196.8
    )Proceeds from sale of assets
    
    
    0.3
    
    
    
    2.1Purchase of minority interest in Hunlock Creek Energy Ventures
    
    
    
    
    
    
    (13.9
    )Decrease (increase) in restricted funds
    
    
    (417.9
    )
    
    
    7.3Other investments
    
    
    (1.2
    )
    
    
    (1.7
    )Net cash provided by investing activities of discontinued operations
    
    
    
    
    
    
    27.4Net cash used in investing activities
    
    $
    (770.1
    )
    
    $
    (175.6
    )
   Financing Activities
  Six Months EndedJune 30,(In millions)
    
    2007
    
    
    2006Issuance of long-term debt
    
    $
    451.2
    
    
    $
    1,142.1Repayment of long-term debt
    
    
    (56.4
    )
    
    
    (1,352.1
    )Proceeds from the exercise of stock options
    
    
    9.0
    
    
    
    10.2Cash dividends paid to minority shareholder in Hunlock Creek Energy Ventures
    
    
    
    
    
    
    (0.4
    )Net cash provided by (used in) financing activities
    
    $
    403.8
    
    
    $
    (200.2
    )
   93




---



##### Table of Contents



Monongahela Cash Flows
 Operating Activities
  Six Months EndedJune 30,(In millions)
    
    2007
    
    
    2006Net income
    
    $
    14.5
    
    
    $
    28.6Non-cash items included in earnings
    
    
    37.3
    
    
    
    36.1Changes in certain assets and liabilities
    
    
    47.7
    
    
    
    12.0Net cash provided by operating activities
    
    $
    99.5
    
    
    $
    76.7
   Investing Activities
  Six Months EndedJune 30,(In millions)
    
    2007
    
    
    2006Capital expenditures
    
    $
    (86.1
    )
    
    $
    (41.0
    )Proceeds from asset sales
    
    
    
    
    
    
    0.1Notes receivable from affiliates
    
    
    27.3
    
    
    
    (60.7
    )Increase in restricted funds
    
    
    (417.2
    )
    
    
    Net cash used in investing activities
    
    $
    (476.0
    )
    
    $
    (101.6
    )
  94




---



##### Table of Contents



Financing Activities
  Six Months EndedJune 30,(In millions)
    
    2007
    
    
    2006Notes payable to affiliates
    
    $
    17.5
    
    
    $
    Issuance of long-term debt
    
    
    338.8
    
    
    
    (0.1
    )Repayment of long-term debt
    
    
    (0.8
    )
    
    
    Asset Swap
    
    
    1.0
    
    
    
    Intercompany tax sharing agreement benefit
    
    
    3.4
    
    
    
    Cash dividends paid on preferred stock
    
    
    (0.6
    )
    
    
    (0.6
    )Cash dividends paid on common stock
    
    
    (3.0
    )
    
    
    (10.0
    )Net cash provided by (used in) financing activities
    
    $
    356.3
    
    
    $
    (10.7
    )
   AGC Cash Flows
 Operating Activities
  Six Months EndedJune 30,(In millions)
    
    2007
    
    
    2006Net income
    
    $
    12.2
    
    
    $
    12.9Non-cash items included in earnings
    
    
    5.3
    
    
    
    5.2Changes in certain assets and liabilities
    
    
    0.2
    
    
    
    (2.8
    )Net cash provided by operating activities
    
    $
    17.7
    
    
    $
    15.3
   Investing Activities
  95




---



##### Table of Contents



Financing Activities
 Six Months EndedJune 30,(In millions)
    
    2007
    
    
    2006Intercompany tax sharing agreement benefit
    
    $
    1.3
    
    
    $
    Cash dividends paid on common stock
    
    
    (13.0
    )
    
    
    (13.0
    )Net cash used in financing activities
    
    $
    (11.7
    )
    
    $
    (13.0
    )
  96




---



##### Table of Contents



Credit Ratings
  Moodys
    
    S & P
    
    FitchAE:Outlook
    
    Under Review (1)
    
    Stable
    
    StableCorporate Credit Rating
    
    Ba2(2)
    
    BBB-
    
    Not RatedSenior Unsecured Debt
    
    Ba2
    
    BB+
    
    BB+Short-term Rating
    
    SGL-2(3)
    
    A-3
    
    Not RatedAE Supply:Outlook
    
    Under Review (1)
    
    Stable
    
    StableSenior Secured Debt
    
    Baa3
    
    BBB
    
    BBB-Senior Unsecured Debt
    
    Ba3
    
    BB+
    
    BB+Pollution Control Bonds
    
    Not Rated
    
    Not Rated
    
    AAAMonongahela:Outlook
    
    Stable
    
    Stable
    
    NegativeFirst Mortgage Bonds
    
    Baa2
    
    BBB
    
    BBB+Senior Unsecured Debt
    
    Baa3
    
    BB+
    
    BBB-Preferred Stock
    
    Ba3
    
    BB
    
    BB+Environmental Control Bonds
    
    Aaa
    
    AAA
    
    AAAPotomac Edison:Outlook
    
    Negative
    
    Stable
    
    NegativeFirst Mortgage Bonds
    
    Baa2
    
    BBB
    
    BBBEnvironmental Control Bonds
    
    Aaa
    
    AAA
    
    AAAWest Penn:Outlook
    
    Stable
    
    Stable
    
    StableTransition Bonds
    
    Aaa
    
    AAA
    
    AAAFirst Mortgage Bonds
    
    Baa2
    
    BBB
    
    BBB+Senior Unsecured Debt
    
    Baa3
    
    BBB-
    
    BBB-AGC:Outlook
    
    Under Review (1)
    
    Stable
    
    StableSenior Unsecured Debt
    
    Ba3
    
    BBB-
    
    BB+
 
 (1)
    
    Under review for possible upgrade from stable(2)
    
    Corporate family rating for AE only, which excludes all of its subsidiaries(3)
    
    Liquidity rating 97




---



##### Table of Contents



OTHER MATTERS
 Critical Accounting Policies
  Recent Accounting Pronouncements
  REGULATORY MATTERS
 Federal Legislation, Regulation and Rate Matters
 Transmission Rate Design.
   98




---



##### Table of Contents



th
 Transmission Expansion.
   99




---



##### Table of Contents



State Legislation, Regulation and Rate Matters
 Pennsylvania
 Transmission Expansion.
 Default Service Regulations.
  100




---



##### Table of Contents



West Virginia
 Transmission Expansion.
 Rate Case.
 Securitization and Scrubber Project.
   101




---



##### Table of Contents



Maryland
 Rate Stabilization.
  Advanced Metering and Demand Side Management Initiatives
 Virginia
 Transmission Expansion.
 Purchased Power Filing.
 102




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    103




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
  Disclosure Controls and Procedures.
 Changes in Internal Control Over Financial Reporting
  104




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  State rate regulation may delay or deny full recovery of costs and impose risks on Alleghenys
operations. Any denial of, or delay in, cost recovery could have an adverse effect on Alleghenys
business.
  Virginia
     105




---



##### Table of Contents



West Virginia
    The TrAIL Project and the PATH Project are subject to permitting and state regulatory
approvals.
  Allegheny is currently involved in capital intensive projects that may involve various
implementation and financial risks.
   
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  106




---



##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 AE.
   107




---



##### Table of Contents



Election of directors:
 Nominees for Director
    
    Votes For
    
    Votes withheldH. Furlong Baldwin
    
    
    139,295,097
    
    
    
    1,945,877Eleanor Baum
    
    
    137,431,147
    
    
    
    3,809,827Paul J. Evanson
    
    
    138,118,834
    
    
    
    3,122,140Cyrus F. Freidheim, Jr.
    
    
    138,906,539
    
    
    
    2,334,435Julia L. Johnson
    
    
    139,463,641
    
    
    
    1,777,333Ted J. Kleisner
    
    
    139,451,571
    
    
    
    1,789,403Steven H. Rice
    
    
    137,502,090
    
    
    
    3,738,884Gunnar E. Sarsten
    
    
    137,454,891
    
    
    
    3,786,083Michael H. Sutton
    
    
    139,442,670
    
    
    
    1,798,304
 Other items as described above:
 Item
    
    Votes For
    
    Votes Against
    
    Abstentions
    
    Broker Non-Votes(2)
    

    137,581,883

    

    2,616,980

    

    1,042,111

    

    0(3)
    

    13,625,587

    

    106,396,564

    

    2,678,385

    

    42,834,921(4)
    

    18,819,301

    

    102,443,460

    

    1,437,778

    

    42,834,919(5)
    

    60,854,748

    

    60,358,994

    

    1,486,793

    

    42,834,922(6)
    

    68,791,040

    

    51,567,108

    

    2,342,388

    

    42,834,922(7)
    

    60,699,596

    

    56,633,223

    

    5,367,712

    

    42,834,926(8)
    

    8,843,999

    

    99,152,056

    

    14,704,478

    

    42,834,924(9)
    

    42,633,794

    

    65,308,490

    

    14,758,250

    

    42,834,923
 Monongahela
 AGC
 
 ITEM 5. OTHER INFORMATION
  108




---



##### Table of Contents



ITEM 6. EXHIBITS
 EXHIBIT INDEX
 Allegheny Energy, Inc.
 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
 109




---



##### 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
 110




---



##### 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
 111




---



##### Table of Contents



SIGNATURE
  ALLEGHENY ENERGY, INC.Date:  August 8, 2007
    By:
    /s/ Philip L. GouldingPhilip L. GouldingSenior Vice President and
Chief Financial OfficerMONONGAHELA POWER COMPANYDate:  August 8, 2007
    By:
    /s/ Philip L. GouldingPhilip L. GouldingVice President and
Principal Financial OfficerALLEGHENY GENERATING COMPANY.Date:  August 8, 2007
    By:
    /s/ Philip L. GouldingPhilip L. GouldingVice President and
Principal Financial Officer 112