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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2005



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|                       |  |                                                                                                                                               |  |                                   
|---------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------
|Commission File Number |  | Name of Registrant State of
Incorporation Address of Principal Executive Offices and Telephone Number                                         |  | IRS Employer Identification
Number
|1-267                  |  | ALLEGHENY ENERGY, INC. (A Maryland
Corporation) 800 Cabin Hill Drive Greensburg,
Pennsylvania 15601 Telephone (724) 837-3000                  |  | 13-5531602                        
|                       |  |                                                                                                                                              
|1-5164                 |  | MONONGAHELA POWER COMPANY (An Ohio
Corporation) 1310 Fairmont Avenue Fairmont, West
Virginia 26554 Telephone (304) 366-3000                   |  | 13-5229392                        
|                       |  |                                                                                                                                              
|1-3376-2               |  | THE POTOMAC EDISON COMPANY (A Maryland and
Virginia Corporation) 800 Cabin Hill Drive Greensburg, Pennsylvania 15601 Telephone (724) 837-3000 |  | 13-5323955                        
|                       |  |                                                                                                                                              
|0-14688                |  | ALLEGHENY GENERATING COMPANY
(A Virginia Corporation) 800 Cabin Hill Drive Greensburg, Pennsylvania 15601 Telephone (724)
837-3000            |  | 13-3079675                        



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This combined Form 10-Q is separately filed by Allegheny Energy, Inc., Monongahela Power Company, The Potomac Edison Company
and Allegheny Generating Company. Information contained in the Form 10-Q relating to Monongahela Power Company, The Potomac Edison Company and Allegheny Generating Company is filed by each such registrant on its own behalf. Each of Monongahela Power
Company, The Potomac Edison Company and Allegheny Generating Company makes no representation as to information relating to registrants other than itself.



Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act).



|                             |  |              
|---------------------------- |  | -------------
|Allegheny Energy, Inc.       |  | Yes  x    No ̈
|Monongahela Power Company    |  | Yes ̈No  x    
|The Potomac Edison Company   |  | Yes ̈No  x    
|Allegheny Generating Company |  | Yes ̈No  x    



Number of shares
outstanding of each class of common stock as of May 4, 2005:



|                             |  |             |  |                   |  
|---------------------------- |  | ----------- |  | ----------------- | -
|Allegheny Energy, Inc.       |  | 162,538,405 |  | ($1.25 par value  | )
|Monongahela Power Company    |  | 5,891,000   |  | ($50.00 par value | )
|The Potomac Edison Company   |  | 22,385,000  |  | ($0.01 par value  | )
|Allegheny Generating Company |  | 1,000       |  | ($1.00 par value  | )



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TABLE OF CONTENTS



|                                                                                                       |  |         
|------------------------------------------------------------------------------------------------------ |  | --------
|                                                                                                       |  | Page No.
|PART I. FINANCIAL INFORMATION                                                                          |  |         
|                                                                                                       | 
|Item 1. Financial Statements (Unaudited)                                                               |  |         
|                                                                                                       | 
|Allegheny Energy, Inc.:                                                                                |  |         
|Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004               |  | 6       
|Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004               |  | 7       
|Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004                                 |  | 8-9     
|Notes to Consolidated Financial Statements                                                             |  | 11-32   
|                                                                                                       | 
|Monongahela Power Company:                                                                             |  |         
|Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004               |  | 33      
|Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004               |  | 34      
|Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004                                 |  | 35-36   
|Notes to Consolidated Financial Statements                                                             |  | 38-46   
|                                                                                                       | 
|The Potomac Edison Company:                                                                            |  |         
|Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004               |  | 47      
|Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004               |  | 48      
|Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004                                 |  | 49-50   
|Notes to Consolidated Financial Statements                                                             |  | 52-55   
|                                                                                                       | 
|Allegheny Generating Company:                                                                          |  |         
|Statements of Operations for the Three Months Ended March 31, 2005 and 2004                            |  | 56      
|Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004                            |  | 57      
|Balance Sheets as of March 31, 2005 and December 31, 2004                                              |  | 58-59   
|Notes to Financial Statements                                                                          |  | 61-62   
|                                                                                                       | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) |  | 63-103  
|                                                                                                       | 
|Item 3.
Quantitative and Qualitative Disclosures About Market Risk                                     |  | 103     
|                                                                                                       | 
|Item 4.
Controls and Procedures                                                                        |  | 103     
|                                                                                                       | 
|PART II. OTHER INFORMATION                                                                             |  |         
|                                                                                                       | 
|Item 1.
Legal Proceedings                                                                              |  | 103     
|                                                                                                       | 
|Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                    |  | 103     



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|                                                            |  |        
|----------------------------------------------------------- |  | -------
|Item 3.
Defaults Upon Senior Securities                     |  | 103    
|                                                            | 
|Item 4.
Submission of Matters to a Vote of Security Holders |  | 104    
|                                                            | 
|Item 5.
Other Information                                   |  | 104    
|                                                            | 
|Item 6.
Exhibits                                            |  | 105-108
|                                                            | 
|Signatures                                                  |  | 109    



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GLOSSARY



I. The following abbreviations and terms are used in this report to identify Allegheny Energy, Inc. and its subsidiaries:



|                       |  |                                                                                                                      
|---------------------- |  | ---------------------------------------------------------------------------------------------------------------------
|AE                     |  | Allegheny Energy, Inc., a diversified utility holding company.                                                       
|AE Supply              |  | Allegheny Energy Supply Company, LLC, an unregulated generation subsidiary of AE.                                    
|AGC                    |  | Allegheny Generating Company, an unregulated generation subsidiary of AE Supply.                                     
|Allegheny              |  | AE together with its consolidated subsidiaries.                                                                      
|Allegheny Ventures     |  | Allegheny Ventures, Inc., an unregulated subsidiary of AE.                                                           
|Distribution Companies |  | Collectively, Monongahela, Potomac Edison and West Penn. The Distribution Companies do business as Allegheny Power.
|Monongahela            |  | Monongahela Power Company, a regulated subsidiary of AE.                                                             
|Mountaineer            |  | Mountaineer Gas Company, a subsidiary of Monongahela.                                                                
|Potomac Edison         |  | The Potomac Edison Company, a regulated subsidiary of AE.                                                            
|West Penn              |  | West Penn Power Company, a regulated subsidiary of AE.                                                               
|WVP                    |  | West Virginia Power, a division of Monongahela.                                                                      



II. The following abbreviations and
acronyms are used in this report to identify entities and terms relevant to Alleghenys business and operations:



|                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2004 Annual Report on Form 10-K |  | Combined Annual Report on Form 10-K of AE, Monongahela, Potomac Edison and AGC for the year ended December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|CDWR                            |  | California Department of Water Resources.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Clean Air Act                   |  | Clean Air Act of 1970.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Exchange Act                    |  | Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|FASB                            |  | Financial Accounting Standards Board.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|FERC                            |  | Federal Energy Regulatory Commission, an independent commission within the Department of Energy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|GAAP                            |  | Generally accepted accounting principles in the United States of America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|KWh                             |  | Kilowatt-hour, which is a unit of electric energy equivalent to one kilowatt operating for one hour.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Maryland PSC                    |  | Maryland Public Service Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|MW                              |  | Megawatt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|MWh                             |  | Megawatt-hour.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|OVEC                            |  | Ohio Valley Electric Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Pennsylvania PUC                |  | Pennsylvania Public Utility Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|PJM                             |  | PJM Interconnection, LLC, a regional transmission organization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|PLR                             |  | Provider-of-last-resort.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|PUCO                            |  | Public Utilities Commission of Ohio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|PUHCA                           |  | Public Utility Holding Company Act of 1935, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|PURPA                           |  | Public Utility Regulatory Policies Act of 1978.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|SEC                             |  | United States Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|SFAS No. 133                    |  | FASBs Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities  Deferral of the Effective Date of FASB Statement No. 133  an amendment of FASB Statement No. 133, SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities  an amendment of FASB Statement No. 133, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.



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|                  |  |                                                                                                                              
|----------------- |  | -----------------------------------------------------------------------------------------------------------------------------
|SFAS No. 144      |  | FASBs Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-lived Assets.
|Virginia SCC      |  | Virginia State Corporate Commission.                                                                                         
|West Virginia PSC |  | Public Service Commission of West Virginia.                                                                                  



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                                                            |  |                              |             |      |   |            
|--------------------------------------------------------------------------- |  | ---------------------------- | ----------- | ---- | - | -----------
|                                                                            |  | Three Months Ended March 31,
|(In thousands)                                                              |  | 2005                         |             | 2004
|Operating revenues                                                          |  | $                            | 754,030     |      | $ | 735,350    
|                                                                            |  |                             
|Operating expenses:                                                         |  |                              |             |      |   |            
|Fuel consumed in electric generation                                        |  |                              | 173,887     |      |   | 161,712    
|Purchased power and transmission                                            |  |                              | 104,822     |      |   | 81,013     
|Deferred energy costs, net                                                  |  |                              | 1,186       |      |   | 914        
|Operations and maintenance                                                  |  |                              | 162,677     |      |   | 200,790    
|Depreciation and amortization                                               |  |                              | 76,411      |      |   | 72,987     
|Taxes other than income taxes                                               |  |                              | 55,058      |      |   | 49,185     
|                                                                            |  |                              |             |      |   |            
|Total operating expenses                                                    |  |                              | 574,041     |      |   | 566,601    
|                                                                            |  |                              |             |      |   |            
|Operating income                                                            |  |                              | 179,989     |      |   | 168,749    
|                                                                            |  |                             
|Other income and expenses, net (Note 12)                                    |  |                              | 5,253       |      |   | 7,854      
|                                                                            |  |                             
|Interest expense and preferred dividends:                                   |  |                              |             |      |   |            
|                                                                            |  |                             
|Interest expense                                                            |  |                              | 125,794     |      |   | 119,830    
|Preferred dividend of subsidiary                                            |  |                              | 1,259       |      |   | 1,259      
|                                                                            |  |                              |             |      |   |            
|Total interest expense and preferred dividends                              |  |                              | 127,053     |      |   | 121,089    
|                                                                            |  |                              |             |      |   |            
|Income from continuing operations before income taxes and minority interest |  |                              | 58,189      |      |   | 55,514     
|                                                                            |  |                             
|Income tax expense from continuing operations                               |  |                              | 23,376      |      |   | 23,018     
|                                                                            |  |                             
|Minority interest in net income of subsidiaries                             |  |                              | 415         |      |   | 1,859      
|                                                                            |  |                              |             |      |   |            
|Income from continuing operations                                           |  |                              | 34,398      |      |   | 30,637     
|                                                                            |  |                             
|Income from discontinued operations, net of tax (Note 3)                    |  |                              | 8,244       |      |   | 2,641      
|                                                                            |  |                              |             |      |   |            
|Net income                                                                  |  | $                            | 42,642      |      | $ | 33,278     
|                                                                            |  |                              |             |      |   |            
|Basic weighted average common shares outstanding                            |  |                              | 137,417,964 |      |   | 126,969,238
|Diluted weighted average common shares outstanding                          |  |                              | 165,674,343 |      |   | 152,941,183
|                                                                            |  |                             
|Basic income per common share:                                              |  |                              |             |      |   |            
|Income from continuing operations                                           |  | $                            | 0.25        |      | $ | 0.24       
|Income from discontinued operations, net                                    |  |                              | 0.06        |      |   | 0.02       
|                                                                            |  |                              |             |      |   |            
|Net income per common share                                                 |  | $                            | 0.31        |      | $ | 0.26       
|                                                                            |  |                              |             |      |   |            
|Diluted income per common share:                                            |  |                              |             |      |   |            
|Income from continuing operations                                           |  | $                            | 0.24        |      | $ | 0.24       
|Income from discontinued operations, net                                    |  |                              | 0.05        |      |   | 0.01       
|                                                                            |  |                              |             |      |   |            
|Net income per common share                                                 |  | $                            | 0.29        |      | $ | 0.25       
|                                                                            |  |                              |             |      |   |            



See accompanying Notes
to Consolidated Financial Statements.



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                            |  |                              |          |   |      |   |            |  
|--------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | ---------- | -
|                                                                            |  | Three Months Ended March 31, |         
|(In thousands)                                                              |  | 2005                         |          |   | 2004 |  
|Cash Flows From Operating Activities:                                       |  |                              |          |   |      |   |            |  
|Net income                                                                  |  | $                            | 42,642   |   |      | $ | 33,278     |  
|                                                                            |  |                             
|Adjustments for discontinued operations and non-cash charges and (credits): |  |                              |          |   |      |   |            |  
|Income from discontinued operations, net                                    |  |                              | (8,244   | ) |      |   |           |  
|Depreciation and amortization                                               |  |                              | 76,411   |   |      |   | 83,291     |  
|Gain on asset sales and disposals                                           |  |                              | (1,490   | ) |      |   | (11,600    | )
|Minority interest in net income of subsidiaries                             |  |                              | 415      |   |      |   | 1,859      |  
|Deferred investment credit and income taxes, net                            |  |                              | 24,459   |   |      |   | 13,491     |  
|Stock-based compensation expense                                            |  |                              | 3,200    |   |      |   | 6,761      |  
|Unrealized (gains) losses on commodity contracts, net                       |  |                              | (4,121   | ) |      |   | 11,139     |  
|Other, net                                                                  |  |                              | 5,599    |   |      |   | 31,636     |  
|                                                                            |  |                             
|Changes in certain assets and liabilities:                                  |  |                              |          |   |      |   |            |  
|Accounts receivable, net                                                    |  |                              | (34,328  | ) |      |   | (30,634    | )
|Materials, supplies and fuel                                                |  |                              | (5,247   | ) |      |   | 48,396     |  
|Taxes receivable/accrued, net                                               |  |                              | (19,385  | ) |      |   | (15,781    | )
|Prepaid taxes                                                               |  |                              | (29,734  | ) |      |   | (28,561    | )
|Collateral deposits                                                         |  |                              | (27,595  | ) |      |   | (58,696    | )
|Accounts payable                                                            |  |                              | (21,415  | ) |      |   | (12,620    | )
|Accrued interest                                                            |  |                              | 61,357   |   |      |   | 24,252     |  
|Other, net                                                                  |  |                              | 34,023   |   |      |   | 20,186     |  
|                                                                            |  |                              |          |   |      |   |            |  
|Net cash from operating activities                                          |  |                              | 96,547   |   |      |   | 116,397    |  
|                                                                            |  |                              |          |   |      |   |            |  
|Cash Flows From (Used In) Investing Activities:                             |  |                              |          |   |      |   |            |  
|Capital expenditures                                                        |  |                              | (52,980  | ) |      |   | (53,773    | )
|Proceeds from sale of businesses and assets                                 |  |                              | 2,424    |   |      |   | 11,589     |  
|Decrease in restricted funds                                                |  |                              | 208,854  |   |      |   | 17,357     |  
|Other investments                                                           |  |                              | (813     | ) |      |   | (3,116     | )
|                                                                            |  |                              |          |   |      |   |            |  
|Net cash from (used in) investing activities                                |  |                              | 157,485  |   |      |   | (27,943    | )
|                                                                            |  |                              |          |   |      |   |            |  
|Cash Flows Used In Financing Activities:                                    |  |                              |          |   |      |   |            |  
|Issuance of long-term debt                                                  |  |                              |         |   |      |   | 1,481,592  |  
|Retirement of long-term debt                                                |  |                              | (267,201 | ) |      |   | (1,709,650 | )
|Exercise of stock options                                                   |  |                              | 443      |   |      |   |           |  
|                                                                            |  |                              |          |   |      |   |            |  
|Net cash used in financing activities                                       |  |                              | (266,758 | ) |      |   | (228,058   | )
|                                                                            |  |                              |          |   |      |   |            |  
|Net decrease in cash and cash equivalents                                   |  |                              | (12,726  | ) |      |   | (139,604   | )
|Cash and cash equivalents at beginning of period                            |  |                              | 189,482  |   |      |   | 528,612    |  
|                                                                            |  |                              |          |   |      |   |            |  
|Cash and cash equivalents at end of period                                  |  | $                            | 176,756  |   |      | $ | 389,008    |  
|                                                                            |  |                              |          |   |      |   |            |  
|Supplemental Cash Flow Information:                                         |  |                              |          |   |      |   |            |  
|Cash paid for interest (net of amount capitalized)                          |  | $                            | 60,159   |   |      | $ | 86,337     |  



See accompanying Notes
to Consolidated Financial Statements.



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)



|                                         |  |               |            |   |                  |   |            |  
|---------------------------------------- |  | ------------- | ---------- | - | ---------------- | - | ---------- | -
|(In thousands)                           |  | March 31,2005 |            |   | December 31,2004 |  
|ASSETS                                   |  |               |            |   |                  |   |            |  
|                                         |  |              
|Current Assets:                          |  |               |            |   |                  |   |            |  
|Cash and cash equivalents                |  | $             | 176,756    |   |                  | $ | 189,482    |  
|Accounts receivable:                     |  |               |            |   |                  |   |            |  
|Customer                                 |  |               | 211,728    |   |                  |   | 164,666    |  
|Unbilled utility revenue                 |  |               | 139,474    |   |                  |   | 145,498    |  
|Wholesale and other                      |  |               | 24,510     |   |                  |   | 32,966     |  
|Allowance for uncollectible accounts     |  |               | (18,126    | ) |                  |   | (19,854    | )
|Materials and supplies                   |  |               | 102,557    |   |                  |   | 100,054    |  
|Fuel                                     |  |               | 64,556     |   |                  |   | 61,812     |  
|Deferred income taxes                    |  |               | 62,434     |   |                  |   | 44,590     |  
|Prepaid taxes                            |  |               | 76,634     |   |                  |   | 46,900     |  
|Assets held for sale (Note 3)            |  |               | 114,418    |   |                  |   | 150,031    |  
|Collateral deposits                      |  |               | 116,303    |   |                  |   | 88,708     |  
|Commodity contracts                      |  |               | 14,168     |   |                  |   | 13,523     |  
|Restricted funds                         |  |               | 20,003     |   |                  |   | 228,857    |  
|Regulatory assets                        |  |               | 39,106     |   |                  |   | 37,626     |  
|Other                                    |  |               | 14,619     |   |                  |   | 20,273     |  
|                                         |  |               |            |   |                  |   |            |  
|Total current assets                     |  |               | 1,159,140  |   |                  |   | 1,305,132  |  
|                                         |  |               |            |   |                  |   |            |  
|Property, Plant and Equipment, Net:      |  |               |            |   |                  |   |            |  
|Generation                               |  |               | 5,702,559  |   |                  |   | 5,695,851  |  
|Transmission                             |  |               | 1,017,603  |   |                  |   | 1,015,751  |  
|Distribution                             |  |               | 3,399,220  |   |                  |   | 3,366,217  |  
|Other                                    |  |               | 465,311    |   |                  |   | 463,515    |  
|Accumulated depreciation                 |  |               | (4,400,442 | ) |                  |   | (4,341,282 | )
|                                         |  |               |            |   |                  |   |            |  
|Subtotal                                 |  |               | 6,184,251  |   |                  |   | 6,200,052  |  
|Construction work in progress            |  |               | 103,043    |   |                  |   | 102,966    |  
|                                         |  |               |            |   |                  |   |            |  
|Total property, plant and equipment, net |  |               | 6,287,294  |   |                  |   | 6,303,018  |  
|                                         |  |               |            |   |                  |   |            |  
|Investments and Other Assets:            |  |               |            |   |                  |   |            |  
|Assets held for sale (Note 3)            |  |               | 340,679    |   |                  |   | 340,457    |  
|Goodwill                                 |  |               | 367,287    |   |                  |   | 367,287    |  
|Investments in unconsolidated affiliates |  |               | 29,663     |   |                  |   | 29,991     |  
|Intangible assets                        |  |               | 33,199     |   |                  |   | 33,215     |  
|Other                                    |  |               | 46,980     |   |                  |   | 46,628     |  
|                                         |  |               |            |   |                  |   |            |  
|Total investments and other assets       |  |               | 817,808    |   |                  |   | 817,578    |  
|                                         |  |               |            |   |                  |   |            |  
|Deferred Charges:                        |  |               |            |   |                  |   |            |  
|Commodity contracts                      |  |               | 3,379      |   |                  |   | 3,667      |  
|Regulatory assets                        |  |               | 557,849    |   |                  |   | 562,843    |  
|Other                                    |  |               | 51,913     |   |                  |   | 52,902     |  
|                                         |  |               |            |   |                  |   |            |  
|Total deferred charges                   |  |               | 613,141    |   |                  |   | 619,412    |  
|                                         |  |               |            |   |                  |   |            |  
|Total Assets                             |  | $             | 8,877,383  |   |                  | $ | 9,045,140  |  
|                                         |  |               |            |   |                  |   |            |  



See accompanying Notes
to Consolidated Financial Statements.



8



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##### Table of Contents

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(unaudited)



|                                                          |  |               |           |   |                  |   |           |  
|--------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|(In thousands)                                            |  | March 31,2005 |           |   | December 31,2004 |  
|LIABILITIES AND STOCKHOLDERS EQUITY                      |  |               |           |   |                  |   |           |  
|                                                          |  |              
|Current Liabilities:                                      |  |               |           |   |                  |   |           |  
|Long-term debt due within one year (Note 2)               |  | $             | 385,177   |   |                  | $ | 385,142   |  
|Accounts payable                                          |  |               | 202,114   |   |                  |   | 223,584   |  
|Accrued taxes                                             |  |               | 101,064   |   |                  |   | 112,866   |  
|Commodity contracts                                       |  |               | 54,502    |   |                  |   | 40,835    |  
|Accrued interest                                          |  |               | 123,083   |   |                  |   | 61,726    |  
|Liabilities associated with assets held for sale (Note 3) |  |               | 45,115    |   |                  |   | 37,471    |  
|Other                                                     |  |               | 137,636   |   |                  |   | 144,082   |  
|                                                          |  |               |           |   |                  |   |           |  
|Total current liabilities                                 |  |               | 1,048,691 |   |                  |   | 1,005,706 |  
|                                                          |  |               |           |   |                  |   |           |  
|Long-term Debt (Note 2)                                   |  |               | 4,273,321 |   |                  |   | 4,540,764 |  
|                                                          |  |              
|Deferred Credits and Other Liabilities:                   |  |               |           |   |                  |   |           |  
|Commodity contracts                                       |  |               | 54,994    |   |                  |   | 56,501    |  
|Investment tax credit                                     |  |               | 81,722    |   |                  |   | 83,307    |  
|Deferred income taxes                                     |  |               | 671,228   |   |                  |   | 635,374   |  
|Obligations under capital leases                          |  |               | 21,653    |   |                  |   | 23,788    |  
|Regulatory liabilities                                    |  |               | 460,344   |   |                  |   | 453,913   |  
|Adverse power purchase commitment                         |  |               | 197,089   |   |                  |   | 201,377   |  
|Liabilities associated with assets held for sale (Note 3) |  |               | 89,505    |   |                  |   | 89,356    |  
|Other                                                     |  |               | 490,719   |   |                  |   | 505,620   |  
|                                                          |  |               |           |   |                  |   |           |  
|Total deferred credits and other liabilities              |  |               | 2,067,254 |   |                  |   | 2,049,236 |  
|                                                          |  |               |           |   |                  |   |           |  
|Commitments and Contingencies (Note 15)                   |  |               |           |   |                  |   |           |  
|                                                          |  |              
|Minority Interest                                         |  |               | 22,032    |   |                  |   | 21,618    |  
|                                                          |  |              
|Preferred Stock of Subsidiary                             |  |               | 74,000    |   |                  |   | 74,000    |  
|                                                          |  |              
|Common Stockholders Equity:                              |  |               |           |   |                  |   |           |  
|Common stock                                              |  |               | 171,965   |   |                  |   | 171,788   |  
|Other paid-in capital                                     |  |               | 1,605,642 |   |                  |   | 1,600,215 |  
|Retained deficit                                          |  |               | (265,047  | ) |                  |   | (307,690  | )
|Treasury stock                                            |  |               | (1,756    | ) |                  |   | (1,756    | )
|Accumulated other comprehensive loss                      |  |               | (118,719  | ) |                  |   | (108,741  | )
|                                                          |  |               |           |   |                  |   |           |  
|Total common stockholders equity                         |  |               | 1,392,085 |   |                  |   | 1,353,816 |  
|                                                          |  |               |           |   |                  |   |           |  
|Total Liabilities and Stockholders Equity                |  | $             | 8,877,383 |   |                  | $ | 9,045,140 |  
|                                                          |  |               |           |   |                  |   |           |  



See accompanying Notes
to Consolidated Financial Statements.



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



|         |  |                                                                  |  |         
|-------- |  | ---------------------------------------------------------------- |  | --------
|Note No. |  |                                                                  |  | Page No.
|1        |  | Basis of Presentation                                            |  | 11      
|         |  |                                                                 
|2        |  | Debt                                                             |  | 13      
|         |  |                                                                 
|3        |  | Assets Held for Sale and Discontinued Operations                 |  | 16      
|         |  |                                                                 
|4        |  | Goodwill and Intangible Assets                                   |  | 18      
|         |  |                                                                 
|5        |  | Derivative Instruments and Hedging Activities                    |  | 18      
|         |  |                                                                 
|6        |  | Asset Retirement Obligations (AROs)                            |  | 19      
|         |  |                                                                 
|7        |  | Comprehensive Income (Loss)                                      |  | 20      
|         |  |                                                                 
|8        |  | Business Segments                                                |  | 21      
|         |  |                                                                 
|9        |  | Accounting for the Effects of Price Regulation                   |  | 22      
|         |  |                                                                 
|10       |  | Income Per Share                                                 |  | 22      
|         |  |                                                                 
|11       |  | Pension Benefits and Postretirement Benefits Other Than Pensions |  | 23      
|         |  |                                                                 
|12       |  | Other Income and Expenses, Net                                   |  | 24      
|         |  |                                                                 
|13       |  | Guarantees and Letters of Credit                                 |  | 24      
|         |  |                                                                 
|14       |  | Variable Interest Entities                                       |  | 24      
|         |  |                                                                 
|15       |  | Commitments and Contingencies                                    |  | 25      
|         |  |                                                                 
|16       |  | Interest Expense  Merrill Lynch Litigation                      |  | 31      
|         |  |                                                                 
|17       |  | Subsequent Events                                                |  | 32      



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 1: BASIS OF PRESENTATION



Allegheny Energy, Inc. (AE) is a holding company registered under the Public Utility Holding Company Act of 1935, as amended (PUHCA). AE operates primarily through directly and indirectly owned subsidiaries (together
with AE, Allegheny). Alleghenys two business segments are the Delivery and Services segment and the Generation and Marketing segment.



The Delivery and Services segment primarily consists of AEs regulated utility subsidiaries. These subsidiaries include Monongahela Power Company
(Monongahela), excluding generation of electricity for its West Virginia customers, The Potomac Edison Company (Potomac Edison) and West Penn Power Company (West Penn) (collectively, the Distribution
Companies). These subsidiaries primarily operate electric and natural gas transmission and distribution systems in Pennsylvania, West Virginia, Maryland, Virginia and Ohio. These subsidiaries are subject to federal and state regulation,
including PUHCA.



The Generation and Marketing segment
primarily consists of AEs subsidiaries, Allegheny Energy Supply Company, LLC (AE Supply) and Allegheny Generating Company (AGC). AE Supply owns, operates and controls electric generation capacity and supplies and trades
energy and energy-related commodities. AGC is owned approximately 77% by AE Supply and approximately 23% by Monongahela. It owns and sells generation capacity to AE Supply and Monongahela. The Generation and Marketing segment also includes
Monongahelas generation of electricity for its West Virginia customers. The Generation and Marketing segment is subject to federal regulation, including PUHCA, but is not subject to state regulation of rates, except that Monongahela is subject
to state regulation in West Virginia.



Allegheny Energy
Services Corporation (AESC) is a wholly owned subsidiary of AE that employs substantially all of the people who work at Allegheny.



The accompanying unaudited interim financial statements should be read in conjunction with the Combined Annual Report on Form 10-K of AE, Monongahela,
Potomac Edison and AGC for the year ended December 31, 2004 (the 2004 Annual Report on Form 10-K).



The interim financial statements included herein have been prepared by Allegheny, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles used in the United States of America
(GAAP) have been condensed or omitted. Management believes that the disclosures are adequate to make the information presented not misleading.



In the opinion of management, the unaudited interim financial statements included herein reflect all normal recurring adjustments that are necessary for a
fair presentation of the results of operations for the three months ended March 31, 2005 and 2004, cash flows for the three months ended March 31, 2005 and 2004 and financial position at March 31, 2005 and December 31, 2004. Because of the seasonal
nature of Alleghenys operations, results for the three months ended March 31, 2005 are not necessarily indicative of results that may be expected for the year ending December 31, 2005.



During the third quarter of 2004, AE and certain of its subsidiaries entered
into agreements to sell, or made the decision to sell, certain non-core assets. The results of operations relating to these assets have been reclassified to discontinued operations in the accompanying Consolidated Statements of Operations for all
periods presented. In accordance with the provisions of the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144), the assets and liabilities associated with these discontinued operations have been reclassified as held for sale in the Consolidated Balance Sheets as of, and subsequent to, the date that held for
sale criteria were met.



11



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Certain amounts in the financial statements have been reclassified for comparative purposes.



Federal and State Income Taxes. The provision for
income tax expense for earnings from operations, and/or the income tax benefit for losses from operations, results in an effective income tax rate that differs from the federal statutory rate of 35%, principally due to state income taxes, tax
credits, the effects of utility rate making and certain non-deductible expenses.



Allegheny allocates income tax expense or benefit to its subsidiaries pursuant to its consolidated tax sharing agreement. This corporate allocation may cause significant fluctuations in the effective quarterly and
year to date tax rates from the statutory rates for certain of Alleghenys subsidiaries, depending on the level of pre-tax income.



Stock-Based Compensation. AE maintains certain stock-based employee compensation arrangements, which are described in greater detail in Item 8,
Note 18, Stock-Based Compensation, in the 2004 Annual Report on Form 10-K. These arrangements include AEs Long-Term Incentive Plan, under which stock option awards, restricted share awards and performance awards may be granted. Options to
purchase approximately 0.2 million shares of AEs common stock were granted under the Long-Term Incentive Plan during the three months ended March 31, 2005.



Through July 2, 2004, Allegheny recorded compensation expense related to stock units issued to certain of its executive
officers using the variable method of accounting. On that date, Allegheny received authorization from the SEC to settle stock units in shares of AEs common stock as the units vest. As a result, Allegheny began recording compensation expense
relating to stock unit awards using the fixed method of accounting effective July 3, 2004.



Allegheny accounts for stock options under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations. No stock option based compensation expense has been recognized in consolidated net income, because all options granted under the Long-Term Incentive Plan had an exercise price equal to the market price of the underlying stock on the
date of grant.



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Allegheny follows the disclosure provisions of SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, an Amendment of SFAS No. 123. The following table illustrates the effect on consolidated net income and income per share as if Allegheny had applied the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to all stock-based employee compensation:



|                                                                                                                                    |  |                             |      |   |      |   |      |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---- | - | ---- | - | ---- | -
|                                                                                                                                    |  | Three Months EndedMarch 31, |     
|(In millions)                                                                                                                       |  | 2005                        |      |   | 2004 |  
|Consolidated net income, as reported                                                                                                |  | $                           | 42.6 |   |      | $ | 33.3 |  
|Add:                                                                                                                                |  |                             |      |   |      |   |      |  
|Stock-based employee compensation expense included in consolidated net income, net of related tax effects                           |  |                             | 1.8  |   |      |   | 4.0  |  
|Deduct:                                                                                                                             |  |                             |      |   |      |   |      |  
|Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             | (3.2 | ) |      |   | (5.5 | )
|                                                                                                                                    |  |                             |      |   |      |   |      |  
|                                                                                                                                    |  |                            
|Consolidated net income, pro forma                                                                                                  |  | $                           | 41.2 |   |      | $ | 31.8 |  
|                                                                                                                                    |  |                             |      |   |      |   |      |  
|                                                                                                                                    |  |                            
|Basic income per share:                                                                                                             |  |                             |      |   |      |   |      |  
|As reported                                                                                                                         |  | $                           | 0.31 |   |      | $ | 0.26 |  
|Pro forma                                                                                                                           |  | $                           | 0.30 |   |      | $ | 0.25 |  
|                                                                                                                                    |  |                            
|Diluted income per share:                                                                                                           |  |                             |      |   |      |   |      |  
|As reported                                                                                                                         |  | $                           | 0.29 |   |      | $ | 0.25 |  
|Pro forma                                                                                                                           |  | $                           | 0.29 |   |      | $ | 0.24 |  



In April 2005, the SEC
adopted a new rule that amended the compliance dates for SFAS No. 123R, Share-Based Payment. SFAS No. 123R was issued by the Financial Accounting Standards Board in December 2004 and will require companies to measure compensation cost
for all share-based payments (including employee stock options) at fair value. Prior to the new rule, Allegheny had planned to adopt SFAS No. 123R on July 1, 2005. As permitted by the new SEC rule, Allegheny now plans to adopt SFAS No. 123R on
January 1, 2006. Allegheny is currently evaluating the impact of SFAS No. 123R.



NOTE 2: DEBT



There was no debt
issued during the three months ended March 31, 2005.



Repayments of indebtedness, by entity, during the three months ended March 31, 2005 are listed below:



|                          |  |    |      |           |   |           |  |       |      |  |   |      
|------------------------- |  | -- | ---- | --------- | - | --------- |  | ----- | ---- |  | - | -----
|(In Millions)             |  | AE |      | AE Supply |   | West Penn |  | Total
|New AE Facility           |  | $  | 25.0 |           | $ |          |  | $     |     |  | $ | 25.0 
|Refinanced AE Supply Loan |  |    |     |           |   | 208.4     |  |       |     |  |   | 208.4
|Medium-Term Notes         |  |    |     |           |   | 14.4      |  |       |     |  |   | 14.4 
|Transition Bonds          |  |    |     |           |   |          |  |       | 19.4 |  |   | 19.4 
|                          |  |    |      |           |   |           |  |       |      |  |   |      
|Total                     |  | $  | 25.0 |           | $ | 222.8     |  | $     | 19.4 |  | $ | 267.2
|                          |  |    |      |           |   |           |  |       |      |  |   |      



During the three
months ended March 31, 2005, AE Supply repaid an aggregate $208.4 million outstanding under its secured credit facility that was refinanced in October 2004 (the Refinanced AE Supply Loan). As a result of repayments made during the fourth
quarter of 2004 and a portion of the repayments made during the first quarter of 2005, the annual interest rate on the Refinanced AE Supply Loan was reduced to the London Interbank Offering Rate plus 2.50%.



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



At March 31, 2005, contractual maturities for Alleghenys long-term debt for the remainder of
2005 and the full years thereafter, excluding $86.7 million of long-term debt included in liabilities associated with assets held for sale, are:



|                                                                        |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | ----- | - |  | ---- | ----- | ---------- |  | - | ----- |  | - | ------- | - |  | - | ------- | -
|(In millions)                                                           |  | 2005 |       | 2006 |   | 2007  |  |   | 2008  |   |  | 2009 |       | Thereafter |  |   | Total | 
|Medium-Term Notes                                                       |  | $    | 300.0 |      | $ | 100.0 |  | $ | 365.6 |   |  | $    |      |            |  | $ |      |  | $ | 1,240.0 |   |  | $ | 2,005.6 |  
|Refinanced AE Supply Loan                                               |  |      | 7.8   |      |   | 10.4  |  |   | 10.4  |   |  |      | 10.4  |            |  |   | 10.4  |  |   | 724.3   |   |  |   | 773.7   |  
|First Mortgage Bonds                                                    |  |      |      |      |   | 300.0 |  |   |      |   |  |      |      |            |  |   |      |  |   | 510.0   |   |  |   | 810.0   |  
|Pollution Control Bonds                                                 |  |      |      |      |   |      |  |   | 107.2 |   |  |      |      |            |  |   |      |  |   | 261.6   |   |  |   | 368.8   |  
|Convertible Preferred Securities                                        |  |      |      |      |   |      |  |   |      |   |  |      | 300.0 |            |  |   |      |  |   |        |   |  |   | 300.0   |  
|Transition Bonds                                                        |  |      | 53.6  |      |   | 75.8  |  |   | 80.0  |   |  |      | 44.2  |            |  |   |      |  |   |        |   |  |   | 253.6   |  
|New AE Facility                                                         |  |      |      |      |   |      |  |   | 75.0  |   |  |      |      |            |  |   |      |  |   |        |   |  |   | 75.0    |  
|Debentures                                                              |  |      |      |      |   |      |  |   |      |   |  |      |      |            |  |   |      |  |   | 100.0   |   |  |   | 100.0   |  
|Unamortized debt discounts, premiums and terminated interest rate swaps |  |      | 1.3   |      |   |      |  |   |      |   |  |      | (0.8  | )          |  |   |      |  |   | (16.0   | ) |  |   | (15.5   | )
|Eliminations                                                            |  |      |      |      |   |      |  |   | (2.3  | ) |  |      |      |            |  |   |      |  |   | (10.5   | ) |  |   | (12.8   | )
|                                                                        |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Total consolidated debt                                                 |  | $    | 362.7 |      | $ | 486.2 |  | $ | 635.9 |   |  | $    | 353.8 |            |  | $ | 10.4  |  | $ | 2,809.4 |   |  | $ | 4,658.4 |  
|                                                                        |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



At March 31, 2005, contractual maturities of long-term debt for the remainder of 2005 and for full
years thereafter are as follows:



|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | ----- | - |  | ---- | ----- | ---------- |  | - | ----- |  | - | ------- | - |  | - | ------- | -
|(In millions)                                                          |  | 2005 |       | 2006 |   | 2007  |  |   | 2008  |   |  | 2009 |       | Thereafter |  |   | Total | 
|AE:                                                                    |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Medium-Term Notes                                                      |  | $    | 300.0 |      | $ |      |  | $ |      |   |  | $    |      |            |  | $ |      |  | $ |        |   |  | $ | 300.0   |  
|New AE Facility                                                        |  |      |      |      |   |      |  |   | 75.0  |   |  |      |      |            |  |   |      |  |   |        |   |  |   | 75.0    |  
|Convertible Preferred Securities                                       |  |      |      |      |   |      |  |   |      |   |  |      | 300.0 |            |  |   |      |  |   |        |   |  |   | 300.0   |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Total AE                                                               |  | $    | 300.0 |      | $ |      |  | $ | 75.0  |   |  | $    | 300.0 |            |  | $ |      |  | $ |        |   |  | $ | 675.0   |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|AE Supply:                                                             |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Pollution Control Bonds                                                |  | $    |      |      | $ |      |  | $ | 91.7  |   |  | $    |      |            |  | $ |      |  | $ | 191.4   |   |  | $ | 283.1   |  
|Medium-Term Notes                                                      |  |      |      |      |   |      |  |   | 365.6 |   |  |      |      |            |  |   |      |  |   | 1,050.0 |   |  |   | 1,415.6 |  
|Debentures-AGC                                                         |  |      |      |      |   |      |  |   |      |   |  |      |      |            |  |   |      |  |   | 100.0   |   |  |   | 100.0   |  
|Refinanced AE Supply Loan                                              |  |      | 7.8   |      |   | 10.4  |  |   | 10.4  |   |  |      | 10.4  |            |  |   | 10.4  |  |   | 724.3   |   |  |   | 773.7   |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Total AE Supply                                                        |  | $    | 7.8   |      | $ | 10.4  |  | $ | 467.7 |   |  | $    | 10.4  |            |  | $ | 10.4  |  | $ | 2,065.7 |   |  | $ | 2,572.4 |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Monongahela:                                                           |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|First Mortgage Bonds                                                   |  | $    |      |      | $ | 300.0 |  | $ |      |   |  | $    |      |            |  | $ |      |  | $ | 190.0   |   |  | $ | 490.0   |  
|Pollution Control Bonds                                                |  |      |      |      |   |      |  |   | 15.5  |   |  |      |      |            |  |   |      |  |   | 70.2    |   |  |   | 85.7    |  
|Medium-Term Notes                                                      |  |      |      |      |   |      |  |   |      |   |  |      |      |            |  |   |      |  |   | 110.0   |   |  |   | 110.0   |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Total Monongahela                                                      |  | $    |      |      | $ | 300.0 |  | $ | 15.5  |   |  | $    |      |            |  | $ |      |  | $ | 370.2   |   |  | $ | 685.7   |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Potomac Edison:                                                        |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|First Mortgage Bonds                                                   |  | $    |      |      | $ |      |  | $ |      |   |  | $    |      |            |  | $ |      |  | $ | 320.0   |   |  | $ | 320.0   |  
|Medium-Term Notes                                                      |  |      |      |      |   | 100.0 |  |   |      |   |  |      |      |            |  |   |      |  |   |        |   |  |   | 100.0   |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Total Potomac Edison                                                   |  | $    |      |      | $ | 100.0 |  | $ |      |   |  | $    |      |            |  | $ |      |  | $ | 320.0   |   |  | $ | 420.0   |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|West Penn:                                                             |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Transition Bonds                                                       |  | $    | 53.6  |      | $ | 75.8  |  | $ | 80.0  |   |  | $    | 44.2  |            |  | $ |      |  | $ |        |   |  | $ | 253.6   |  
|Medium-Term Notes                                                      |  |      |      |      |   |      |  |   |      |   |  |      |      |            |  |   |      |  |   | 80.0    |   |  |   | 80.0    |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Total West Penn                                                        |  | $    | 53.6  |      | $ | 75.8  |  | $ | 80.0  |   |  | $    | 44.2  |            |  | $ |      |  | $ | 80.0    |   |  | $ | 333.6   |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|AGC:                                                                   |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Debentures                                                             |  | $    |      |      | $ |      |  | $ |      |   |  | $    |      |            |  | $ |      |  | $ | 100.0   |   |  | $ | 100.0   |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Sub-total                                                              |  | $    | 361.4 |      | $ | 486.2 |  | $ | 638.2 |   |  | $    | 354.6 |            |  | $ | 10.4  |  | $ | 2,935.7 |   |  | $ | 4,786.7 |  
|Unamortized debt discounts, premiums and terminatedinterest rate swaps |  | $    | 1.3   |      | $ |      |  | $ |      |   |  | $    | (0.8  | )          |  | $ |      |  | $ | (16.0   | ) |  | $ | (15.5   | )
|Eliminations                                                           |  | $    |      |      | $ |      |  | $ | (2.3  | ) |  | $    |      |            |  | $ |      |  | $ | (110.5  | ) |  | $ | (112.8  | )
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Total consolidated debt                                                |  | $    | 362.7 |      | $ | 486.2 |  | $ | 635.9 |   |  | $    | 353.8 |            |  | $ | 10.4  |  | $ | 2,809.4 |   |  | $ | 4,658.4 |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Liabilities associated with assets held for sale:                      |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  
|Other Notes                                                            |  | $    | 3.3   |      | $ | 3.3   |  | $ | 3.4   |   |  | $    | 3.3   |            |  | $ | 13.4  |  | $ | 60.0    |   |  | $ | 86.7    |  
|                                                                       |  |      |       |      |   |       |  |   |       |   |  |      |       |            |  |   |       |  |   |         |   |  |   |         |  



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Certain of Alleghenys properties are subject to liens of various relative priorities securing
debt. For additional information regarding property liens, see Item 2, Properties in the 2004 Annual Report on Form 10-K.



As discussed in Note 17, Subsequent Events, in April 2005, the holders of $295.0 million of the outstanding $300.0 million 117/8% Mandatorily Convertible Trust Preferred Securities (the Trust Preferred Securities) issued by
Allegheny Capital Trust I (Capital Trust) accepted AE and Capital Trusts tender offer and consent solicitation. Under the terms of the offer, for each $1,000 in liquidation amount of Trust Preferred Securities tendered, a holder
received 83.33 shares of AE common stock and $160 in cash. On April 22, 2005, AE issued an aggregate of 24.6 million shares of its common stock and $47.2 million in cash to the holders of the tendered Trust Preferred Securities. In accordance with
SFAS No. 84, Induced Conversions of Convertible Debt, the $47.2 million cash payment will be expensed during the second quarter of 2005. This amount represents the difference between the fair value transferred in the transaction in
excess of the fair value of the securities issuable pursuant to the original conversion terms. In addition, AE received the required consents from holders of the Trust Preferred Securities for amendments to the indenture governing AEs 117/8% Notes due 2008. The holder of the remaining $5.0 million in liquidation amount of Trust Preferred Securities
converted its Trust Preferred Securities into 416,650 shares of AE common stock on May 3, 2005.



NOTE 3: ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS



During the third quarter of 2004, Allegheny and certain of its subsidiaries entered into agreements to sell, or made the decision to sell, certain non-core assets. The results of operations relating to these assets
have been reclassified to discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented. In accordance with the provisions of SFAS No. 144, the assets and liabilities associated with these discontinued
operations have been reclassified as held for sale in the accompanying balance sheets.



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



The components of income (loss) from discontinued operations are as follows:



|                                                |  |                             |        |   |      |   |        |  
|----------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                |  | Three Months EndedMarch 31, |       
|(In millions)                                   |  | 2005                        |        |   | 2004 |  
|AE Supply:                                      |  |                             |        |   |      |   |        |  
|Operating revenues                              |  | $                           | 0.2    |   |      | $ | 5.6    |  
|Operating expenses                              |  |                             | (1.2   | ) |      |   | (9.7   | )
|Interest expense                                |  |                             | (3.1   | ) |      |   | (9.0   | )
|                                                |  |                             |        |   |      |   |        |  
|Loss before income taxes                        |  |                             | (4.1   | ) |      |   | (13.1  | )
|Income tax benefit                              |  |                             | 1.4    |   |      |   | 4.8    |  
|                                                |  |                             |        |   |      |   |        |  
|Loss from discontinued operations, net of tax   |  | $                           | (2.7   | ) |      | $ | (8.3   | )
|                                                |  |                             |        |   |      |   |        |  
|Monongahela:                                    |  |                             |        |   |      |   |        |  
|Operating revenues                              |  | $                           | 150.2  |   |      | $ | 148.8  |  
|Operating expenses                              |  |                             | (130.1 | ) |      |   | (128.6 | )
|Other income                                    |  |                             | 0.2    |   |      |   | 0.2    |  
|Interest expense                                |  |                             | (2.1   | ) |      |   | (2.0   | )
|                                                |  |                             |        |   |      |   |        |  
|Income before income taxes                      |  |                             | 18.2   |   |      |   | 18.4   |  
|Income tax expense                              |  |                             | (6.7   | ) |      |   | (7.4   | )
|Impairment charge, net of tax                   |  |                             | (0.6   | ) |      |   |       |  
|                                                |  |                             |        |   |      |   |        |  
|Income from discontinued operations, net of tax |  | $                           | 10.9   |   |      | $ | 11.0   |  
|                                                |  |                             |        |   |      |   |        |  
|Allegheny:                                      |  |                             |        |   |      |   |        |  
|Operating revenues                              |  | $                           | 150.4  |   |      | $ | 154.4  |  
|Operating expenses                              |  |                             | (131.3 | ) |      |   | (138.3 | )
|Other income                                    |  |                             | 0.2    |   |      |   | 0.2    |  
|Interest expense                                |  |                             | (5.2   | ) |      |   | (11.0  | )
|                                                |  |                             |        |   |      |   |        |  
|Income before income taxes                      |  |                             | 14.1   |   |      |   | 5.3    |  
|Income tax expense                              |  |                             | (5.3   | ) |      |   | (2.6   | )
|Impairment charge, net of tax                   |  |                             | (0.6   | ) |      |   |       |  
|                                                |  |                             |        |   |      |   |        |  
|Income from discontinued operations, net of tax |  | $                           | 8.2    |   |      | $ | 2.7    |  
|                                                |  |                             |        |   |      |   |        |  



Assets held for sale
and liabilities associated with assets held for sale at March 31, 2005 were as follows:



|                                       |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      
|-------------------------------------- |  | ----------- | ----- | -------------- | - | --------- |  | ------------ | ----- |  | --------- | ----- | - |  | - | -----
|(In Millions)                          |  | Monongahela |       | Potomac Edison |   | AE Supply |  | Eliminations |       |  | Allegheny
|Assets:                                |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      
|Current assets                         |  | $           | 113.5 |                | $ |          |  | $            | 2.2   |  | $         | (1.3  | ) |  | $ | 114.4
|Property, plant and equipment          |  |             | 164.4 |                |   | 10.8      |  |              | 152.5 |  |           |      |   |  |   | 327.7
|Investments and other assets           |  |             | 7.2   |                |   |          |  |              |      |  |           |      |   |  |   | 7.2  
|Deferred charges                       |  |             | 6.1   |                |   |          |  |              |      |  |           | (0.3  | ) |  |   | 5.8  
|                                       |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      
|Total assets                           |  | $           | 291.2 |                | $ | 10.8      |  | $            | 154.7 |  | $         | (1.6  | ) |  | $ | 455.1
|                                       |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      
|Liabilities:                           |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      
|Current liabilities                    |  | $           | 57.1  |                | $ |          |  | $            |      |  | $         | (12.0 | ) |  | $ | 45.1 
|Long-term debt                         |  |             | 83.4  |                |   |          |  |              |      |  |           |      |   |  |   | 83.4 
|Deferred credits and other liabilities |  |             | 16.5  |                |   |          |  |              |      |  |           | (10.4 | ) |  |   | 6.1  
|                                       |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      
|Total liabilities                      |  | $           | 157.0 |                | $ |          |  | $            |      |  | $         | (22.4 | ) |  | $ | 134.6
|                                       |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Assets held for sale and liabilities associated with assets held for sale at December 31, 2004 were
as follows:



|                                       |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      
|-------------------------------------- |  | ----------- | ----- | -------------- | - | --------- |  | ------------ | ----- |  | --------- | ----- | - |  | - | -----
|(In Millions)                          |  | Monongahela |       | Potomac Edison |   | AE Supply |  | Eliminations |       |  | Allegheny
|Assets:                                |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      
|Current assets                         |  | $           | 147.8 |                | $ |          |  | $            | 2.2   |  | $         |      |   |  | $ | 150.0
|Property, plant and equipment          |  |             | 163.7 |                |   | 10.8      |  |              | 153.3 |  |           |      |   |  |   | 327.8
|Investments and other assets           |  |             | 6.8   |                |   |          |  |              |      |  |           |      |   |  |   | 6.8  
|Deferred charges                       |  |             | 6.3   |                |   |          |  |              |      |  |           | (0.5  | ) |  |   | 5.8  
|                                       |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      
|Total assets                           |  | $           | 324.6 |                | $ | 10.8      |  | $            | 155.5 |  | $         | (0.5  | ) |  | $ | 490.4
|                                       |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      
|Liabilities:                           |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      
|Current liabilities                    |  | $           | 95.5  |                | $ |          |  | $            |      |  | $         | (58.0 | ) |  | $ | 37.5 
|Long-term debt                         |  |             | 83.4  |                |   |          |  |              |      |  |           |      |   |  |   | 83.4 
|Deferred credits and other liabilities |  |             | 17.6  |                |   |          |  |              |      |  |           | (11.6 | ) |  |   | 6.0  
|                                       |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      
|Total liabilities                      |  | $           | 196.5 |                | $ |          |  | $            |      |  | $         | (69.6 | ) |  | $ | 126.9
|                                       |  |             |       |                |   |           |  |              |       |  |           |       |   |  |   |      



NOTE 4: GOODWILL AND INTANGIBLE ASSETS



There were no changes in goodwill during the three months ended March 31, 2005.



The intangible assets included in Investments and Other Assets on the Consolidated Balance Sheets of $33.2 million at March 31, 2005 and December 31, 2004 relate to an additional minimum pension liability.
See Item 8, Note 17, Pension Benefits and Postretirement Benefits Other Than Pensions, in the 2004 Annual Report on Form 10-K for more information.



The components of intangible assets included in Property, Plant and Equipment, Net on the Consolidated Balance Sheets were as follows:



|                            |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|--------------------------- |  | -------------------- | ----- | ----------------------- | - | -------------------- |  | ----------------------- | ----- |  | - | ----
|                            |  | As of March 31, 2005 |       | As of December 31, 2004
|(In Millions)               |  | Gross CarryingAmount |       | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|Land easements, amortized   |  | $                    | 97.2  |                         | $ | 26.1                 |  | $                       | 96.5  |  | $ | 25.8
|Land easements, unamortized |  |                      | 31.8  |                         |   |                     |  |                         | 31.8  |  |   |    
|Software                    |  |                      | 86.6  |                         |   | 59.3                 |  |                         | 82.7  |  |   | 55.8
|                            |  |                      |       |                         |   |                      |  |                         |       |  |   |     
|                            |  | $                    | 215.6 |                         | $ | 85.4                 |  | $                       | 211.0 |  | $ | 81.6
|                            |  |                      |       |                         |   |                      |  |                         |       |  |   |     



In addition,
Assets held for sale included intangible assets related to natural gas rights, amortized with a gross carrying amount of $8.6 million at March 31, 2005 and December 31, 2004, and accumulated amortization of $4.9 million at March 31, 2005
and December 31, 2004.



Amortization of intangible assets,
excluding Mountaineer, which is included in Assets held for sale at March 31, 2005, was $3.8 million for the three months ended March 31, 2005. Amortization of intangible assets for the three months ended March 31, 2004 was $4.4 million.



Amortization expense is estimated to be $18.7 million annually
for 2005 through 2009.



NOTE 5: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES



Allegheny utilizes derivative instruments to manage its exposure to various market risks, as described in the 2004 Annual Report on Form 10-K. The following information supplements, and should be read in conjunction
with, Item 8, Note 5, Wholesale Energy Activities, and Note 10, Derivative Instruments and Hedging Activities, in the 2004 Annual Report on Form 10-K.



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



AE Supply records any commodity contract related to energy trading that is a derivative instrument at
its fair value as a component of operating revenues, unless the contract falls within the normal purchases and normal sales scope exception of SFAS No. 133 or is designated as a hedge for accounting purposes. The normal purchases and
normal sales scope exception requires, among other things, physical delivery in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that are designated as normal purchases and normal sales are
accounted for under accrual accounting and, therefore, are not recorded on the balance sheet at fair value. For certain transactions that are designed to hedge the cash flows of a forecasted transaction, the effective portion of the gain or loss is
initially recorded as a separate component of stockholders equity under the caption Accumulated other comprehensive loss and subsequently reclassified into earnings when the forecasted transaction is completed or settled. The
ineffective portion of the hedge is immediately reflected in earnings.



AE Supply has designated certain contracts as cash flow hedges effective July 1, 2004. Changes in the fair value of these contracts are reflected in Accumulated other comprehensive income (loss). Existing derivative liabilities
associated with each contract at the time of its designation will be realized in earnings over the remaining term of the contract, in accordance with the estimated cash flow of the contract at the time of the designation. These contracts expire at
various dates through December 31, 2006 and represent an aggregate liability at March 31, 2005 of $44.2 million. The $13.1 million increase in this liability since December 31, 2004 is a result of the change in the fair value of these contracts and
is reflected in accumulated other comprehensive loss. The accumulated other comprehensive loss balance at March 31, 2005 was a loss of $19.2 million. Based on the fair value of AE Supplys financial instruments as of March 31, 2005, accumulated
other comprehensive loss of $8.1 million is expected to be reclassified as a reduction to earnings over the next twelve months. The ineffective portion of the cash flow hedges is reflected in earnings for the three months ended March 31, 2005 and is
not material.



Net unrealized gains (losses) of $4.1 million
and $(11.1) million, before income taxes, were recorded in Operating revenues to reflect the change in fair value of the trading contracts for the three months ended March 31, 2005 and 2004, respectively.



NOTE 6: ASSET RETIREMENT OBLIGATIONS (AROs)



Allegheny recorded AROs primarily related to ash landfills, underground and aboveground storage tanks and natural gas wells. Allegheny also has identified a number of AROs associated with certain of its electric
generation and transmission assets that have not been recorded because the fair value of these obligations cannot be reasonably estimated, primarily due to the indeterminate lives of the assets.



AROs were identified with respect to property, plant and equipment at
Monongahela, and the cost of removal for these assets currently is being recovered through rates. Allegheny believes it is probable that any difference between expenses under SFAS No. 143, Accounting for Asset Retirement Obligations, and
expenses recovered currently in rates with respect to these assets will be recoverable in future rates. Therefore, Allegheny is deferring these expenses as a regulatory asset.



For the three months ended March 31, 2005, Alleghenys ARO balance increased $0.9 million, from $28.8 million at
December 31, 2004 to $29.7 million at March 31, 2005, primarily due to accretion expense.



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Certain estimated removal costs that are not qualified as AROs are being recovered through the
ratemaking process. These costs are recorded by Alleghenys regulated subsidiaries as regulatory liabilities (assets) as follows:



|               |  |               |       |   |                  |   |       |  
|-------------- |  | ------------- | ----- | - | ---------------- | - | ----- | -
|(In millions)  |  | March 31,2005 |       |   | December 31,2004 |  
|Monongahela    |  | $             | 244.7 |   |                  | $ | 241.8 |  
|Potomac Edison |  |               | 165.3 |   |                  |   | 162.3 |  
|West Penn      |  |               | (18.3 | ) |                  |   | (17.2 | )
|               |  |               |       |   |                  |   |       |  
|Total          |  | $             | 391.7 |   |                  | $ | 386.9 |  
|               |  |               |       |   |                  |   |       |  



In March 2005, the
FASB issued FASB Interpretation No. 47 (FIN 47), which is an interpretation of SFAS No. 143. FIN 47 requires entities with an ARO that is conditional on a future event to record an ARO, even if the event has not yet occurred. The
obligation to perform the asset retirement is unconditional even though uncertainty exists as to the timing and method of settlement due to the existence of a conditional event. This interpretation is effective for fiscal years ending after December
15, 2005. Retrospective application for interim periods is permitted but is not required. Obligations recorded as a result of the adoption of FIN 47 will be recorded as a cumulative effect due to a change in accounting principle. Allegheny currently
is evaluating the impact of FIN 47.



NOTE 7: COMPREHENSIVE INCOME (LOSS)



Alleghenys consolidated comprehensive income (loss), net of income taxes, was as follows:



|                                               |  |                             |      |   |      |   |     
|---------------------------------------------- |  | --------------------------- | ---- | - | ---- | - | ----
|                                               |  | Three Months EndedMarch 31,
|(In millions)                                  |  | 2005                        |      |   | 2004
|Allegheny                                      |  |                             |      |   |      |   |     
|Consolidated net income                        |  | $                           | 42.6 |   |      | $ | 33.3
|Other comprehensive income (loss), net of tax: |  |                             |      |   |      |   |     
|Minimum pension liability adjustment           |  |                             | (0.1 | ) |      |   | 2.3 
|Changes in fair value of cash flow hedges      |  |                             | (9.8 | ) |      |   |    
|                                               |  |                             |      |   |      |   |     
|Consolidated comprehensive income              |  | $                           | 32.7 |   |      | $ | 35.6
|                                               |  |                             |      |   |      |   |     



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 8: BUSINESS SEGMENTS



Allegheny manages and evaluates its operations in two business segments, the Delivery and Services segment and the Generation and Marketing segment. Monongahela operates in both segments. All other Allegheny subsidiaries operate in only one
segment. The Delivery and Services segment includes the operations of Potomac Edison, West Penn, Allegheny Ventures, Inc. (Allegheny Ventures) and Monongahelas electric and gas transmission and distribution businesses. The
Generation and Marketing segment includes the operations of AE Supply and AGC and Monongahelas West Virginia generating assets.



Business segment information for Allegheny is summarized below. Significant transactions between reportable segments are shown as eliminations to
reconcile the segment information to consolidated amounts.



|                                                 |  |                             |        |   |      |   |        |  
|------------------------------------------------ |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                 |  | Three Months EndedMarch 31, |       
|(In millions)                                    |  | 2005                        |        |   | 2004 |  
|Total operating revenues:                        |  |                             |        |   |      |   |        |  
|Delivery and Services                            |  | $                           | 739.4  |   |      | $ | 721.3  |  
|Generation and Marketing                         |  |                             | 416.9  |   |      |   | 422.3  |  
|Eliminations                                     |  |                             | (402.3 | ) |      |   | (408.3 | )
|                                                 |  |                             |        |   |      |   |        |  
|Total                                            |  | $                           | 754.0  |   |      | $ | 735.3  |  
|                                                 |  |                             |        |   |      |   |        |  
|Depreciation and amortization:                   |  |                             |        |   |      |   |        |  
|Delivery and Services                            |  | $                           | 38.1   |   |      | $ | 37.1   |  
|Generation and Marketing                         |  |                             | 38.3   |   |      |   | 35.9   |  
|                                                 |  |                             |        |   |      |   |        |  
|Total                                            |  | $                           | 76.4   |   |      | $ | 73.0   |  
|                                                 |  |                             |        |   |      |   |        |  
|Operating income:                                |  |                             |        |   |      |   |        |  
|Delivery and Services                            |  | $                           | 95.9   |   |      | $ | 75.9   |  
|Generation and Marketing                         |  |                             | 84.1   |   |      |   | 92.8   |  
|                                                 |  |                             |        |   |      |   |        |  
|Total                                            |  | $                           | 180.0  |   |      | $ | 168.7  |  
|                                                 |  |                             |        |   |      |   |        |  
|Interest Expense:                                |  |                             |        |   |      |   |        |  
|Delivery and Services                            |  | $                           | 28.8   |   |      | $ | 32.4   |  
|Generation and Marketing                         |  |                             | 97.0   |   |      |   | 87.4   |  
|                                                 |  |                             |        |   |      |   |        |  
|Total                                            |  | $                           | 125.8  |   |      | $ | 119.8  |  
|                                                 |  |                             |        |   |      |   |        |  
|Income (loss) from continuing operations:        |  |                             |        |   |      |   |        |  
|Delivery and Services                            |  | $                           | 49.7   |   |      | $ | 28.0   |  
|Generation and Marketing                         |  |                             | (15.2  | ) |      |   | 2.6    |  
|Eliminations                                     |  |                             | (0.1   | ) |      |   |       |  
|                                                 |  |                             |        |   |      |   |        |  
|Total                                            |  | $                           | 34.4   |   |      | $ | 30.6   |  
|                                                 |  |                             |        |   |      |   |        |  
|Income (loss) from discontinued operations, net: |  |                             |        |   |      |   |        |  
|Delivery and Services                            |  | $                           | 10.8   |   |      | $ | 11.0   |  
|Generation and Marketing                         |  |                             | (2.7   | ) |      |   | (8.3   | )
|Eliminations                                     |  |                             | 0.1    |   |      |   |       |  
|                                                 |  |                             |        |   |      |   |        |  
|Total                                            |  | $                           | 8.2    |   |      | $ | 2.7    |  
|                                                 |  |                             |        |   |      |   |        |  
|Net income (loss):                               |  |                             |        |   |      |   |        |  
|Delivery and Services                            |  | $                           | 60.5   |   |      | $ | 39.0   |  
|Generation and Marketing                         |  |                             | (17.9  | ) |      |   | (5.7   | )
|                                                 |  |                             |        |   |      |   |        |  
|Total                                            |  | $                           | 42.6   |   |      | $ | 33.3   |  
|                                                 |  |                             |        |   |      |   |        |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 9: ACCOUNTING FOR THE EFFECTS OF PRICE REGULATION



As of March 31, 2005, Alleghenys reserve for adverse power purchase commitments was $197.1 million. Alleghenys reserve for adverse power purchase commitments, which is recorded entirely on West Penns
Consolidated Balance Sheets, decreased as follows:



|                                                           |  |                             |     |      |   |    
|---------------------------------------------------------- |  | --------------------------- | --- | ---- | - | ---
|                                                           |  | Three Months EndedMarch 31,
|(In millions)                                              |  | 2005                        |     | 2004
|Decrease in reserve for adverse power purchase commitments |  | $                           | 4.3 |      | $ | 4.5



Alleghenys
Consolidated Balance Sheets include the amounts listed below for generating assets no longer subject to SFAS No. 71, Accounting for the Effects of Certain Types of Regulation.



|                                          |  |               |          |   |                  |   |          |  
|----------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|(In millions)                             |  | March 31,2005 |          |   | December 31,2004 |  
|Property, plant and equipment             |  | $             | 4,129.4  |   |                  | $ | 4,121.2  |  
|Amounts under construction included above |  | $             | 38.7     |   |                  | $ | 36.1     |  
|Accumulated depreciation                  |  | $             | (1,953.7 | ) |                  | $ | (1,925.6 | )



NOTE 10: INCOME PER SHARE



The
information used to compute Alleghenys income per share is as follows:



|                                                                |  |                              |             |      |   |            
|--------------------------------------------------------------- |  | ---------------------------- | ----------- | ---- | - | -----------
|                                                                |  | Three Months Ended March 31,
|(In millions, except per share data)                            |  | 2005                         |             | 2004
|Basic Earnings Per ShareNumerator                              |  |                              |             |      |   |            
|Income from continuing operations                               |  | $                            | 34.4        |      | $ | 30.6       
|Income from discontinued operations                             |  |                              | 8.2         |      |   | 2.7        
|                                                                |  |                              |             |      |   |            
|Net income                                                      |  | $                            | 42.6        |      | $ | 33.3       
|                                                                |  |                              |             |      |   |            
|Diluted Earnings Per ShareNumerator                            |  |                              |             |      |   |            
|Income from continuing operations                               |  | $                            | 34.4        |      | $ | 30.6       
|Addback: Interest expense on convertible securities, net of tax |  |                              | 6.0         |      |   | 5.4        
|Income from discontinued operations                             |  |                              | 8.2         |      |   | 2.7        
|                                                                |  |                              |             |      |   |            
|Diluted earnings per share- numerator                           |  | $                            | 48.6        |      | $ | 38.7       
|                                                                |  |                              |             |      |   |            
|Basic Earnings Per ShareDenominator                            |  |                              |             |      |   |            
|Weighted average common shares outstanding                      |  |                              | 137,417,964 |      |   | 126,969,238
|                                                                |  |                              |             |      |   |            
|Diluted Earnings Per ShareDenominator                          |  |                              |             |      |   |            
|Weighted average common shares outstanding                      |  |                              | 137,417,964 |      |   | 126,969,238
|Stock options                                                   |  |                              | 957,115     |      |   |           
|Performance shares                                              |  |                              | 59,366      |      |   | 103,302    
|Non-employee stock awards                                       |  |                              | 16,800      |      |   |           
|Stock units                                                     |  |                              | 2,223,098   |      |   | 868,643    
|Convertible securities                                          |  |                              | 25,000,000  |      |   | 25,000,000 
|                                                                |  |                              |             |      |   |            
|Total                                                           |  |                              | 165,674,343 |      |   | 152,941,183
|                                                                |  |                              |             |      |   |            



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 11: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS



Substantially all of Alleghenys employees, including officers, are employed by AESC and are covered by noncontributory, defined benefit pension
plans. Benefits are based on each employees years of service and compensation. Allegheny makes annual contributions based on the minimum amount required under the Employee Retirement Income Security Act of 1974 (ERISA). Annual
contributions are not more than can be deducted for federal income tax purposes.



Allegheny also provides partially contributory medical and life insurance plans for eligible retirees and dependents. Medical benefits, which make up the largest component of the plans, are based upon an age and
years-of-service vesting schedule and other plan provisions. Subsidized medical coverage is not provided in retirement to employees hired on or after January 1, 1993, with the exception of certain union employees. The postretirement health care
plans include a limit on Alleghenys share of costs for recent and future retirees.



The components of the net periodic cost for pension benefits and for postretirement benefits other than pensions (principally health care and life insurance) for employees and covered dependents and the allocation by
Allegheny, through AESC, of costs for pension benefits and postretirement benefits other than pensions were as follows:



|                                                           |  |                             |       |   |                                            |   |       |      |  |   |      |   |  |   |      |  
|---------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------------------------ | - | ----- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                           |  | Pension Benefits            |       |   | Postretirement Benefits OtherThan Pensions |  
|                                                           |  | Three Months EndedMarch 31, |       |   | Three Months Ended March 31,               |  
|(In millions)                                              |  | 2005                        |       |   | 2004                                       |   |       | 2005 |  |   | 2004 |  
|Components of net periodic cost:                           |  |                             |       |   |                                            |   |       |      |  |   |      |   |  |   |      |  
|Service cost                                               |  | $                           | 5.9   |   |                                            | $ | 5.8   |      |  | $ | 1.0  |   |  | $ | 1.1  |  
|Interest cost                                              |  |                             | 15.8  |   |                                            |   | 15.6  |      |  |   | 4.2  |   |  |   | 3.9  |  
|Expected return on plan assets                             |  |                             | (17.3 | ) |                                            |   | (17.2 | )    |  |   | (1.5 | ) |  |   | (1.6 | )
|Amortization of unrecognized transition obligation         |  |                             | 0.1   |   |                                            |   | 0.1   |      |  |   | 1.5  |   |  |   | 1.5  |  
|Amortization of prior service cost                         |  |                             | 0.9   |   |                                            |   | 1.1   |      |  |   |     |   |  |   | 0.1  |  
|Recognized actuarial loss                                  |  |                             | 2.3   |   |                                            |   | 1.3   |      |  |   | 0.5  |   |  |   |     |  
|                                                           |  |                             |       |   |                                            |   |       |      |  |   |      |   |  |   |      |  
|Subtotal                                                   |  |                             | 7.7   |   |                                            |   | 6.7   |      |  |   | 5.7  |   |  |   | 5.0  |  
|Curtailments, settlements and special termination benefits |  |                             | 0.2   |   |                                            |   | 1.3   |      |  |   |     |   |  |   |     |  
|                                                           |  |                             |       |   |                                            |   |       |      |  |   |      |   |  |   |      |  
|Net periodic cost                                          |  | $                           | 7.9   |   |                                            | $ | 8.0   |      |  | $ | 5.7  |   |  | $ | 5.0  |  
|                                                           |  |                             |       |   |                                            |   |       |      |  |   |      |   |  |   |      |  
|Allocation of net periodic cost:                           |  |                             |       |   |                                            |   |       |      |  |   |      |   |  |   |      |  
|Monongahela                                                |  | $                           | 2.5   |   |                                            | $ | 2.3   |      |  | $ | 1.6  |   |  | $ | 1.5  |  
|AE Supply                                                  |  |                             | 2.3   |   |                                            |   | 2.7   |      |  |   | 1.3  |   |  |   | 1.2  |  
|West Penn                                                  |  |                             | 1.7   |   |                                            |   | 1.7   |      |  |   | 1.5  |   |  |   | 1.2  |  
|Potomac Edison                                             |  |                             | 1.3   |   |                                            |   | 1.2   |      |  |   | 1.2  |   |  |   | 1.1  |  
|AE                                                         |  |                             | 0.1   |   |                                            |   | 0.1   |      |  |   | 0.1  |   |  |   |     |  
|                                                           |  |                             |       |   |                                            |   |       |      |  |   |      |   |  |   |      |  
|Net periodic cost                                          |  | $                           | 7.9   |   |                                            | $ | 8.0   |      |  | $ | 5.7  |   |  | $ | 5.0  |  
|                                                           |  |                             |       |   |                                            |   |       |      |  |   |      |   |  |   |      |  



Employer
Contributions. Allegheny contributed approximately $20.1 million to its pension plans during the three months ended March 31, 2005, including a voluntary contribution of $0.1 million to the Supplemental Executive Retirement Plan
(SERP). Allegheny also contributed $6.0 million to its postretirement benefits other than pension plans during the three months ended March 31, 2005. Allegheny currently anticipates contributing a total amount of approximately $58.1
million to its pension plans during 2005, including $0.3 million to the SERP. Allegheny also currently anticipates contributing a total amount ranging from $25.0 to $30.0 million to fund postretirement benefits other than pensions during 2005.



Allegheny made matching contributions to the 401(k) Employee
Stock Ownership and Savings Plan (the ESOSP) by issuing shares of AEs common stock. AE issued a total of 84,204 shares of its common stock as matching contributions to the ESOSP for the three months ended March 31, 2005. Allegheny
recorded expense for these contributions of $1.7 million.



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 12: OTHER INCOME AND EXPENSES, NET



Other income and expenses, net, represents non-operating income and expenses before income taxes. The following table summarizes Alleghenys other income and expenses, net.



|                                                      |  |                             |     |      |   |      |  
|----------------------------------------------------- |  | --------------------------- | --- | ---- | - | ---- | -
|                                                      |  | Three Months EndedMarch 31, |    
|(In millions)                                         |  | 2005                        |     | 2004 |  
|Allegheny:                                            |  |                             |     |      |   |      |  
|Gain on sale of land                                  |  | $                           | 1.6 |      | $ | 6.6  |  
|Interest and dividend income                          |  |                             | 1.8 |      |   | 1.6  |  
|Premium services                                      |  |                             | 1.0 |      |   | 0.2  |  
|Impairment charges related to unregulated investments |  |                             |    |      |   | (2.3 | )
|Other                                                 |  |                             | 0.9 |      |   | 1.8  |  
|                                                      |  |                             |     |      |   |      |  
|Total                                                 |  | $                           | 5.3 |      | $ | 7.9  |  
|                                                      |  |                             |     |      |   |      |  



NOTE 13: GUARANTEES AND LETTERS OF CREDIT



Effective January 1, 2003, Allegheny began recording, as liabilities at their fair value, all guarantees issued or modified after that date. As of March 31, 2005, Alleghenys Consolidated Balance Sheet reflected liabilities for $9.1
million of the total $26.7 million in outstanding guarantees. The $9.1 million in guarantees recorded as liabilities were issued by AE Supply in connection with the sale of its contract with the California Department of Water Resources
(CDWR) and related hedge transactions and the performance of a put option issued in connection with an asset sale.



Of the remaining $17.6 million in unrecorded guarantees, approximately $3.1 million relates to the purchase, sale, exchange or transportation of wholesale
natural gas, electric power and related services, $4.7 million relates to a lease agreement that was signed in 2001 and $9.8 million relates to loans and other financing-related matters.



In addition, $11.5 million in letters of credit were outstanding at March 31, 2005 under AEs revolving credit
facility. Of this amount, $9.5 million was issued on behalf of Potomac Edison and expires in July 2005 and $2.0 million was issued on behalf of Allegheny Ventures and expires in September 2005. AE Supply also had a $1.6 million letter of credit
outstanding that is collateralized by cash and expires in February 2006. These letters of credit are not recorded on Alleghenys Consolidated Balance Sheets.



NOTE 14: VARIABLE INTEREST ENTITIES



Under FASBs Interpretation No. 46 (Revised December 2003) Consolidation of Variable Interest Entities (FIN 46R), Allegheny consolidated Hunlock Creek Energy Ventures, LLC as of March 31, 2004. This entity
operates two plants that produce and sell electricity to Allegheny and a third party.



Potomac Edison and West Penn each have a long-term electricity purchase contract with an unrelated independent power producer (IPP) that represents a variable interest under FIN 46R. Allegheny continues to
pursue, but has been unable to obtain, certain information from the IPPs necessary to determine if the related variable interest entities (VIEs) should be consolidated under FIN 46R.



Potomac Edison and West Penn had power purchases from these two IPPs in the
amount of $25.6 million and $11.3 million, respectively, for the three months ended March 31, 2005 and $25.1 million and $11.8 million, respectively, for the three months ended March 31, 2004. Potomac Edison



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



recovers the full amount and West Penn recovers a portion of the cost of the applicable power contract in their rates
charged to consumers. Neither Potomac Edison nor West Penn is subject to any risk of loss associated with the applicable VIE, because neither of them has any obligation to the applicable IPP other than to purchase the power that the IPP produces
according to the terms of the applicable electricity purchase contract.



NOTE 15: COMMITMENTS AND CONTINGENCIES



Reference is made to Item 8, Note 27, Commitments and Contingencies, in the 2004 Annual Report on Form 10-K.



Environmental Matters and Litigation



Allegheny is subject to various laws, regulations and uncertainties as to environmental matters. Compliance may require Allegheny to incur substantial
additional costs to modify or replace existing and proposed equipment and facilities that may adversely affect the cost of future operations.



Clean Air Act Matters: Allegheny currently meets applicable standards for particulate matter emissions at its generation stations
through the use of high-efficiency electrostatic precipitators, cleaned coal, flue-gas conditioning, optimization software and fuel combustion modifications and, at times, through reduction of output. From time to time, minor excursions of stack
emission opacity that are normal to fossil fuel operations are experienced and accommodated by the regulatory process.



Allegheny meets current emission standards for sulfur dioxide (SO2) by using scrubbers, burning low-sulfur coal, purchasing cleaned coal (which has lower sulfur content), blending low-sulfur coal with higher sulfur coal
and using emission allowances.



Alleghenys compliance
with the Clean Air Act of 1970 (the Clean Air Act) has required, and may require in the future, that Allegheny install expensive post-combustion control technologies on many of its generation stations. The Clean Air Interstate Rule
promulgated by the United States Environmental Protection Agency (the EPA) on March 10, 2005 may accelerate the need to install this equipment by phasing out a portion of currently available allowances.



The Clean Air Act mandates annual reductions of SO2and created a SO2emission allowance trading program. AE Supply and Monongahela comply with current SO2emission standards through a system-wide plan combining the use of emission controls, low sulfur fuel and emission allowances. Allegheny continues to study the use of allowances, additional emission controls and low sulfur fuel to
meet future SO2compliance obligations. Allegheny estimates that it may purchase allowances for up to 25,000 tons
for 2005 and an average of approximately 100,000 tons per year for 2006 through 2008. Alleghenys allowance needs, to a large extent, are affected at any given time by the amount of output produced and the type of fuel used by its generation
facilities. Allegheny currently expects that its plan to increase its use of lower sulfur coal and implement other environmental control improvements should reduce allowance purchase requirements over this time period.



In 1998, the EPA finalized its Nitrogen Oxide (NOx) State
Implementation Plan (SIP) call rule (known as the NOx SIP call), which addressed the regional transport of ground-level ozone and required the equivalent of a uniform 0.15 lb/mmBtu emission rate throughout a 22-state region,
including Pennsylvania, Maryland and West Virginia. Compliance with the NOx SIP call was required beginning in May 2004. Pennsylvania and Maryland implemented their respective SIP call rules in May 2003. West Virginias SIP call rules were
effective as of May 2004.



AE Supply and Monongahela have
completed installation of substantially all NOx controls to meet the Pennsylvania, Maryland and West Virginia SIP calls. These NOx controls include selective catalytic reduction at the Harrison and Pleasants generation stations and selective
noncatalytic reduction at the Hatfields Ferry and Fort Martin generation stations, as well as burner modifications at the Mitchell



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



generation station. The NOx compliance plan functions on a system-wide basis, similar to the SO2compliance plan. AE Supply and Monongahela also have the option, in some cases, to purchase alternate fuels or NOx allowances,
if needed, to supplement their compliance strategies. AE Supply estimates that its emission control activities, in concert with its inventory of banked allowances, will facilitate its compliance with NOx limits established by the SIP through 2008.
Alleghenys allowance needs, to a large extent, are affected at any given time by the amount of output produced and the type of fuel used by its generation facilities. Alleghenys capital expenditure forecast includes the expenditure of
$3.5 million of capital costs during the 2005 through 2007 period for additional NOx emission controls.



Clean Air Act Litigation: In August 2000, AE received a letter from the EPA requesting that it provide information and documentation
relevant to the operation and maintenance of the following ten electric generation stations, which collectively include 22 generation units: Albright, Armstrong, Fort Martin, Harrison, Hatfields Ferry, Mitchell, Pleasants, Rivesville, R. Paul
Smith and Willow Island. AE Supply and Monongahela own these generation stations. The letter requested information under Section 114 of the Clean Air Act to determine compliance with the Clean Air Act and related requirements, including potential
application of the New Source Review (NSR) standards of the Clean Air Act, which can require the installation of additional emission control equipment when the major modification of an existing facility results in an increase in
emissions. AE provided responsive information to this and a subsequent request. A meeting between the EPA and AE was held on July 16, 2003. At this time, AE is engaged in discussions with the EPA with respect to environmental matters, including NSR
issues.



Similar inquiries have been made of other electric
utilities and have resulted in enforcement proceedings in most cases. AE believes that its subsidiaries generation facilities have been operated in accordance with the Clean Air Act and the rules implementing it. The experience of other energy
companies, however, suggests that, in recent years, the EPA has narrowed its view regarding the scope of the definition of routine maintenance under its rules, thereby broadening the range of actions subject to compliance with NSR
standards. Section 114 information requests concerning facility modifications are often followed by enforcement actions.



If NSR standards are applied to Alleghenys generation stations, in addition to the possible imposition of fines, compliance would entail significant
expenditures. There are two federal district court decisions interpreting the application of NSR standards to utilities, the Ohio Edison decision and the Duke Energy decision. The Ohio Edison decision is favorable to the EPA. The Duke Energy
decision supports the industrys understanding of NSR requirements. The Duke Energy decision was appealed to the United States Court of Appeals for the Fourth Circuit and oral argument was held on February 3, 2005. A decision from the Fourth
Circuit is expected within six months after the oral argument. The final Routine Maintenance, Repair and Replacement Rule (RMRR) released by the EPA is more consistent with the energy industrys historical compliance approach. On
December 24, 2003, the U.S. Court of Appeals for the District of Columbia Circuit issued an order to stay the RMRR, which was scheduled to go into effect on December 26, 2003. The stay delays implementation of the RMRR. At this time, AE and its
subsidiaries are not able to determine the effect that these actions may have on them.



On February 2, 2004, the EPA informed AE that it intended to provide the New York Attorney General, pursuant to his request, certain records that AE provided to the EPA pursuant to its request under Section 114 of the
Clean Air Act. On April 23, 2004, the Pennsylvania Department of Environmental Protection (PADEP) notified AE Supply that PADEP had requested that the EPA provide it with these records.



On May 20, 2004, AE, AE Supply, Monongahela and West Penn received a Notice
of Intent to Sue Pursuant to Clean Air Act §7604 (the Notice) from the Attorneys General of New York, New Jersey and Connecticut and from PADEP. The Notice alleged that Allegheny made major modifications to some of its West Virginia
facilities in violation of the Prevention of Significant Deterioration (PSD) provisions of the Clean Air Act at the following coal-fired facilities: Albright Unit No. 3; Fort Martin Units No. 1 and 2; Harrison Units No. 1, 2 and 3;
Pleasants Units No. 1 and 2 and Willow Island Unit No. 2. The Notice also alleged PSD violations at the Armstrong, Hatfields Ferry and Mitchell generation stations in Pennsylvania



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



and identifies PADEP as the lead agency regarding those facilities. On September 8, 2004, AE, AE Supply, Monongahela
and West Penn received a separate Notice of Intent to Sue from the Maryland Attorney General that essentially mirrored the previous Notice.



AE Supply and Monongahela filed a declaratory judgment action against the Attorneys General of New York, Connecticut and New Jersey in federal district
court in West Virginia on January 6, 2005. This action requests that the court declare that AE Supplys and Monongahelas coal-fired generation facilities in Pennsylvania and West Virginia are in compliance with the Clean Air Act. The
Attorneys General filed a motion to dismiss the declaratory judgment action. If the action is dismissed based upon their motion, the Attorneys General may file an enforcement action against Allegheny in federal court in Pennsylvania. It is also
possible that the EPA and other state authorities may join in the current declaratory judgment action or, if it is dismissed, a new action filed by the Attorneys General.



On February 16, 2005, Citizens for Pennsylvanias Future, an environmental group, sued Allegheny in the U.S. District
Court for the Western District of Pennsylvania. The action alleges violations of opacity limits and particulate matter emission limits at the Hatfields Ferry generation facility.



Allegheny intends to vigorously pursue and defend against these matters but cannot predict their outcomes.



Comprehensive Environmental Response Compensation and Liability Act of
1980 (CERCLA) Claim: On March 4, 1994, Monongahela and certain affiliated companies received notice that the EPA had identified them as potentially responsible parties (PRPs) with respect to the Jacks
Creek/Sitkin Smelting Superfund Site in Pennsylvania. Initially, approximately 175 PRPs were involved; however, the current number of active PRPs has been reduced as a result of settlements with de minimis contributors and other contributors to the
site. The costs of remediation will be shared by all past and active responsible parties. In 1999, a PRP group that included Monongahela and certain affiliated companies entered into a consent order with the EPA to remediate the site. It is
currently estimated that the total remediation costs to be borne by all of the responsible parties will not exceed $30.0 million. Allegheny has an accrued liability representing its estimated share of the remediation costs as of March 31, 2005.



Claims Related to Alleged Asbestos Exposure: The
Distribution Companies have been named as defendants, along with multiple other defendants, in pending asbestos cases alleging bodily injury involving multiple plaintiffs and multiple sites. These suits have been brought mostly by seasonal
contractors employees and do not involve allegations of either the manufacture, sale or distribution of asbestos-containing products by Allegheny. These asbestos suits arise out of historical operations and are related to the installation and
removal of asbestos-containing materials at Alleghenys generation facilities. Alleghenys historical operations were insured by various foreign and domestic insurers, including Lloyds of London. Asbestos-related litigation expenses
have to date been reimbursed in full by recoveries from these historical insurers, and Allegheny believes that it has sufficient insurance to respond fully to the asbestos suits. Certain insurers, however, have contested their obligations to pay for
the future defense and settlement costs relating to the asbestos suits. Allegheny is currently involved in two asbestos insurance-related actions, Certain Underwriters at Lloyds, London et al. v. Allegheny Energy, Inc. et al., Case No.
21-C-03-16733 (Washington County, Md.), and Monongahela Power Company et al. v. Certain Underwriters at Lloyds London and London Market Companies, et al., Civil Action No. 03-C-281 (Monongalia County, W.Va.). The parties in these
actions are seeking an allocation of responsibility for historic and potential future asbestos liability.



In connection with a settlement, Allegheny will continue to receive payments from one of its insurance companies in the amount of $625,000, payable on
each of July 1, 2005 and 2006. As part of the settlement, Allegheny released this insurance company from potential liabilities associated with claims against Allegheny alleging asbestos exposure. Allegheny does not believe that the existence or
pendency of either the asbestos suits or the actions involving its insurance will have a material impact on its consolidated financial position, results of operations or cash flows. Allegheny believes that it has



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



established adequate reserves, net of insurance receivables and recoveries, to cover existing and future asbestos
claims. As of March 31, 2005, Allegheny had 1,555 open cases remaining. Allegheny intends to vigorously defend against these actions but cannot predict their outcomes.



Other Litigation



Putative Class Actions Under California Statutes: Eight related putative class action lawsuits were filed against and served on AE Supply
and more than two dozen other named defendant power suppliers in various California superior courts during 2002. These class action suits were removed from state court and transferred to the U.S. District Court for the Southern District of
California. Seven of the suits were commenced by consumers of wholesale electricity in California. The eighth, Millar v. Allegheny Energy Supply Co., et al., was filed on behalf of California consumers and taxpayers. The complaints allege, among
other things, that AE Supply and the other defendant power suppliers violated Californias antitrust statute and the California unfair business practices statutes by manipulating the California electricity market. The suits also challenge the
validity of various long-term power contracts with the State of California, including the California Department of Water Resources (CDWR) contract.



On August 25, 2003, the U.S. District Court granted AE Supplys motion to dismiss the seven consumer class actions with prejudice. On February 25,
2005, the United States Court of Appeals for the Ninth Circuit affirmed the District Courts judgment dismissing the seven class actions with prejudice.



The District Court separately granted plaintiffs motion to remand in the eighth action, Millar, on July 9, 2003. On December 18, 2003, the
plaintiffs filed an amended complaint in California state court, solely on behalf of consumers, naming certain additional defendants, including The Goldman Sachs Group, Inc. (Goldman Sachs). The case was removed to federal court based on
the amended complaint. On January 11, 2005, the federal district court remanded the case back to the state court in San Francisco. On May 6, 2005, the defendants in the Millar action filed a series of demurrers seeking to have the action dismissed.
The state court has scheduled oral argument on those demurrers on June 24, 2005.



Under the terms of the agreement relating to the sale of the CDWR contract, AE Supply and one of its affiliates have agreed to indemnify Goldman Sachs and its affiliate J. Aron & Company, under certain conditions,
for any losses arising out of the class action litigation up to the amount of the purchase price. AE Supply issued a guarantee to J. Aron & Company in connection with this indemnification obligation.



AE Supply intends to vigorously defend against these actions but cannot
predict their outcomes.



Nevada Power Contracts:
On December 7, 2001, Nevada Power Company (NPC) filed a complaint with the Federal Energy Regulatory Commission (FERC) against AE Supply seeking action by FERC to modify prices payable to AE Supply under three trade
confirmations between Merrill Lynch and NPC. NPCs claim was based, in part, on the assertion that dysfunctional California spot markets had an adverse effect on the prices NPC was able to negotiate with Merrill Lynch under the contracts. NPC
filed substantially identical complaints against a number of other energy suppliers. On December 19, 2002, the Administrative Law Judge (ALJ) issued findings that no contract modification was warranted. The ALJ determined in favor of NPC
that AE Supply, rather than Merrill Lynch, was a proper subject of NPCs complaint.



On June 26, 2003, FERC affirmed the ALJs decision upholding the long-term contracts negotiated between NPC and Merrill Lynch, among others, and did not render a decision on whether AE Supply, rather than Merrill
Lynch, was the real party in interest. On November 10, 2003, FERC issued an order, on rehearing, affirming its conclusion that the long-term contracts should not be modified. Snohomish County and other parties filed petitions for review of
FERCs June 26, 2003 order with the U.S. Court of Appeals for the Ninth Circuit (the NPC Petitions). On December 17, 2003, AE Supply filed a motion to intervene in this proceeding in the Ninth Circuit. The Ninth Circuit heard oral
argument in these cases on December 8, 2004. The NPC Petitions were consolidated in the Ninth Circuit. AE Supply intends to vigorously defend against these actions but cannot predict their outcomes.



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Sierra/Nevada: On April 2, 2003, NPC and Sierra Pacific Resources, Inc. (together,
Sierra/Nevada) initiated a lawsuit in U.S. District Court in Nevada against AE and AE Supply, together with Merrill Lynch & Co. and Merrill Lynch Capital Services, Inc. (together, Merrill). The complaint alleged that AE,
AE Supply and Merrill engaged in fraudulent conduct in connection with NPCs application to the Public Utilities Commission of Nevada (the Nevada PUC) for a deferred energy accounting adjustment, which allegedly caused the Nevada
PUC to disallow $180 million of NPCs deferred energy expenses. Sierra/Nevada asserted claims against AE and AE Supply for: (1) tortious interference with Sierra/Nevadas contractual and prospective economic advantages; (2) conspiracy and
(3) violations of the Nevada state Racketeer Influenced and Corrupt Organization (RICO) Act. Sierra/Nevada filed an amended complaint on May 30, 2003, which asserted a fourth cause of action against AE and AE Supply for wrongful hiring
and supervision. Sierra/Nevada seeks $180 million in compensatory damages plus attorneys fees and seeks in excess of $850 million under the RICO count. AE and AE Supply filed motions to dismiss the complaints on May 6, 2003 and June 23, 2003.
Thereafter, plaintiffs filed a motion to stay the action, pending the outcome of certain state court proceedings in which they are parties. On April 4, 2005, the District Court granted the stay motion, and the action is currently stayed. AE Supply
intends to vigorously defend against this action but cannot predict its outcome.



Litigation Involving Merrill Lynch: AE and AE Supply entered into an asset purchase agreement with Merrill Lynch and affiliated parties in 2001, under which AE and AE Supply purchased Merrill
Lynchs energy marketing and trading business for approximately $489 million and an equity interest in AE Supply of nearly 2%. The asset purchase agreement provided that Merrill Lynch would have the right to require AE to purchase Merrill
Lynchs equity interest in AE Supply for $115 million plus interest calculated from March 16, 2001 in the event that certain conditions were not met.



On September 24, 2002, certain Merrill Lynch entities filed a complaint against AE in the U.S. District Court for the Southern District of New York,
alleging that AE breached the asset purchase agreement by failing to repurchase the equity interest in AE Supply from Merrill Lynch and seeking damages in excess of $125 million. On September 25, 2002, AE and AE Supply filed an action against
Merrill Lynch in New York state court. The complaint in that action alleged that Merrill Lynch fraudulently induced AE to enter into the purchase agreement and that Merrill Lynch breached certain representations and warranties contained in the
agreement.



On May 29, 2003, the U.S. District Court for the
Southern District of New York denied AEs motion to stay Merrill Lynchs action and ordered that AE and AE Supply assert their claims against Merrill Lynch, which were initially brought in New York state court, as counterclaims in Merrill
Lynchs federal court action. As a result, AE and AE Supply dismissed the New York state action and filed an answer and asserted affirmative defenses and counterclaims against Merrill Lynch in the U.S. District Court for the Southern District
of New York. The counterclaims, as amended, allege that Merrill Lynch fraudulently induced AE and AE Supply to enter into the purchase agreement, that Merrill Lynch breached certain representations and warranties contained in the purchase agreement,
that Merrill Lynch negligently misrepresented certain facts relating to the purchase agreement and that Merrill Lynch breached fiduciary duties owed to AE and AE Supply. The counterclaims seek damages in excess of $605 million, among other relief.



On November 24, 2003, the court dismissed AE and AE
Supplys counterclaim for rescission and struck their demand for a jury trial. On February 2, 2005, following discovery, the parties filed separate motions for summary judgment. On April 12, 2005, the court granted Merrill Lynchs motion
for summary judgment on its breach of contract claim, thereby requiring AE to purchase Merrill Lynchs equity interest in AE Supply for $115 million plus interest from March 16, 2001, to be offset by whatever judgment AE and AE Supply obtain on
their counterclaims, if any. The court denied Merrill Lynchs summary judgment motion with respect to AE and AE Supplys counterclaims for fraudulent inducement and breach of contract, and granted Merrill Lynchs motion with respect
to the counterclaims for breach of fiduciary duty and negligent misrepresentations. The court also denied AE and AE Supplys motion for partial summary judgment on their breach of contract claims. AE and AE Supplys counterclaims for
fraudulent inducement and breach of contract remain pending before the court. The trial has been scheduled to begin on May 9, 2005.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



The federal government is holding certain assets of Daniel L. Gordon, the former head of energy
trading for AE Supply. Both AE and Merrill Lynch have filed petitions with the U.S. District Court for the Southern District of New York claiming rights to the funds. On August 13, 2004, the U.S. Attorney filed a motion to dismiss the petitions
filed by AE and Merrill Lynch on the grounds that neither AE nor Merrill Lynch had an interest in the specific property seized by the government at the time Gordon committed his offense. On September 30, 2004, AE filed an opposition to the
governments motion to dismiss.



AE and AE Supply intend
to vigorously pursue these matters but cannot predict their outcomes.



Putative Shareholder, Benefit Plan Class Actions and Derivative Actions: From October 2002 through December 2002, plaintiffs claiming to represent purchasers of AEs securities filed 14 putative class action lawsuits
against AE and several of its former senior managers in U.S. District Courts for the Southern District of New York and the District of Maryland. The complaints alleged that AE and senior management violated federal securities laws when AE purchased
Merrill Lynchs energy marketing and trading business with the knowledge that the business was built on illegal wash or round-trip trades with Enron, which the complaints alleged artificially inflated trading revenue, volume and growth. The
complaints asserted that AEs fortunes fell when Enrons collapse exposed what plaintiffs claim were illegal trades in the energy markets. All of the securities cases were transferred to the District of Maryland and consolidated. The
plaintiffs filed an amended complaint on May 3, 2004 that alleged that the defendants violated federal securities laws by failing to disclose weaknesses in Merrill Lynchs energy marketing and trading business, as well as other internal control
and accounting deficiencies. The amended complaint seeks unspecified compensatory damages and equitable relief. On July 2, 2004, the defendants moved to dismiss the amended complaint. Plaintiffs have opposed the motion and it remains outstanding.



In February and March 2003, two putative class action lawsuits
were filed against AE in U.S. District Courts for the Southern District of New York and the District of Maryland. The suits alleged that AE and a senior manager violated ERISA by: (1) failing to provide complete and accurate information to plan
beneficiaries regarding the energy trading business, among other things; (2) failing to diversify plan assets; (3) failing to monitor investment alternatives; (4) failing to avoid conflicts of interest and (5) violating fiduciary duties. The ERISA
cases were consolidated in the District of Maryland. On April 26, 2004, the plaintiffs in the ERISA cases filed an amended complaint, adding a number of current and former directors of AE as defendants and clarifying the nature of their claims. On
June 25, 2004, the defendants filed a motion to dismiss the amended complaint. Plaintiffs have opposed the motion and it remains outstanding.



In June 2003, a shareholder derivative action was filed against AEs Board of Directors and several former senior managers in the Supreme Court of
the State of New York for the County of New York. The suit alleges that the Board and senior management breached fiduciary duties to AE that have exposed AE to the securities class action lawsuits. The New York state court derivative action has been
stayed pending the commencement of discovery in the securities cases. On April 8, 2005, a second shareholder derivative action was filed against AEs Board of Directors and several former senior managers and former directors. The action was
filed in the U.S. District Court for the District of Maryland and consolidated with the securities class actions pending in that court. The Maryland derivative action contains allegations similar to the New York state court derivative action.



AE intends to vigorously defend against these actions but
cannot predict their outcome.



Suits Related to the
Gleason Generating Facility: Allegheny Energy Supply Gleason Generating Facility, LLC, a subsidiary of AE Supply, is the defendant in a suit brought in the Circuit Court for Weakley County, Tennessee, by residents living in the vicinity of
the generation facility in Gleason, Tennessee. The original suit was filed on September 16, 2002. AE Supply purchased the generation facility in 2001. The plaintiffs are asserting claims based on trespass and/or nuisance, claiming personal injury
and property damage as a result of noise from the generation facility. They seek a restraining order



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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



with respect to the operation of the plant and damages of $200 million. A mediation session was held on June 17,
2004, but the parties did not reach settlement. AE has undertaken property purchases and other mitigation measures. AE intends to vigorously defend against this action but cannot predict its outcome.



AE Supply has demanded indemnification from Siemens Westinghouse, the
manufacturer of the turbines used in the Gleason Generating Facility, pursuant to the terms of the related equipment purchase agreement. On October 17, 2002, Siemens Westinghouse filed a declaratory judgment action in the Court of Common Pleas of
Allegheny County, Pennsylvania, against AE Supply and its subsidiary seeking a declaration that the prior owner released Siemens Westinghouse from this liability through a release executed after AE Supply purchased the Gleason facility. On May 6,
2004, AE Supply filed a motion for summary judgment to dismiss the declaratory judgment action. The motion for summary judgment was granted on September 7, 2004. On October 6, 2004, Siemens Westinghouse appealed the dismissal of the declaratory
judgment action. Allegheny intends to vigorously defend against this action but cannot predict its outcome.



SEC Matters: On October 9, October 25 and November 5, 2002, AE received subpoenas from the SEC. The subpoenas principally concerned: (1) the
departure of Daniel L. Gordon; (2) AEs litigation with Merrill Lynch; (3) AE Supplys valuation and management of its trading business; (4) AEs November 4, 2002 press release concerning its financial statements; (5) the departure of
AEs and its subsidiaries Controller, Thomas Kloc, in June 2002 and (6) AEs acquisition of power plants from Enron. AE and AE Supply responded to the subpoenas.



On January 16, 2004, the SEC requested that AE voluntarily produce certain documents in connection with an informal
investigation of AE, and the SEC has since requested the voluntary production of additional documents. AE has responded to the SECs request for documents. The SEC also has taken testimony from several current and former employees and has
expressed an intention to take testimony from several additional current and former employees. AE is cooperating fully with the SEC.



LTI Arbitration: On April 22, 2004, Leasing Technologies International, Inc. and its shareholders (collectively, LTI) filed a
demand for arbitration against Allegheny Ventures and AE before the American Arbitration Association. In December 2000, Allegheny Ventures entered into an agreement to acquire LTI, an equipment leasing company. Allegheny Ventures terminated the
agreement on May 4, 2003. LTI alleges that the termination of the agreement was unjustified and seeks damages in an unspecified amount for breach of the agreement, as well as other consequential damages. On June 11, 2004, AE and Allegheny Ventures
filed an answer to LTIs demand, denying all claims. The arbitration hearing currently is scheduled to begin in October 2005. Allegheny intends to vigorously defend against this action, but cannot predict its outcome.



Ordinary Course of Business: The registrants are from time to
time involved in litigation and other legal disputes in the ordinary course of business. Each registrant is of the belief that there are no other legal proceedings that could have a material adverse effect on its business or financial condition.



NOTE 16: INTEREST EXPENSE  MERRILL LYNCH LITIGATION



AEs financial statements for the three months ended March 31, 2005 reflect a charge of approximately $38.5 million representing interest expense for the period from March 16, 2001 to March 31, 2005 relating to
the Merrill Lynch litigation discussed in Note 15, Commitments and Contingencies.



As a result of the April 12, 2005 court order in this matter, AE was required to record this charge under GAAP without regard to any potential judgment that AE may obtain in its counterclaims against Merrill Lynch.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 17: SUBSEQUENT EVENTS



In
April 2005, the holders of $295.0 million of the outstanding $300.0 million 117/8% Trust Preferred Securities
issued by Capital Trust accepted AE and Capital Trusts tender offer and consent solicitation. Under the terms of the offer, for each $1,000 in liquidation amount tendered, a holder received 83.33 shares of AE common stock and $160 in cash. On
April 22, 2005, AE issued an aggregate of 24.6 million shares of its common stock and $47.2 million in cash to the holders of the tendered Trust Preferred Securities. In accordance with SFAS No. 84, Induced Conversions of Convertible
Debt, the $47.2 million cash payment will be expensed in the second quarter of 2005. This amount represents the difference between the fair value transferred in the transaction in excess of the fair value of the securities issuable pursuant to
the original conversion terms. In addition, AE received the required consents from holders of the Trust Preferred Securities for amendments to the indenture governing AEs 117/8% Notes due 2008. The holder of the remaining $5.0 million in liquidation amount of Trust Preferred Securities converted its Trust Preferred Securities into 416,650 shares of AE
common stock on May 3, 2005.



On May 6, 2005, AE
Supply and its subsidiaries, Allegheny Energy Supply Wheatland Generating Facility, LLC and Lake Acquisition Company, L.L.C., signed an agreement with PSI Energy, Inc. and The Cincinnati Gas & Electric Company (collectively, the Wheatland
Buyers) pursuant to which the Wheatland Buyers agreed to purchase certain of the assets and assume certain of the liabilities relating to AE Supplys Wheatland generating facility. The purchase price for the transaction is $100 million,
subject to certain post-closing adjustments. The transaction is subject to certain closing conditions and federal regulatory approvals. It is expected to close in the fourth quarter of 2005. Proceeds from the sale are expected to be used to repay
debt.



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MONONGAHELA POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                                         |  |                              |         |   |      |   |        
|-------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | -------
|                                                         |  | Three Months Ended March 31,
|(In thousands)                                           |  | 2005                         |         |   | 2004
|Operating revenues                                       |  | $                            | 186,581 |   |      | $ | 180,157
|                                                         |  |                             
|Operating expenses:                                      |  |                              |         |   |      |   |        
|Fuel consumed in electric generation                     |  |                              | 34,977  |   |      |   | 32,662 
|Purchased power and transmission                         |  |                              | 58,658  |   |      |   | 41,344 
|Operations and maintenance                               |  |                              | 43,911  |   |      |   | 52,466 
|Depreciation and amortization                            |  |                              | 16,770  |   |      |   | 16,266 
|Taxes other than income taxes                            |  |                              | 12,733  |   |      |   | 12,381 
|                                                         |  |                              |         |   |      |   |        
|Total operating expenses                                 |  |                              | 167,049 |   |      |   | 155,119
|                                                         |  |                              |         |   |      |   |        
|Operating income                                         |  |                              | 19,532  |   |      |   | 25,038 
|                                                         |  |                             
|Other income and expenses, net (Note 8)                  |  |                              | 2,232   |   |      |   | 1,983  
|                                                         |  |                             
|Interest expense                                         |  |                              | 10,743  |   |      |   | 10,608 
|                                                         |  |                              |         |   |      |   |        
|Income from continuing operations before income taxes    |  |                              | 11,021  |   |      |   | 16,413 
|                                                         |  |                             
|Income tax (benefit) expense from continuing operations  |  |                              | (301    | ) |      |   | 8,725  
|                                                         |  |                              |         |   |      |   |        
|Income from continuing operations                        |  |                              | 11,322  |   |      |   | 7,688  
|                                                         |  |                             
|Income from discontinued operations, net of tax (Note 3) |  |                              | 10,871  |   |      |   | 10,966 
|                                                         |  |                              |         |   |      |   |        
|Net income                                               |  | $                            | 22,193  |   |      | $ | 18,654 
|                                                         |  |                              |         |   |      |   |        



See accompanying Notes
to Consolidated Financial Statements.



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MONONGAHELA POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                            |  |                              |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Three Months Ended March 31, |        
|(In thousands)                                                              |  | 2005                         |         |   | 2004 |  
|Cash Flows From Operating Activities:                                       |  |                              |         |   |      |   |         |  
|Net income                                                                  |  | $                            | 22,193  |   |      | $ | 18,654  |  
|                                                                            |  |                             
|Adjustments for discontinued operations and non-cash charges and (credits): |  |                              |         |   |      |   |         |  
|Income from discontinued operations, net                                    |  |                              | (10,871 | ) |      |   |        |  
|Depreciation and amortization                                               |  |                              | 16,770  |   |      |   | 18,782  |  
|Deferred investment credit and income taxes, net                            |  |                              | 12,539  |   |      |   | 4,346   |  
|Deferred energy costs, net                                                  |  |                              |        |   |      |   | 15,817  |  
|Other, net                                                                  |  |                              | (1,100  | ) |      |   | 91      |  
|                                                                            |  |                             
|Changes in certain assets and liabilities:                                  |  |                              |         |   |      |   |         |  
|Accounts receivable, net                                                    |  |                              | (18,831 | ) |      |   | (23,573 | )
|Accounts receivable due from/payable to affiliates, net                     |  |                              | 57,438  |   |      |   | (32,517 | )
|Materials, supplies and fuel                                                |  |                              | (264    | ) |      |   | 41,676  |  
|Collateral deposits                                                         |  |                              | (16,300 | ) |      |   |        |  
|Accounts payable                                                            |  |                              | (4,970  | ) |      |   | (4,547  | )
|Accrued taxes                                                               |  |                              | (16,663 | ) |      |   | 9,490   |  
|Accrued interest                                                            |  |                              | 5,927   |   |      |   | 4,431   |  
|Other, net                                                                  |  |                              | 16,229  |   |      |   | 3,149   |  
|                                                                            |  |                              |         |   |      |   |         |  
|Net cash from operating activities                                          |  |                              | 62,097  |   |      |   | 55,799  |  
|                                                                            |  |                              |         |   |      |   |         |  
|Cash Flows Used In Investing Activities:                                    |  |                              |         |   |      |   |         |  
|Capital expenditures                                                        |  |                              | (12,479 | ) |      |   | (14,174 | )
|Other investments                                                           |  |                              |        |   |      |   | 2       |  
|                                                                            |  |                              |         |   |      |   |         |  
|Net cash used in investing activities                                       |  |                              | (12,479 | ) |      |   | (14,172 | )
|                                                                            |  |                              |         |   |      |   |         |  
|Cash Flows Used In Financing Activities:                                    |  |                              |         |   |      |   |         |  
|Note receivable from affiliate                                              |  |                              | (38,748 | ) |      |   |        |  
|Retirement of long-term debt                                                |  |                              |        |   |      |   | (4      | )
|Cash dividends paid on capital stock:                                       |  |                              |         |   |      |   |         |  
|Preferred stock                                                             |  |                              | (1,259  | ) |      |   | (1,259  | )
|Common stock                                                                |  |                              |        |   |      |   | (8,188  | )
|                                                                            |  |                              |         |   |      |   |         |  
|Net cash used in financing activities                                       |  |                              | (40,007 | ) |      |   | (9,451  | )
|                                                                            |  |                              |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                   |  |                              | 9,611   |   |      |   | 32,176  |  
|Cash and cash equivalents at beginning of period                            |  |                              | 45,092  |   |      |   | 43,971  |  
|                                                                            |  |                              |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                            | 54,703  |   |      | $ | 76,147  |  
|                                                                            |  |                              |         |   |      |   |         |  
|Supplemental Cash Flow Information:                                         |  |                              |         |   |      |   |         |  
|Cash paid for interest (net of amount capitalized)                          |  | $                            | 2,900   |   |      | $ | 6,133   |  



See accompanying Notes
to Consolidated Financial Statements.



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MONONGAHELA POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)



|                                         |  |               |           |   |                  |   |           |  
|---------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|(In thousands)                           |  | March 31,2005 |           |   | December 31,2004 |  
|ASSETS                                   |  |               |           |   |                  |   |           |  
|                                         |  |              
|Current Assets:                          |  |               |           |   |                  |   |           |  
|Cash and cash equivalents                |  | $             | 54,703    |   |                  | $ | 45,092    |  
|Accounts receivable:                     |  |               |           |   |                  |   |           |  
|Customer                                 |  |               | 50,370    |   |                  |   | 39,736    |  
|Unbilled utility revenue                 |  |               | 45,589    |   |                  |   | 36,332    |  
|Wholesale and other                      |  |               | 3,084     |   |                  |   | 4,399     |  
|Allowance for uncollectible accounts     |  |               | (2,379    | ) |                  |   | (2,616    | )
|Note receivable from affiliate           |  |               | 42,953    |   |                  |   | 4,205     |  
|Materials and supplies                   |  |               | 17,322    |   |                  |   | 17,123    |  
|Fuel                                     |  |               | 15,375    |   |                  |   | 15,310    |  
|Prepaid taxes                            |  |               | 17,847    |   |                  |   | 21,579    |  
|Assets held for sale (Note 3)            |  |               | 113,456   |   |                  |   | 147,862   |  
|Collateral deposits                      |  |               | 16,300    |   |                  |   |          |  
|Regulatory assets                        |  |               | 4,702     |   |                  |   | 4,702     |  
|Other                                    |  |               | 3,007     |   |                  |   | 4,638     |  
|                                         |  |               |           |   |                  |   |           |  
|Total current assets                     |  |               | 382,329   |   |                  |   | 338,362   |  
|                                         |  |               |           |   |                  |   |           |  
|Property, Plant and Equipment, Net:      |  |               |           |   |                  |   |           |  
|Generation                               |  |               | 938,885   |   |                  |   | 938,214   |  
|Transmission                             |  |               | 291,888   |   |                  |   | 291,558   |  
|Distribution                             |  |               | 952,795   |   |                  |   | 945,431   |  
|Other                                    |  |               | 82,003    |   |                  |   | 82,767    |  
|Accumulated depreciation                 |  |               | (881,121  | ) |                  |   | (869,077  | )
|                                         |  |               |           |   |                  |   |           |  
|Subtotal                                 |  |               | 1,384,450 |   |                  |   | 1,388,893 |  
|Construction work in progress            |  |               | 17,858    |   |                  |   | 15,533    |  
|                                         |  |               |           |   |                  |   |           |  
|Total property, plant and equipment, net |  |               | 1,402,308 |   |                  |   | 1,404,426 |  
|                                         |  |               |           |   |                  |   |           |  
|Investments and Other Assets:            |  |               |           |   |                  |   |           |  
|Assets held for sale (Note 3)            |  |               | 177,663   |   |                  |   | 176,742   |  
|Investment in AGC                        |  |               | 47,747    |   |                  |   | 46,055    |  
|Other                                    |  |               | 4,014     |   |                  |   | 4,033     |  
|                                         |  |               |           |   |                  |   |           |  
|Total investments and other assets       |  |               | 229,424   |   |                  |   | 226,830   |  
|                                         |  |               |           |   |                  |   |           |  
|Deferred Charges:                        |  |               |           |   |                  |   |           |  
|Regulatory assets                        |  |               | 100,408   |   |                  |   | 99,502    |  
|Other                                    |  |               | 11,312    |   |                  |   | 12,307    |  
|                                         |  |               |           |   |                  |   |           |  
|Total deferred charges                   |  |               | 111,720   |   |                  |   | 111,809   |  
|                                         |  |               |           |   |                  |   |           |  
|Total Assets                             |  | $             | 2,125,781 |   |                  | $ | 2,081,427 |  
|                                         |  |               |           |   |                  |   |           |  



See accompanying Notes
to Consolidated Financial Statements.



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MONONGAHELA POWER COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(unaudited)



|                                                          |  |               |           |   |                  |   |          
|--------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | ---------
|(In thousands)                                            |  | March 31,2005 |           |   | December 31,2004
|LIABILITIES AND STOCKHOLDERS EQUITY                      |  |               |           |   |                  |   |          
|                                                          |  |              
|Current Liabilities:                                      |  |               |           |   |                  |   |          
|Accounts payable                                          |  | $             | 33,322    |   |                  | $ | 38,292   
|Accounts payable to affiliates, net                       |  |               | 69,234    |   |                  |   | 11,534   
|Accrued taxes                                             |  |               | 31,848    |   |                  |   | 40,833   
|Deferred income taxes                                     |  |               | 1,366     |   |                  |   | 5,344    
|Accrued interest                                          |  |               | 14,721    |   |                  |   | 8,794    
|Liabilities associated with assets held for sale (Note 3) |  |               | 57,104    |   |                  |   | 95,501   
|Other                                                     |  |               | 27,719    |   |                  |   | 28,078   
|                                                          |  |               |           |   |                  |   |          
|Total current liabilities                                 |  |               | 235,314   |   |                  |   | 228,376  
|                                                          |  |               |           |   |                  |   |          
|Long-term Debt (Note 2)                                   |  |               | 684,052   |   |                  |   | 684,001  
|                                                          |  |              
|Deferred Credits and Other Liabilities:                   |  |               |           |   |                  |   |          
|Investment tax credit                                     |  |               | 2,053     |   |                  |   | 2,590    
|Non-current income taxes payable                          |  |               | 45,671    |   |                  |   | 45,671   
|Deferred income taxes                                     |  |               | 206,474   |   |                  |   | 190,511  
|Obligations under capital leases                          |  |               | 8,019     |   |                  |   | 8,747    
|Regulatory liabilities                                    |  |               | 246,501   |   |                  |   | 243,974  
|Liabilities associated with assets held for sale (Note 3) |  |               | 99,915    |   |                  |   | 100,988  
|Other                                                     |  |               | 24,503    |   |                  |   | 24,197   
|                                                          |  |               |           |   |                  |   |          
|Total deferred credits and other liabilities              |  |               | 633,136   |   |                  |   | 616,678  
|                                                          |  |               |           |   |                  |   |          
|Commitments and Contingencies (Note 9)                    |  |               |           |   |                  |   |          
|                                                          |  |              
|Preferred Stock                                           |  |               | 74,000    |   |                  |   | 74,000   
|                                                          |  |              
|Common Stockholders Equity:                              |  |               |           |   |                  |   |          
|Common stock                                              |  |               | 294,550   |   |                  |   | 294,550  
|Other paid-in capital                                     |  |               | 111,241   |   |                  |   | 111,182  
|Retained earnings                                         |  |               | 93,490    |   |                  |   | 72,557   
|Accumulated other comprehensive (loss) income             |  |               | (2        | ) |                  |   | 83       
|                                                          |  |               |           |   |                  |   |          
|Total common stockholders equity                         |  |               | 499,279   |   |                  |   | 478,372  
|                                                          |  |               |           |   |                  |   |          
|Total Liabilities and Stockholders Equity                |  | $             | 2,125,781 |   |                  | $ | 2,081,427
|                                                          |  |               |           |   |                  |   |          



See accompanying Notes
to Consolidated Financial Statements.



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MONONGAHELA POWER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



|         |  |                                                                  |  |         
|-------- |  | ---------------------------------------------------------------- |  | --------
|Note No. |  |                                                                  |  | Page No.
|1        |  | Basis of Presentation                                            |  | 38      
|2        |  | Debt                                                             |  | 39      
|3        |  | Assets Held for Sale and Discontinued Operations                 |  | 39      
|4        |  | Intangible Assets                                                |  | 40      
|5        |  | Asset Retirement Obligations (AROs)                            |  | 40      
|6        |  | Business Segments                                                |  | 41      
|7        |  | Pension Benefits and Postretirement Benefits Other Than Pensions |  | 43      
|8        |  | Other Income and Expenses, Net                                   |  | 43      
|9        |  | Commitments and Contingencies                                    |  | 43      



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MONONGAHELA POWER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 1: BASIS OF PRESENTATION



Monongahela Power Company, together with its consolidated subsidiaries (Monongahela), is a wholly owned subsidiary of Allegheny Energy, Inc. (AE, and together with its consolidated subsidiaries,
Allegheny). Monongahela, along with its wholly owned subsidiary Mountaineer Gas Company (Mountaineer) and its regulated utility affiliates, The Potomac Edison Company (Potomac Edison) and West Penn Power Company
(West Penn), collectively doing business as Allegheny Power, operates electric and natural gas transmission and distribution (T&D) systems. Monongahela operates electric T&D systems in Ohio and West Virginia and
natural gas T&D systems in West Virginia. Monongahela also generates power for its West Virginia customers. Monongahela has two principal business segments. The Generation and Marketing segment includes Monongahelas power generation
operations. The Delivery and Services segment includes Monongahelas electric T&D operations.



Monongahela is subject to regulation by the Securities and Exchange Commission (SEC), the Public Service Commission of West Virginia, the
Public Utilities Commission of Ohio and the Federal Energy Regulatory Commission.



Allegheny Energy Services Corporation (AESC) is a wholly owned subsidiary of AE that employs substantially all of the people who work at Monongahela and its subsidiaries.



The accompanying unaudited interim financial statements of Monongahela should
be read in conjunction with the Combined Annual Report on Form 10-K of AE, Monongahela, Potomac Edison and Allegheny Generating Company (AGC) for the year ended December 31, 2004 (the 2004 Annual Report on Form 10-K).



The interim financial statements included herein have been
prepared by Monongahela, without audit, pursuant to the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting
principles in the United States of America have been condensed or omitted. Management believes that the disclosures are adequate to make the information presented not misleading.



In the opinion of management, the unaudited interim financial statements included herein reflect all normal recurring
adjustments that are necessary for a fair presentation of the results of operations for the three months ended March 31, 2005 and 2004, cash flows for the three months ended March 31, 2005 and 2004 and financial position at March 31, 2005 and
December 31, 2004. Because of the seasonal nature of Monongahelas utility operations, results for the three months ended March 31, 2005 are not necessarily indicative of results that may be expected for the year ending December 31, 2005. For
more information on the seasonal nature of Monongahelas utility operations, see Part I, Item 1, Risk Factors, Other Risk Factors Associated with Our Business, in the 2004 Annual Report on Form 10-K. Certain amounts in the financial
statements have been reclassified for comparative purposes.



During the third quarter of 2004, Monongahela entered into an agreement to sell its West Virginia natural gas operations. The results of operations relating to these assets have been reclassified to discontinued operations in the
accompanying Consolidated Statements of Operations for all periods presented. In accordance with the provisions of the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards (SFAS) No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), the assets and liabilities associated with these discontinued operations have been reclassified as held for sale in the Consolidated Balance
Sheets as of, and subsequent to, the date that held for sale criteria were met.



Federal and State Income Taxes. The provision for income tax expense for earnings from operations, and/or the income tax benefit for losses from operations, results in an effective income tax rate that differs
from the federal statutory rate of 35%, principally due to allocation of consolidated tax savings, state income taxes, tax credits, the effects of utility rate making and certain non-deductible expenses.



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MONONGAHELA POWER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Allegheny allocates income tax expense or benefit to its subsidiaries pursuant to its consolidated
tax sharing agreement. This corporate allocation may cause significant fluctuations in the effective quarterly and year to date tax rates from the statutory rates for certain of Alleghenys subsidiaries, depending on the level of pre-tax
income.



NOTE 2: DEBT



Monongahela did not
issue or redeem any debt during the three months ended March 31, 2005.



At March 31, 2005, contractual maturities for long-term debt for the remainder of 2005 and for full years thereafter, excluding unamortized discounts of $1.7 million, are as follows:



|                                                  |  |      |     |      |   |       |  |      |      |      |   |            |  |       |      |  |   |       |  |   |      
|------------------------------------------------- |  | ---- | --- | ---- | - | ----- |  | ---- | ---- | ---- | - | ---------- |  | ----- | ---- |  | - | ----- |  | - | -----
|(In millions)                                     |  | 2005 |     | 2006 |   | 2007  |  | 2008 |      | 2009 |   | Thereafter |  | Total
|First Mortgage Bonds                              |  | $    |    |      | $ | 300.0 |  | $    |     |      | $ |           |  | $     |     |  | $ | 190.0 |  | $ | 490.0
|Medium-Term Notes                                 |  |      |    |      |   |      |  |      |     |      |   |           |  |       |     |  |   | 110.0 |  |   | 110.0
|Pollution Control Bonds                           |  |      |    |      |   |      |  |      | 15.5 |      |   |           |  |       |     |  |   | 70.2  |  |   | 85.7 
|                                                  |  |      |     |      |   |       |  |      |      |      |   |            |  |       |      |  |   |       |  |   |      
|Total                                             |  | $    |    |      | $ | 300.0 |  | $    | 15.5 |      | $ |           |  | $     |     |  | $ | 370.2 |  | $ | 685.7
|                                                  |  |      |     |      |   |       |  |      |      |      |   |            |  |       |      |  |   |       |  |   |      
|Liabilities associated with assets held for sale: |  |      |     |      |   |       |  |      |      |      |   |            |  |       |      |  |   |       |  |   |      
|Other Notes                                       |  | $    | 3.3 |      | $ | 3.3   |  | $    | 3.4  |      | $ | 3.3        |  | $     | 13.4 |  | $ | 60.0  |  | $ | 86.7 
|                                                  |  |      |     |      |   |       |  |      |      |      |   |            |  |       |      |  |   |       |  |   |      



At March 31, 2005,
substantially all of Monongahelas properties were held subject to liens of various relative priorities securing debt obligations.



NOTE 3: ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS



During the third quarter of 2004, Monongahela entered into an agreement to sell its West Virginia natural gas operations. The results of operations relating to these assets have been reclassified to discontinued
operations in the accompanying Consolidated Statements of Operations for all periods presented. In accordance with the provisions of SFAS No. 144, the assets and liabilities associated with these discontinued operations have been reclassified as
held for sale in the accompanying balance sheets. The components of income from discontinued operations are as follows:



|                                                |  |                              |        |   |      |   |        |  
|----------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                |  | Three Months Ended March 31, |       
|(In millions)                                   |  | 2005                         |        |   | 2004 |  
|Operating revenues                              |  | $                            | 150.2  |   |      | $ | 148.8  |  
|Operating expenses                              |  |                              | (130.1 | ) |      |   | (128.6 | )
|Other income                                    |  |                              | 0.2    |   |      |   | 0.2    |  
|Interest expense                                |  |                              | (2.1   | ) |      |   | (2.0   | )
|                                                |  |                              |        |   |      |   |        |  
|Income before income taxes                      |  |                              | 18.2   |   |      |   | 18.4   |  
|Income tax expense                              |  |                              | (6.7   | ) |      |   | (7.4   | )
|Impairment charge, net of tax                   |  |                              | (0.6   | ) |      |   |       |  
|                                                |  |                              |        |   |      |   |        |  
|Income from discontinued operations, net of tax |  | $                            | 10.9   |   |      | $ | 11.0   |  
|                                                |  |                              |        |   |      |   |        |  



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MONONGAHELA POWER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Assets held for sale and liabilities associated with assets held for sale were as follows:



|                                       |  |                |       |                   |   |      
|-------------------------------------- |  | -------------- | ----- | ----------------- | - | -----
|(In millions)                          |  | March 31, 2005 |       | December 31, 2004
|Assets:                                |  |                |       |                   |   |      
|Current assets                         |  | $              | 113.5 |                   | $ | 147.8
|Property, plant and equipment          |  |                | 164.4 |                   |   | 163.7
|Investments and other assets           |  |                | 7.2   |                   |   | 6.8  
|Deferred charges                       |  |                | 6.1   |                   |   | 6.3  
|                                       |  |                |       |                   |   |      
|Total assets                           |  | $              | 291.2 |                   | $ | 324.6
|                                       |  |                |       |                   |   |      
|Liabilities:                           |  |                |       |                   |   |      
|Current liabilities                    |  | $              | 57.1  |                   | $ | 95.5 
|Long-term debt                         |  |                | 83.4  |                   |   | 83.4 
|Deferred credits and other liabilities |  |                | 16.5  |                   |   | 17.6 
|                                       |  |                |       |                   |   |      
|Total liabilities                      |  | $              | 157.0 |                   | $ | 196.5
|                                       |  |                |       |                   |   |      



NOTE 4: INTANGIBLE ASSETS



Intangible assets included in Property, Plant and Equipment, Net on the Consolidated Balance Sheets were as follows:



|                            |  |                     |      |                         |   |                     |  |                         |      |  |   |    
|--------------------------- |  | ------------------- | ---- | ----------------------- | - | ------------------- |  | ----------------------- | ---- |  | - | ---
|                            |  | March 31, 2005      |      | December 31, 2004      
|(In millions)               |  | GrossCarryingAmount |      | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|Land easements, amortized   |  | $                   | 0.5  |                         | $ | 0.2                 |  | $                       | 0.5  |  | $ | 0.2
|Land easements, unamortized |  |                     | 31.8 |                         |   |                    |  |                         | 31.8 |  |   |   
|Software                    |  |                     | 8.0  |                         |   | 7.6                 |  |                         | 7.9  |  |   | 7.2
|                            |  |                     |      |                         |   |                     |  |                         |      |  |   |    
|Total                       |  | $                   | 40.3 |                         | $ | 7.8                 |  | $                       | 40.2 |  | $ | 7.4
|                            |  |                     |      |                         |   |                     |  |                         |      |  |   |    



Amortization expense
for intangible assets was $0.4 million for the three months ended March 31, 2005 and 2004. Amortization expense is estimated to be $2.3 million annually for 2005 through 2009.



In addition, Assets held for sale included intangible assets related to natural gas rights, amortized with a
gross carrying amount of $6.7 million at March 31, 2005 and December 31, 2004 and accumulated amortization of $4.1 million and $4.0 million at March 31, 2005, and December 31, 2004, respectively.



NOTE 5: ASSET RETIREMENT OBLIGATIONS (AROs)



Monongahela has AROs primarily related to ash landfills, underground and aboveground storage tanks and natural gas wells. Monongahela also has identified a number of AROs associated with certain of its electric
generation and transmission assets that have not been recorded, because the fair value of these obligations cannot be reasonably estimated, primarily due to the indeterminate lives of the assets.



AROs were identified with respect to property, plant and equipment, and the
cost of removal of these assets currently is being recovered through rates. Monongahela believes it is probable that any difference between expenses under SFAS No. 143, Accounting for Asset Retirement Obligations, and expenses recovered
currently in rates with respect to these assets will be recoverable in future rates. Therefore, Monongahela is deferring these expenses as a regulatory asset.



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MONONGAHELA POWER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



For the three months ended March 31, 2005, Monongahelas ARO balance increased $0.1 million,
from $6.7 million at December 31, 2004 to $6.8 million at March 31, 2005, primarily due to accretion expense. In accordance with SFAS No. 144, Mountaineers $1.9 million ARO liability was recorded in liabilities associated with assets held for
sale in the accompanying Consolidated Balance Sheets. See Note 3, Assets Held for Sale and Discontinued Operations to Monongahelas Consolidated Financial Statements for additional information.



Estimated removal costs of $244.7 million and $241.8 million at March 31,
2005 and December 31, 2004, respectively, that are not qualified as AROs are being recovered through the ratemaking process. These costs are recorded by Monongahela as regulatory liabilities.



In March 2005, the FASB issued FASB Interpretation No. 47 (FIN
47), which is an interpretation of SFAS No. 143. FIN 47 requires entities with an ARO that is conditional on a future event to record an ARO, even if the event has not yet occurred. The obligation to perform the asset retirement is
unconditional even though uncertainty exists as to the timing and method of settlement due to the existence of a conditional event. This interpretation is effective for fiscal years ending after December 15, 2005. Retrospective application for
interim periods is permitted but is not required. Obligations recorded as a result of the adoption of FIN 47 will be recorded as a cumulative effect due to a change in accounting principle. Monongahela currently is evaluating the impact of FIN 47.



NOTE 6: BUSINESS SEGMENTS



Monongahela manages and evaluates its operations in two business segments, the Delivery and Services segment and the Generation and Marketing segment. The Delivery and Services segment includes Monongahelas electric T&D
operations. The Generation and Marketing segment owns, operates and manages electric generation capacity. The Generation and Marketing segment includes intersegment sales to provide energy to Monongahelas Delivery and Services segment.



Monongahela accounts for intersegment sales based on cost or
regulatory commission approved tariffs or contracts.



Monongahela entered into an agreement to sell its West Virginia natural gas operations during the third quarter of 2004. The results of operations for these assets have previously been reported as a component of the Delivery and Services
segment. The results of operations for these assets have been reclassified to discontinued operations for all periods presented.



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MONONGAHELA POWER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Business segment information is summarized below. Significant transactions between reportable
segments are shown as eliminations to reconcile the segment information to consolidated amounts. The majority of the eliminations relate to power sold by the Generation and Marketing segment to the Delivery and Services segment.



|                                               |  |                              |       |   |      |   |       |  
|---------------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                                               |  | Three Months Ended March 31, |      
|(In millions)                                  |  | 2005                         |       |   | 2004 |  
|Operating revenues:                            |  |                              |       |   |      |   |       |  
|Delivery and Services                          |  | $                            | 177.3 |   |      | $ | 173.7 |  
|Generation and Marketing                       |  |                              | 91.0  |   |      |   | 86.3  |  
|Eliminations                                   |  |                              | (81.7 | ) |      |   | (79.8 | )
|                                               |  |                              |       |   |      |   |       |  
|Total                                          |  | $                            | 186.6 |   |      | $ | 180.2 |  
|                                               |  |                              |       |   |      |   |       |  
|Depreciation and amortization:                 |  |                              |       |   |      |   |       |  
|Delivery and Services                          |  | $                            | 8.1   |   |      | $ | 7.7   |  
|Generation and Marketing                       |  |                              | 8.7   |   |      |   | 8.6   |  
|                                               |  |                              |       |   |      |   |       |  
|Total                                          |  | $                            | 16.8  |   |      | $ | 16.3  |  
|                                               |  |                              |       |   |      |   |       |  
|Operating income (loss):                       |  |                              |       |   |      |   |       |  
|Delivery and Services                          |  | $                            | 20.9  |   |      | $ | 19.0  |  
|Generation and Marketing                       |  |                              | (1.4  | ) |      |   | 6.0   |  
|                                               |  |                              |       |   |      |   |       |  
|Total                                          |  | $                            | 19.5  |   |      | $ | 25.0  |  
|                                               |  |                              |       |   |      |   |       |  
|Interest expense:                              |  |                              |       |   |      |   |       |  
|Delivery and Services                          |  | $                            | 6.2   |   |      | $ | 5.5   |  
|Generation and Marketing                       |  |                              | 4.5   |   |      |   | 5.1   |  
|                                               |  |                              |       |   |      |   |       |  
|Total                                          |  | $                            | 10.7  |   |      | $ | 10.6  |  
|                                               |  |                              |       |   |      |   |       |  
|Income (loss) from continuing operations, net: |  |                              |       |   |      |   |       |  
|Delivery and Services                          |  | $                            | 11.6  |   |      | $ | 5.6   |  
|Generation and Marketing                       |  |                              | (0.3  | ) |      |   | 2.1   |  
|                                               |  |                              |       |   |      |   |       |  
|Total                                          |  | $                            | 11.3  |   |      | $ | 7.7   |  
|                                               |  |                              |       |   |      |   |       |  
|Income from discontinued operations, net:      |  |                              |       |   |      |   |       |  
|Delivery and Services                          |  | $                            | 10.9  |   |      | $ | 11.0  |  
|                                               |  |                              |       |   |      |   |       |  
|Total                                          |  | $                            | 10.9  |   |      | $ | 11.0  |  
|                                               |  |                              |       |   |      |   |       |  
|Net income (loss):                             |  |                              |       |   |      |   |       |  
|Delivery and Services                          |  | $                            | 22.5  |   |      | $ | 16.6  |  
|Generation and Marketing                       |  |                              | (0.3  | ) |      |   | 2.1   |  
|                                               |  |                              |       |   |      |   |       |  
|Total                                          |  | $                            | 22.2  |   |      | $ | 18.7  |  
|                                               |  |                              |       |   |      |   |       |  



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MONONGAHELA POWER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 7: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS



Monongahela is responsible for its proportionate share of the net periodic cost for pension and postretirement benefits other than pensions (principally
health care and life insurance) for employees and covered dependents provided by AESC. Monongahelas share of the costs was as follows:



|                           |  |                              |     |      |   |    
|-------------------------- |  | ---------------------------- | --- | ---- | - | ---
|                           |  | Three Months Ended March 31,
|(In millions)              |  | 2005                         |     | 2004
|Pension                    |  | $                            | 2.5 |      | $ | 2.3
|Medical and life insurance |  | $                            | 1.6 |      | $ | 1.5



NOTE 8: OTHER INCOME AND EXPENSES, NET



Other income and expenses, net represents non-operating income and expenses before income taxes. The following table summarizes Monongahelas other income and expenses, net:



|                          |  |                              |     |      |   |    
|------------------------- |  | ---------------------------- | --- | ---- | - | ---
|                          |  | Three Months Ended March 31,
|(In millions)             |  | 2005                         |     | 2004
|Equity in earnings of AGC |  | $                            | 1.7 |      | $ | 1.6
|Other                     |  |                              | 0.5 |      |   | 0.4
|                          |  |                              |     |      |   |    
|Total                     |  | $                            | 2.2 |      | $ | 2.0
|                          |  |                              |     |      |   |    



NOTE 9: COMMITMENTS AND CONTINGENCIES



Reference is made to Item 8, Note 19, Commitments and Contingencies, in the 2004 Annual Report on Form 10-K.



Environmental Matters and Litigation



Monongahela is subject to various laws, regulations, and uncertainties as to environmental matters. Compliance may require Monongahela to incur
substantial additional costs to modify or replace existing and proposed equipment and facilities that may adversely affect the cost of future operations.



Clean Air Act Matters: Allegheny currently meets applicable standards for particulate matter emissions at its generation stations through
the use of high-efficiency electrostatic precipitators, cleaned coal, flue-gas conditioning, optimization software and fuel combustion modifications and, at times, through reduction of output. From time to time, minor excursions of stack emission
opacity that are normal to fossil fuel operations are experienced and accommodated by the regulatory process.



Allegheny meets current emission standards for sulfur dioxide (SO2) by using scrubbers, burning low-sulfur coal, purchasing cleaned coal (which has lower sulfur content), blending low-sulfur coal with higher sulfur coal
and using emission allowances.



Alleghenys compliance
with the Clean Air Act of 1970 (the Clean Air Act) has required, and may require in the future, that Allegheny install expensive post-combustion control technologies on many of its generation stations. The Clean Air Interstate Rule
promulgated by the United States Environmental Protection Agency (the EPA) on March 10, 2005 may accelerate the need to install this equipment by phasing out a portion of currently available allowances.



The Clean Air Act mandates annual reductions of SO2and created a SO2emission allowance trading program. AE Supply and Monongahela comply with current SO2emission standards through a system-wide plan combining the use of emission controls, low sulfur fuel and emission allowances. Allegheny continues to study the use of allowances, additional emission controls and low sulfur fuel to



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



meet future SO2compliance obligations. Allegheny estimates that it may purchase allowances for up to 25,000 tons for 2005 and an average of approximately 100,000 tons per year for 2006 through 2008. Alleghenys
allowance needs, to a large extent, are affected at any given time by the amount of output produced and the type of fuel used by its generation facilities. Allegheny currently expects that its plan to increase its use of lower sulfur coal and
implement other environmental control improvements should reduce allowance purchase requirements over this time period.



In 1998, the EPA finalized its Nitrogen Oxide (NOx) State Implementation Plan (SIP) call rule (known as the NOx SIP
call), which addressed the regional transport of ground-level ozone and required the equivalent of a uniform 0.15 lb/mmBtu emission rate throughout a 22-state region, including Pennsylvania, Maryland and West Virginia. Compliance with the NOx
SIP call was required beginning in May 2004. Pennsylvania and Maryland implemented their respective SIP call rules in May 2003. West Virginias SIP call rules were effective as of May 2004.



AE Supply and Monongahela have completed installation of substantially all
NOx controls to meet the Pennsylvania, Maryland and West Virginia SIP calls. These NOx controls include selective catalytic reduction at the Harrison and Pleasants generation stations and selective noncatalytic reduction at the Hatfields Ferry
and Fort Martin generation stations, as well as burner modifications at the Mitchell generation station. The NOx compliance plan functions on a system-wide basis, similar to the SO2compliance plan. AE Supply and Monongahela also have the option, in some cases, to purchase alternate fuels or NOx allowances, if needed, to supplement their compliance strategies.
AE Supply estimates that its emission control activities, in concert with its inventory of banked allowances, will facilitate its compliance with NOx limits established by the SIP through 2008. Alleghenys allowance needs, to a large extent,
are affected at any given time by the amount of output produced and the type of fuel used by its generation facilities. Alleghenys capital expenditure forecast includes the expenditure of $3.5 million of capital costs during the 2005 through
2007 period for additional NOx emission controls.



Clean
Air Act Litigation:In August 2000, AE received a letter from the EPA requesting that it provide information and documentation relevant to the operation and maintenance of the following ten electric generation stations, which collectively
include 22 generation units: Albright, Armstrong, Fort Martin, Harrison, Hatfields Ferry, Mitchell, Pleasants, Rivesville, R. Paul Smith and Willow Island. AE Supply and Monongahela own these generation stations. The letter requested
information under Section 114 of the Clean Air Act to determine compliance with the Clean Air Act and related requirements, including potential application of the New Source Review (NSR) standards of the Clean Air Act, which can require
the installation of additional emission control equipment when the major modification of an existing facility results in an increase in emissions. AE provided responsive information to this and a subsequent request. A meeting between the EPA and AE
was held on July 16, 2003. At this time, AE is engaged in discussions with the EPA with respect to environmental matters, including NSR issues.



Similar inquiries have been made of other electric utilities and have resulted in enforcement proceedings in most cases. AE believes that its
subsidiaries generation facilities have been operated in accordance with the Clean Air Act and the rules implementing it. The experience of other energy companies, however, suggests that, in recent years, the EPA has narrowed its view
regarding the scope of the definition of routine maintenance under its rules, thereby broadening the range of actions subject to compliance with NSR standards. Section 114 information requests concerning facility modifications are often
followed by enforcement actions.



If NSR standards are applied
to Alleghenys generation stations, in addition to the possible imposition of fines, compliance would entail significant expenditures. There are two federal district court decisions interpreting the application of NSR standards to utilities,
the Ohio Edison decision and the Duke Energy decision. The Ohio Edison decision is favorable to the EPA. The Duke Energy decision supports the industrys understanding of NSR requirements. The Duke Energy decision was appealed to the United
States Court of Appeals for the Fourth Circuit and oral argument was held on February 3, 2005. A decision from the Fourth Circuit is expected within six months after the oral argument. The final Routine



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MONONGAHELA POWER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Maintenance, Repair and Replacement Rule (RMRR) released by the EPA is more consistent with the energy
industrys historical compliance approach. On December 24, 2003, the U.S. Court of Appeals for the District of Columbia Circuit issued an order to stay the RMRR, which was scheduled to go into effect on December 26, 2003. The stay delays
implementation of the RMRR. At this time, AE and its subsidiaries are not able to determine the effect that these actions may have on them.



On February 2, 2004, the EPA informed AE that it intended to provide the New York Attorney General, pursuant to his request, certain records that AE
provided to the EPA pursuant to its request under Section 114 of the Clean Air Act. On April 23, 2004, the Pennsylvania Department of Environmental Protection (PADEP) notified AE Supply that PADEP had requested that the EPA provide it
with these records.



On May 20, 2004, AE, AE Supply,
Monongahela and West Penn received a Notice of Intent to Sue Pursuant to Clean Air Act §7604 (the Notice) from the Attorneys General of New York, New Jersey and Connecticut and from PADEP. The Notice alleged that Allegheny made
major modifications to some of its West Virginia facilities in violation of the Prevention of Significant Deterioration (PSD) provisions of the Clean Air Act at the following coal-fired facilities: Albright Unit No. 3; Fort Martin Units
No. 1 and 2; Harrison Units No. 1, 2 and 3; Pleasants Units No. 1 and 2 and Willow Island Unit No. 2. The Notice also alleged PSD violations at the Armstrong, Hatfields Ferry and Mitchell generation stations in Pennsylvania and identifies
PADEP as the lead agency regarding those facilities. On September 8, 2004, AE, AE Supply, Monongahela and West Penn received a separate Notice of Intent to Sue from the Maryland Attorney General that essentially mirrored the previous Notice.



AE Supply and Monongahela filed a declaratory judgment action
against the Attorneys General of New York, Connecticut and New Jersey in federal district court in West Virginia on January 6, 2005. This action requests that the court declare that AE Supplys and Monongahelas coal-fired generation
facilities in Pennsylvania and West Virginia are in compliance with the Clean Air Act. The Attorneys General filed a motion to dismiss the declaratory judgment action. If the action is dismissed based upon their motion, the Attorneys General may
file an enforcement action against Allegheny in federal court in Pennsylvania. It is also possible that the EPA and other state authorities may join in the current declaratory judgment action or, if it is dismissed, a new action filed by the
Attorneys General.



On February 16, 2005, Citizens for
Pennsylvanias Future, an environmental group, sued Allegheny in the U.S. District Court for the Western District of Pennsylvania. The action alleges violations of opacity limits and particulate matter emission limits at the Hatfields
Ferry generation facility.



Allegheny intends to vigorously
pursue and defend against these matters but cannot predict their outcomes.



Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) Claim: On March 4, 1994, Monongahela and certain affiliated companies received notice that the EPA had
identified them as potentially responsible parties (PRPs) with respect to the Jacks Creek/Sitkin Smelting Superfund Site in Pennsylvania. Initially, approximately 175 PRPs were involved, however, the current number of active PRPs
has been reduced as a result of settlements with de minimis contributors and other contributors to the site. The costs of remediation will be shared by all past and active responsible parties. In 1999, a PRP group that included Monongahela and
certain affiliated companies entered into a consent order with the EPA to remediate the site. It is currently estimated that the total remediation costs to be borne by all of the responsible parties will not exceed $30.0 million. Monongahela has an
accrued liability representing its estimated share of the remediation costs as of March 31, 2005.



Claims Related to Alleged Asbestos Exposure: The Distribution Companies have been named as defendants, along with multiple other defendants,
in pending asbestos cases alleging bodily injury involving multiple plaintiffs and multiple sites. These suits have been brought mostly by seasonal



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MONONGAHELA POWER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



contractors employees and do not involve allegations of either the manufacture, sale or distribution of
asbestos-containing products by Allegheny. These asbestos suits arise out of historical operations and are related to the installation and removal of asbestos-containing materials at Alleghenys generation facilities. Alleghenys
historical operations were insured by various foreign and domestic insurers, including Lloyds of London. Asbestos-related litigation expenses have to date been reimbursed in full by recoveries from these historical insurers, and Allegheny
believes that it has sufficient insurance to respond fully to the asbestos suits. Certain insurers, however, have contested their obligations to pay for the future defense and settlement costs relating to the asbestos suits. Allegheny is currently
involved in two asbestos insurance-related actions, Certain Underwriters at Lloyds, London et al. v. Allegheny Energy, Inc. et al., Case No. 21-C-03-16733 (Washington County, Md.), and Monongahela Power Company et al. v. Certain
Underwriters at Lloyds London and London Market Companies, et al., Civil Action No. 03-C-281 (Monongalia County, W.Va.). The parties in these actions are seeking an allocation of responsibility for historic and potential future asbestos
liability.



In connection with a settlement, Allegheny will
continue to receive payments from one of its insurance companies in the amount of $625,000, payable on each of July 1, 2005 and 2006. As part of the settlement, Allegheny released this insurance company from potential liabilities associated with
claims against Allegheny alleging asbestos exposure. Allegheny does not believe that the existence or pendency of either the asbestos suits or the actions involving its insurance will have a material impact on its consolidated financial position,
results of operations or cash flows. Allegheny believes that it has established adequate reserves, net of insurance receivables and recoveries, to cover existing and future asbestos claims. As of March 31, 2005, Allegheny had 1,555 open cases
remaining. Allegheny intends to vigorously defend against these actions but cannot predict their outcomes.



Ordinary Course of Business: Monongahela is from time to time involved in litigation and other legal disputes in the ordinary course of
business. Monongahela is of the belief that there are no other legal proceedings that could have a material adverse effect on its business or financial condition.



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##### Table of Contents

THE POTOMAC EDISON COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                        |  |                              |         |      |   |        
|--------------------------------------- |  | ---------------------------- | ------- | ---- | - | -------
|                                        |  | Three Months Ended March 31,
|(In thousands)                          |  | 2005                         |         | 2004
|Operating revenues                      |  | $                            | 257,564 |      | $ | 247,169
|                                        |  |                             
|Operating expenses:                     |  |                              |         |      |   |        
|Purchased power and transmission        |  |                              | 177,800 |      |   | 171,620
|Deferred energy costs, net              |  |                              | 1,186   |      |   | 914    
|Operations and maintenance              |  |                              | 25,510  |      |   | 27,534 
|Depreciation and amortization           |  |                              | 10,656  |      |   | 9,741  
|Taxes other than income taxes           |  |                              | 9,293   |      |   | 8,893  
|                                        |  |                              |         |      |   |        
|Total operating expenses                |  |                              | 224,445 |      |   | 218,702
|                                        |  |                              |         |      |   |        
|Operating income                        |  |                              | 33,119  |      |   | 28,467 
|                                        |  |                             
|Other income and expenses, net (Note 7) |  |                              | 1,223   |      |   | 780    
|                                        |  |                             
|Interest expense                        |  |                              | 7,098   |      |   | 7,787  
|                                        |  |                              |         |      |   |        
|Income before income taxes              |  |                              | 27,244  |      |   | 21,460 
|                                        |  |                             
|Income tax expense                      |  |                              | 7,149   |      |   | 7,638  
|                                        |  |                              |         |      |   |        
|Net income                              |  | $                            | 20,095  |      | $ | 13,822 
|                                        |  |                              |         |      |   |        



See accompanying Notes
to Consolidated Financial Statements.



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THE POTOMAC EDISON COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                     |  |                              |         |   |      |   |         |  
|---------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                     |  | Three Months Ended March 31, |        
|(In thousands)                                       |  | 2005                         |         |   | 2004 |  
|Cash Flows From Operating Activities:                |  |                              |         |   |      |   |         |  
|Net income                                           |  | $                            | 20,095  |   |      | $ | 13,822  |  
|                                                     |  |                             
|Adjustments for non-cash charges and (credits):      |  |                              |         |   |      |   |         |  
|Depreciation and amortization                        |  |                              | 10,656  |   |      |   | 9,741   |  
|Deferred investment credit and income taxes, net     |  |                              | (1,781  | ) |      |   | 2,624   |  
|Deferred energy costs, net                           |  |                              | 1,186   |   |      |   | 914     |  
|Other, net                                           |  |                              | 418     |   |      |   | 126     |  
|                                                     |  |                             
|Changes in certain assets and liabilities:           |  |                              |         |   |      |   |         |  
|Accounts receivable, net                             |  |                              | (15,522 | ) |      |   | (14,609 | )
|Materials and supplies                               |  |                              | (1,095  | ) |      |   | (748    | )
|Taxes receivable/accrued, net                        |  |                              | 9,684   |   |      |   | 6,193   |  
|Accounts payable                                     |  |                              | 740     |   |      |   | 7,619   |  
|Accounts payable to affiliates, net                  |  |                              | (1,839  | ) |      |   | (18,153 | )
|Accrued interest                                     |  |                              | 6,375   |   |      |   | 5,763   |  
|Other, net                                           |  |                              | (3,806  | ) |      |   | 6,463   |  
|                                                     |  |                              |         |   |      |   |         |  
|Net cash from operating activities                   |  |                              | 25,111  |   |      |   | 19,755  |  
|                                                     |  |                              |         |   |      |   |         |  
|Cash Flows Used In Investing Activities:             |  |                              |         |   |      |   |         |  
|Capital expenditures                                 |  |                              | (14,662 | ) |      |   | (13,936 | )
|Decrease in restricted funds                         |  |                              | 9,217   |   |      |   |        |  
|                                                     |  |                              |         |   |      |   |         |  
|Net cash used in investing activities                |  |                              | (5,445  | ) |      |   | (13,936 | )
|                                                     |  |                              |         |   |      |   |         |  
|Cash Flows Used In Financing Activities:             |  |                              |         |   |      |   |         |  
|Note receivable from affiliate                       |  |                              | 6,389   |   |      |   |        |  
|Cash dividends paid on common stock                  |  |                              | (21,000 | ) |      |   | (8,730  | )
|                                                     |  |                              |         |   |      |   |         |  
|Net cash used in financing activities                |  |                              | (14,611 | ) |      |   | (8,730  | )
|                                                     |  |                              |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents |  |                              | 5,055   |   |      |   | (2,911  | )
|Cash and cash equivalents at beginning of period     |  |                              | 16,231  |   |      |   | 31,790  |  
|                                                     |  |                              |         |   |      |   |         |  
|Cash and cash equivalents at end of period           |  | $                            | 21,286  |   |      | $ | 28,879  |  
|                                                     |  |                              |         |   |      |   |         |  
|Supplemental Cash Flow Information:                  |  |                              |         |   |      |   |         |  
|Cash paid for interest (net of amount capitalized)   |  | $                            | 192     |   |      | $ | 1,716   |  



See accompanying Notes
to Consolidated Financial Statements.



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THE POTOMAC EDISON COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)



|                                         |  |               |           |   |                  |   |           |  
|---------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|(In thousands)                           |  | March 31,2005 |           |   | December 31,2004 |  
|ASSETS                                   |  |               |           |   |                  |   |           |  
|                                         |  |              
|Current Assets:                          |  |               |           |   |                  |   |           |  
|Cash and cash equivalents                |  | $             | 21,286    |   |                  | $ | 16,231    |  
|Accounts receivable:                     |  |               |           |   |                  |   |           |  
|Customer                                 |  |               | 74,442    |   |                  |   | 52,898    |  
|Unbilled utility revenue                 |  |               | 32,423    |   |                  |   | 40,057    |  
|Wholesale and other                      |  |               | 6,251     |   |                  |   | 4,634     |  
|Allowance for uncollectible accounts     |  |               | (2,694    | ) |                  |   | (2,689    | )
|Note receivable from affiliate           |  |               | 8,043     |   |                  |   | 14,432    |  
|Materials and supplies                   |  |               | 15,343    |   |                  |   | 14,248    |  
|Taxes receivable                         |  |               |          |   |                  |   | 7,618     |  
|Deferred income taxes                    |  |               | 3,859     |   |                  |   | 2,948     |  
|Prepaid taxes                            |  |               | 6,421     |   |                  |   | 8,759     |  
|Regulatory assets                        |  |               | 1,910     |   |                  |   | 352       |  
|Other                                    |  |               | 3,264     |   |                  |   | 13,888    |  
|                                         |  |               |           |   |                  |   |           |  
|Total current assets                     |  |               | 170,548   |   |                  |   | 173,376   |  
|                                         |  |               |           |   |                  |   |           |  
|Property, Plant and Equipment, Net:      |  |               |           |   |                  |   |           |  
|Transmission                             |  |               | 324,566   |   |                  |   | 323,916   |  
|Distribution                             |  |               | 1,174,998 |   |                  |   | 1,160,307 |  
|Other                                    |  |               | 74,253    |   |                  |   | 74,998    |  
|Accumulated depreciation                 |  |               | (475,798  | ) |                  |   | (470,008  | )
|                                         |  |               |           |   |                  |   |           |  
|Subtotal                                 |  |               | 1,098,019 |   |                  |   | 1,089,213 |  
|Construction work in progress            |  |               | 11,992    |   |                  |   | 14,475    |  
|                                         |  |               |           |   |                  |   |           |  
|Total property, plant and equipment, net |  |               | 1,110,011 |   |                  |   | 1,103,688 |  
|                                         |  |               |           |   |                  |   |           |  
|Other Assets:                            |  |               |           |   |                  |   |           |  
|Assets held for sale (Note 3)            |  |               | 10,758    |   |                  |   | 10,779    |  
|Other                                    |  |               | 9,546     |   |                  |   | 9,529     |  
|                                         |  |               |           |   |                  |   |           |  
|Total other assets                       |  |               | 20,304    |   |                  |   | 20,308    |  
|                                         |  |               |           |   |                  |   |           |  
|Deferred Charges:                        |  |               |           |   |                  |   |           |  
|Regulatory assets                        |  |               | 62,363    |   |                  |   | 64,022    |  
|Other                                    |  |               | 4,406     |   |                  |   | 4,186     |  
|                                         |  |               |           |   |                  |   |           |  
|Total deferred charges                   |  |               | 66,769    |   |                  |   | 68,208    |  
|                                         |  |               |           |   |                  |   |           |  
|Total Assets                             |  | $             | 1,367,632 |   |                  | $ | 1,365,580 |  
|                                         |  |               |           |   |                  |   |           |  



See accompanying Notes
to Consolidated Financial Statements.



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THE POTOMAC EDISON COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(unaudited)



|                                             |  |               |           |                  |   |          
|-------------------------------------------- |  | ------------- | --------- | ---------------- | - | ---------
|(In thousands)                               |  | March 31,2005 |           | December 31,2004
|LIABILITIES AND STOCKHOLDERS EQUITY         |  |               |           |                  |   |          
|                                             |  |              
|Current Liabilities:                         |  |               |           |                  |   |          
|Accounts payable                             |  | $             | 22,461    |                  | $ | 21,721   
|Accounts payable to affiliates, net          |  |               | 46,867    |                  |   | 48,968   
|Accrued taxes                                |  |               | 11,753    |                  |   | 9,687    
|Accrued interest                             |  |               | 10,027    |                  |   | 3,652    
|Other                                        |  |               | 23,605    |                  |   | 31,005   
|                                             |  |               |           |                  |   |          
|Total current liabilities                    |  |               | 114,713   |                  |   | 115,033  
|                                             |  |               |           |                  |   |          
|Long-term Debt (Note 2)                      |  |               | 417,947   |                  |   | 417,908  
|                                             |  |              
|Deferred Credits and Other Liabilities:      |  |               |           |                  |   |          
|Investment tax credit                        |  |               | 6,368     |                  |   | 6,614    
|Non-current income taxes payable             |  |               | 57,561    |                  |   | 57,561   
|Deferred income taxes                        |  |               | 183,434   |                  |   | 183,895  
|Obligations under capital leases             |  |               | 5,721     |                  |   | 6,210    
|Regulatory liabilities                       |  |               | 173,145   |                  |   | 168,862  
|Other                                        |  |               | 8,548     |                  |   | 8,397    
|                                             |  |               |           |                  |   |          
|Total deferred credits and other liabilities |  |               | 434,777   |                  |   | 431,539  
|                                             |  |               |           |                  |   |          
|Commitments and Contingencies (Note 10)      |  |               |           |                  |   |          
|                                             |  |              
|Stockholders Equity:                        |  |               |           |                  |   |          
|Common stock                                 |  |               | 224       |                  |   | 224      
|Other paid-in capital                        |  |               | 221,144   |                  |   | 221,144  
|Retained earnings                            |  |               | 178,826   |                  |   | 179,731  
|Accumulated other comprehensive income       |  |               | 1         |                  |   | 1        
|                                             |  |               |           |                  |   |          
|Total stockholders equity                   |  |               | 400,195   |                  |   | 401,100  
|                                             |  |               |           |                  |   |          
|Total Liabilities and Stockholders Equity   |  | $             | 1,367,632 |                  | $ | 1,365,580
|                                             |  |               |           |                  |   |          



See accompanying Notes
to Consolidated Financial Statements.



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THE POTOMAC EDISON COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



|         |  |                                                                  |  |         
|-------- |  | ---------------------------------------------------------------- |  | --------
|Note No. |  |                                                                  |  | Page No.
|1        |  | Basis of Presentation                                            |  | 52      
|         |  |                                                                 
|2        |  | Debt                                                             |  | 53      
|         |  |                                                                 
|3        |  | Assets Held for Sale                                             |  | 53      
|         |  |                                                                 
|4        |  | Intangible Assets                                                |  | 53      
|         |  |                                                                 
|5        |  | Asset Retirement Obligations (AROs)                            |  | 53      
|         |  |                                                                 
|6        |  | Pension Benefits and Postretirement Benefits Other Than Pensions |  | 54      
|         |  |                                                                 
|7        |  | Other Income and Expenses, Net                                   |  | 54      
|         |  |                                                                 
|8        |  | Letters of Credit                                                |  | 54      
|         |  |                                                                 
|9        |  | Variable Interest Entities                                       |  | 54      
|         |  |                                                                 
|10       |  | Commitments and Contingencies                                    |  | 55      



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THE POTOMAC EDISON COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 1: BASIS OF PRESENTATION



The Potomac Edison Company, together with its consolidated subsidiaries (Potomac Edison), is a regulated wholly owned subsidiary of Allegheny Energy, Inc. (AE, and together with its consolidated subsidiaries,
Allegheny). Potomac Edison, along with its regulated utility affiliates, Monongahela Power Company (Monongahela) and West Penn Power Company, collectively doing business as Allegheny Power, operates electric and natural gas
transmission and distribution (T&D) systems. Potomac Edison operates an electric T&D system in Maryland, Virginia and West Virginia. Potomac Edison currently operates under a single business segment, Delivery and Services.



Potomac Edison is subject to regulation by the Securities and
Exchange Commission (SEC), the Maryland Public Service Commission, the Public Service Commission of West Virginia, the Virginia State Corporation Commission and the Federal Energy Regulatory Commission.



Allegheny Energy Services Corporation (AESC) is a wholly owned
subsidiary of AE that employs substantially all of the people who work at Potomac Edison and its subsidiaries.



The accompanying unaudited interim financial statements of Potomac Edison should be read in conjunction with the Combined Annual Report on Form 10-K of
AE, Monongahela, Potomac Edison and Allegheny Generating Company (AGC) for the year ended December 31, 2004 (the 2004 Annual Report on Form 10-K).



The interim financial statements included herein have been prepared by Potomac Edison, without audit, pursuant to the rules
and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed
or omitted. Management believes that the disclosures are adequate to make the information presented not misleading.



In the opinion of management, the unaudited interim financial statements included herein reflect all normal recurring adjustments that are necessary for a
fair presentation of the results of operations for the three months ended March 31, 2005 and 2004, cash flows for the three months ended March 31, 2005 and 2004 and financial position at March 31, 2005 and December 31, 2004. Because of the seasonal
nature of Potomac Edisons utility operations, results for the three months ended March 31, 2005 are not necessarily indicative of results that may be expected for the year ending December 31, 2005. For more information on the seasonal nature
of Alleghenys utility operations, see Part I, Item 1, Risk Factors, Other Risk Factors Associated with Our Business, in the 2004 Annual Report on Form 10-K. Certain amounts in the financial statements have been reclassified for
comparative purposes.



Federal and State Income Taxes.
The provision for income tax expense for earnings from operations, and/or the income tax benefit for losses from operations, results in an effective income tax rate that differs from the federal statutory rate of 35%, principally due to allocation
of consolidated tax savings, state income taxes, tax credits, the effects of utility rate making and certain non-deductible expenses.



Allegheny allocates income tax expense or benefit to its subsidiaries pursuant to its consolidated tax sharing agreement. This corporate allocation may
cause significant fluctuations in the effective quarterly and year to date tax rates from the statutory rates for certain of Alleghenys subsidiaries, depending on the level of pre-tax income.





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THE POTOMAC EDISON COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 2: DEBT



Potomac Edison did
not issue or redeem any debt during the three months ended March 31, 2005.



As of March 31, 2005, contractual maturities of long-term debt for the remainder of 2005 and for full years thereafter, excluding unamortized discounts of $2.1 million, were as follows:



|                     |  |      |   |      |   |       |  |      |   |      |   |            |  |       |   |  |   |       |  |   |      
|-------------------- |  | ---- | - | ---- | - | ----- |  | ---- | - | ---- | - | ---------- |  | ----- | - |  | - | ----- |  | - | -----
|(In millions)        |  | 2005 |   | 2006 |   | 2007  |  | 2008 |   | 2009 |   | Thereafter |  | Total
|First Mortgage Bonds |  | $    |  |      | $ |      |  | $    |  |      | $ |           |  | $     |  |  | $ | 320.0 |  | $ | 320.0
|Medium-Term Notes    |  |      |  |      |   | 100.0 |  |      |  |      |   |           |  |       |  |  |   |      |  |   | 100.0
|                     |  |      |   |      |   |       |  |      |   |      |   |            |  |       |   |  |   |       |  |   |      
|Total                |  | $    |  |      | $ | 100.0 |  | $    |  |      | $ |           |  | $     |  |  | $ | 320.0 |  | $ | 420.0
|                     |  |      |   |      |   |       |  |      |   |      |   |            |  |       |   |  |   |       |  |   |      



Substantially all of
the properties of Potomac Edison are held subject to the lien securing its first mortgage bonds.



NOTE 3: ASSETS HELD FOR SALE



Potomac Edison has entered into an agreement to sell its Hagerstown, Maryland property for $10.8 million in net cash proceeds. Closing of the sale is expected to occur in 2005. This property is reported as an asset held for sale on the
Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004.



NOTE 4: INTANGIBLE ASSETS



Intangible assets included in Property, Plant and Equipment, Net on the Consolidated Balance Sheets were as follows:



|                          |  |                     |      |                         |   |                     |  |                         |      |  |   |     
|------------------------- |  | ------------------- | ---- | ----------------------- | - | ------------------- |  | ----------------------- | ---- |  | - | ----
|                          |  | March 31, 2005      |      | December 31, 2004      
|(In millions)             |  | GrossCarryingAmount |      | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|Land easements, amortized |  | $                   | 55.6 |                         | $ | 15.1                |  | $                       | 55.2 |  | $ | 14.9
|Software                  |  |                     | 0.3  |                         |   | 0.2                 |  |                         | 0.3  |  |   | 0.2 
|                          |  |                     |      |                         |   |                     |  |                         |      |  |   |     
|Total                     |  | $                   | 55.9 |                         | $ | 15.3                |  | $                       | 55.5 |  | $ | 15.1
|                          |  |                     |      |                         |   |                     |  |                         |      |  |   |     



Amortization expense
for intangible assets was $0.2 million for the three months ended March 31, 2005 and 2004, respectively. Amortization expense is estimated to be $0.8 million for 2005 through 2009.



NOTE 5: ASSET RETIREMENT OBLIGATIONS (AROs)



Potomac Edison recorded AROs related to underground and aboveground storage tanks. Potomac Edison also has identified a number of AROs associated with certain of its transmission assets that have not been recorded,
because the fair value of these obligations cannot be reasonably estimated, primarily due to the indeterminate lives of the assets.



Potomac Edisons ARO balances were $0.2 million at March 31, 2005 and December 31, 2004, respectively.



Estimated removal costs of $165.3 million and $162.3 million at March 31,
2005 and December 31, 2004, respectively, that are not qualified as AROs are being recovered through the ratemaking process. These costs are recorded by Potomac Edison as regulatory liabilities.



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THE POTOMAC EDISON COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



In March 2005, the FASB issued FASB Interpretation No. 47 (FIN
47), which is an interpretation of SFAS No. 143. FIN 47 requires entities with an ARO that is conditional on a future event to record an ARO, even if the event has not yet occurred. The obligation to perform the asset retirement is
unconditional even though uncertainty exists as to the timing and method of settlement due to the existence of a conditional event. This interpretation is effective for fiscal years ending after December 15, 2005. Retrospective application for
interim periods is permitted but is not required. Obligations recorded as a result of the adoption of FIN 47 will be recorded as a cumulative effect due to a change in accounting principle. Potomac Edison currently is evaluating the impact of FIN
47.



NOTE 6: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS



Potomac Edison is responsible for its proportionate share of the net periodic cost for pension and postretirement benefits other than pensions
(principally health care and life insurance) for employees and covered dependents provided by AESC. Potomac Edisons share of the costs was as follows:



|                           |  |                              |     |      |   |    
|-------------------------- |  | ---------------------------- | --- | ---- | - | ---
|                           |  | Three Months Ended March 31,
|(In millions)              |  | 2005                         |     | 2004
|Pension                    |  | $                            | 1.3 |      | $ | 1.2
|Medical and life insurance |  | $                            | 1.2 |      | $ | 1.1



NOTE 7: OTHER INCOME AND EXPENSES, NET



Other income and expenses, net, represents non-operating income and expenses before income taxes. The following table summarizes Potomac Edisons other income and expenses, net:



|                 |  |                              |     |      |   |    
|---------------- |  | ---------------------------- | --- | ---- | - | ---
|                 |  | Three Months Ended March 31,
|(In millions)    |  | 2005                         |     | 2004
|Premium Services |  | $                            | 0.6 |      | $ | 0.2
|Interest income  |  |                              | 0.2 |      |   | 0.1
|Other            |  |                              | 0.4 |      |   | 0.5
|                 |  |                              |     |      |   |    
|Total            |  | $                            | 1.2 |      | $ | 0.8
|                 |  |                              |     |      |   |    



NOTE 8: LETTERS OF CREDIT



Potomac Edison had a $9.5 million letter of credit outstanding at March 31, 2005 under AEs revolving credit facility to support an energy conservation contract. This letter of credit expires in July 2005.



NOTE 9: VARIABLE INTEREST ENTITIES



Potomac Edison has a long-term electricity purchase contract with an unrelated independent power producer (IPP) that represents a variable interest under FASBs Interpretation No. 46 (Revised December 2003)
Consolidation of Variable Interest Entities (FIN 46R). Potomac Edison continues to pursue, but has been unable to obtain, certain information from the IPP necessary to determine if the variable interest entity
(VIE) should be consolidated under FIN 46R.



Potomac Edison had power purchases from this IPP in the amount of $25.6 million and $25.1 million for the three months ended March 31, 2005 and 2004, respectively. Potomac Edison recovers the full amount of the cost of the applicable power
contract in its rates charged to consumers. Potomac Edison is not subject to any risk of loss associated with the VIE, because it does not have any obligation to the IPP other than to purchase the power that the IPP produces according to the terms
of the applicable electricity purchase contract.



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THE POTOMAC EDISON COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 10: COMMITMENTS AND CONTINGENCIES



Reference is made to Item 8, Note 18, Commitments and Contingencies, in the 2004 Annual Report on Form 10-K.



Environmental Matters and Litigation



Potomac Edison is subject to various laws, regulations and uncertainties as to environmental matters. Compliance may require Potomac Edison to incur
substantial additional costs to modify or replace existing and proposed equipment and facilities that may adversely affect the cost of future operations.



Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) Claim: On March 4, 1994, Potomac Edison and
certain affiliated companies received notice that the EPA had identified them as potentially responsible parties (PRPs) with respect to the Jacks Creek/Sitkin Smelting Superfund Site in Pennsylvania. Initially, approximately 175
PRPs were involved, however, the current number of active PRPs has been reduced as a result of settlements with de minimis contributors and other contributors to the site. The costs of remediation will be shared by all past and active responsible
parties. In 1999, a PRP group that included Potomac Edison and certain affiliated companies entered into a consent order with the EPA to remediate the site. It is currently estimated that the total remediation costs to be borne by all of the
responsible parties will not exceed $30.0 million. Potomac Edison has an accrued liability representing its estimated share of the remediation costs as of March 31, 2005.



Claims Related to Alleged Asbestos Exposure: The Distribution Companies have been named as defendants, along
with multiple other defendants, in pending asbestos cases alleging bodily injury involving multiple plaintiffs and multiple sites. These suits have been brought mostly by seasonal contractors employees and do not involve allegations of either
the manufacture, sale or distribution of asbestos-containing products by Allegheny. These asbestos suits arise out of historical operations and are related to the installation and removal of asbestos-containing materials at Alleghenys
generation facilities. Alleghenys historical operations were insured by various foreign and domestic insurers, including Lloyds of London. Asbestos-related litigation expenses have to date been reimbursed in full by recoveries from these
historical insurers, and Allegheny believes that it has sufficient insurance to respond fully to the asbestos suits. Certain insurers, however, have contested their obligations to pay for the future defense and settlement costs relating to the
asbestos suits. Allegheny is currently involved in two asbestos insurance-related actions, Certain Underwriters at Lloyds, London et al. v. Allegheny Energy, Inc. et al., Case No. 21-C-03-16733 (Washington County, Md.), and
Monongahela Power Company et al. v. Certain Underwriters at Lloyds London and London Market Companies, et al., Civil Action No. 03-C-281 (Monongalia County, W.Va.). The parties in these actions are seeking an allocation of
responsibility for historic and potential future asbestos liability.



In connection with a settlement, Allegheny will continue to receive payments from one of its insurance companies in the amount of $625,000, payable on each of July 1, 2005 and 2006. As part of the settlement, Allegheny released this
insurance company from potential liabilities associated with claims against Allegheny alleging asbestos exposure. Allegheny does not believe that the existence or pendency of either the asbestos suits or the actions involving its insurance will have
a material impact on its consolidated financial position, results of operations or cash flows. Allegheny believes that it has established adequate reserves, net of insurance receivables and recoveries, to cover existing and future asbestos claims.
As of March 31, 2005, Allegheny had 1,555 open cases remaining. Allegheny intends to vigorously defend against these actions but cannot predict their outcomes.



Ordinary Course of Business: Potomac Edison is, from time to time, involved in litigation and other legal disputes in the ordinary course
of business. Potomac Edison is of the belief that there are no other legal proceedings that could have a material adverse effect on its business or financial condition.



55



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##### Table of Contents

ALLEGHENY GENERATING COMPANY

STATEMENTS OF OPERATIONS

(unaudited)



|                              |  |                              |        |      |   |       
|----------------------------- |  | ---------------------------- | ------ | ---- | - | ------
|                              |  | Three Months Ended March 31,
|(In thousands)                |  | 2005                         |        | 2004
|Operating revenues            |  | $                            | 16,859 |      | $ | 17,157
|                              |  |                             
|Operating expenses:           |  |                              |        |      |   |       
|Operations and maintenance    |  |                              | 1,137  |      |   | 1,255 
|Depreciation                  |  |                              | 4,237  |      |   | 4,251 
|Taxes other than income taxes |  |                              | 737    |      |   | 812   
|                              |  |                              |        |      |   |       
|Total operating expenses      |  |                              | 6,111  |      |   | 6,318 
|                              |  |                              |        |      |   |       
|Operating income              |  |                              | 10,748 |      |   | 10,839
|                              |  |                             
|Other income, net             |  |                              | 53     |      |   | 15    
|                              |  |                             
|Interest expense              |  |                              | 1,955  |      |   | 2,323 
|                              |  |                              |        |      |   |       
|Income before income taxes    |  |                              | 8,846  |      |   | 8,531 
|                              |  |                             
|Income tax expense            |  |                              | 1,482  |      |   | 1,562 
|                              |  |                              |        |      |   |       
|Net income                    |  | $                            | 7,364  |      | $ | 6,969 
|                              |  |                              |        |      |   |       



See accompanying Notes
to Financial Statements.



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ALLEGHENY GENERATING COMPANY

STATEMENTS OF CASH FLOWS

(unaudited)



|                                                        |  |                              |         |   |      |   |        |  
|------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------ | -
|                                                        |  | Three Months Ended March 31, |        
|(In thousands)                                          |  | 2005                         |         |   | 2004 |  
|Cash Flows From Operating Activities:                   |  |                              |         |   |      |   |        |  
|Net income                                              |  | $                            | 7,364   |   |      | $ | 6,969  |  
|                                                        |  |                             
|Adjustments for non-cash charges and (credits):         |  |                              |         |   |      |   |        |  
|Depreciation                                            |  |                              | 4,237   |   |      |   | 4,251  |  
|Deferred investment credit and income taxes, net        |  |                              | (1,776  | ) |      |   | (1,501 | )
|Other, net                                              |  |                              | 72      |   |      |   | 71     |  
|                                                        |  |                             
|Changes in certain assets and liabilities:              |  |                              |         |   |      |   |        |  
|Accounts receivable due from/payable to affiliates, net |  |                              | 1,577   |   |      |   | 1,652  |  
|Materials and supplies                                  |  |                              | (88     | ) |      |   | 58     |  
|Taxes receivable/accrued, net                           |  |                              | 4,318   |   |      |   | 909    |  
|Accounts payable                                        |  |                              | 424     |   |      |   | 1,050  |  
|Accrued interest                                        |  |                              | (1,719  | ) |      |   | (1,719 | )
|Other, net                                              |  |                              | 207     |   |      |   | 214    |  
|                                                        |  |                              |         |   |      |   |        |  
|Net cash from operating activities                      |  |                              | 14,616  |   |      |   | 11,954 |  
|                                                        |  |                              |         |   |      |   |        |  
|Cash Flows Used In Investing Activities:                |  |                              |         |   |      |   |        |  
|Capital expenditures                                    |  |                              | (2,780  | ) |      |   | (1,948 | )
|                                                        |  |                              |         |   |      |   |        |  
|Cash Flows Used In Financing Activities:                |  |                              |         |   |      |   |        |  
|Note payable to parent                                  |  |                              | (10,000 | ) |      |   |       |  
|Cash dividends paid on common stock                     |  |                              |        |   |      |   | (5,500 | )
|                                                        |  |                              |         |   |      |   |        |  
|Net cash used in financing activities                   |  |                              | (10,000 | ) |      |   | (5,500 | )
|                                                        |  |                              |         |   |      |   |        |  
|Net increase in cash and cash equivalents               |  |                              | 1,836   |   |      |   | 4,506  |  
|Cash and cash equivalents at beginning of period        |  |                              | 7,500   |   |      |   | 2,272  |  
|                                                        |  |                              |         |   |      |   |        |  
|Cash and cash equivalents at end of period              |  | $                            | 9,336   |   |      | $ | 6,778  |  
|                                                        |  |                              |         |   |      |   |        |  
|Supplemental Cash Flow Information:                     |  |                              |         |   |      |   |        |  
|Cash paid for interest                                  |  | $                            | 3,603   |   |      | $ | 3,970  |  



See accompanying Notes
to Financial Statements.



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##### Table of Contents

ALLEGHENY GENERATING COMPANY

BALANCE SHEETS

(unaudited)



|                                         |  |               |          |   |                  |   |          |  
|---------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|(In thousands)                           |  | March 31,2005 |          |   | December 31,2004 |  
|ASSETS                                   |  |               |          |   |                  |   |          |  
|                                         |  |              
|Current Assets:                          |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                |  | $             | 9,336    |   |                  | $ | 7,500    |  
|Materials and supplies                   |  |               | 1,519    |   |                  |   | 1,431    |  
|Other                                    |  |               | 173      |   |                  |   | 260      |  
|                                         |  |               |          |   |                  |   |          |  
|Total current assets                     |  |               | 11,028   |   |                  |   | 9,191    |  
|                                         |  |               |          |   |                  |   |          |  
|Property, Plant and Equipment, Net:      |  |               |          |   |                  |   |          |  
|Generation                               |  |               | 779,956  |   |                  |   | 782,666  |  
|Transmission                             |  |               | 42,857   |   |                  |   | 43,642   |  
|Other                                    |  |               | 3,197    |   |                  |   | 3,219    |  
|Accumulated depreciation                 |  |               | (303,724 | ) |                  |   | (303,745 | )
|                                         |  |               |          |   |                  |   |          |  
|Subtotal                                 |  |               | 522,286  |   |                  |   | 525,782  |  
|Construction work in progress            |  |               | 15,409   |   |                  |   | 13,370   |  
|                                         |  |               |          |   |                  |   |          |  
|Total property, plant and equipment, net |  |               | 537,695  |   |                  |   | 539,152  |  
|                                         |  |               |          |   |                  |   |          |  
|Deferred Charges:                        |  |               |          |   |                  |   |          |  
|Regulatory assets                        |  |               | 8,690    |   |                  |   | 8,752    |  
|Other                                    |  |               | 101      |   |                  |   | 102      |  
|                                         |  |               |          |   |                  |   |          |  
|Total deferred charges                   |  |               | 8,791    |   |                  |   | 8,854    |  
|                                         |  |               |          |   |                  |   |          |  
|Total Assets                             |  | $             | 557,514  |   |                  | $ | 557,197  |  
|                                         |  |               |          |   |                  |   |          |  



See accompanying Notes
to Financial Statements.



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##### Table of Contents

ALLEGHENY GENERATING COMPANY

BALANCE SHEETS (continued)

(unaudited)



|                                             |  |               |         |                  |   |        
|-------------------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|(In thousands)                               |  | March 31,2005 |         | December 31,2004
|LIABILITIES AND STOCKHOLDERS EQUITY         |  |               |         |                  |   |        
|                                             |  |              
|Current Liabilities:                         |  |               |         |                  |   |        
|Accounts payable                             |  | $             | 450     |                  | $ | 26     
|Accounts payable to affiliates, net          |  |               | 2,078   |                  |   | 501    
|Accrued taxes                                |  |               | 7,395   |                  |   | 3,077  
|Accrued interest                             |  |               | 573     |                  |   | 2,292  
|Other                                        |  |               | 121     |                  |   |       
|                                             |  |               |         |                  |   |        
|Total current liabilities                    |  |               | 10,617  |                  |   | 5,896  
|                                             |  |               |         |                  |   |        
|Long-term Debt :                             |  |               |         |                  |   |        
|Long-term debt (Note 2)                      |  |               | 99,401  |                  |   | 99,393 
|Long-term note payable to parent             |  |               | 5,000   |                  |   | 15,000 
|                                             |  |               |         |                  |   |        
|Total long-term debt                         |  |               | 104,401 |                  |   | 114,393
|                                             |  |               |         |                  |   |        
|Deferred Credits and Other Liabilities:      |  |               |         |                  |   |        
|Investment tax credit                        |  |               | 38,263  |                  |   | 38,593 
|Non-current income taxes payable             |  |               | 17,544  |                  |   | 17,544 
|Deferred income taxes                        |  |               | 154,476 |                  |   | 155,712
|Regulatory liabilities                       |  |               | 24,361  |                  |   | 24,571 
|                                             |  |               |         |                  |   |        
|Total deferred credits and other liabilities |  |               | 234,644 |                  |   | 236,420
|                                             |  |               |         |                  |   |        
|Commitments and Contingencies (Note 4)       |  |               |         |                  |   |        
|                                             |  |              
|Stockholders Equity:                        |  |               |         |                  |   |        
|Common stock                                 |  |               | 1       |                  |   | 1      
|Other paid-in capital                        |  |               | 172,669 |                  |   | 172,669
|Retained earnings                            |  |               | 35,182  |                  |   | 27,818 
|                                             |  |               |         |                  |   |        
|Total stockholders equity                   |  |               | 207,852 |                  |   | 200,488
|                                             |  |               |         |                  |   |        
|Total Liabilities and Stockholders Equity   |  | $             | 557,514 |                  | $ | 557,197
|                                             |  |               |         |                  |   |        



See accompanying Notes
to Financial Statements.



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##### Table of Contents

ALLEGHENY GENERATING COMPANY

NOTES TO FINANCIAL STATEMENTS

(unaudited)



|         |  |                               |  |         
|-------- |  | ----------------------------- |  | --------
|Note No. |  |                               |  | Page No.
|1        |  | Basis of Presentation         |  | 61      
|         |  |                              
|2        |  | Debt                          |  | 61      
|         |  |                              
|3        |  | Intangible Assets             |  | 62      
|         |  |                              
|4        |  | Commitments and Contingencies |  | 62      



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##### Table of Contents

ALLEGHENY GENERATING COMPANY

NOTES TO FINANCIAL STATEMENTS

(unaudited)



NOTE 1: BASIS OF PRESENTATION



Allegheny Energy Supply Company, LLC (AE Supply) and Monongahela Power Company (Monongahela and together with AE Supply, the Parents), own 100% of Allegheny Generating Company (AGC). AE Supply
owns 77.03% and Monongahela owns 22.97% of AGC. AGC owns an undivided 40% interest (985 megawatts (MW)) in the 2,463 MW pumped storage, hydroelectric station in Bath County, Virginia, operated by the 60% owner, Virginia Electric and
Power Company, a nonaffiliated utility. AGC sells its generation capacity to its Parents. AGC operates under a single business segment, Generation and Marketing.



AGC is subject to regulation by the Securities and Exchange Commission (SEC), the Virginia State Corporation
Commission and the Federal Energy Regulatory Commission.



Allegheny Energy Services Corporation is a wholly owned subsidiary of AE that employs substantially all of the people who work at AGC.



The accompanying unaudited interim financial statements of AGC should be read in conjunction with the Combined Annual Report on the combined 2004 Form
10-K of AE, Monongahela, Potomac Edison and AGC for the year ended December 31, 2004 (the 2004 Annual Report on Form 10-K).



The interim financial statements included herein have been prepared by Allegheny Generating Company, without audit, pursuant to the rules and regulations
of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted.
Management believes that the disclosures are adequate to make the information presented not misleading.



In the opinion of management, the unaudited interim financial statements included herein reflect all normal recurring adjustments that are necessary for a
fair presentation of the results of operations for the three months ended March 31, 2005 and 2004, cash flows for the three months ended March 31, 2005 and 2004 and financial position at March 31, 2005 and December 31, 2004.



Federal and State Income Taxes. The provision for income tax expense
for earnings from operations, and/or the income tax benefit for losses from operations, results in an effective income tax rate that differs from the federal statutory rate of 35%, principally due to allocation of consolidated tax savings, state
income taxes, tax credits, the effects of utility rate making and certain non-deductible expenses.



Allegheny allocates income tax expense or benefit to its subsidiaries pursuant to its consolidated tax sharing agreement. This corporate allocation may
cause significant fluctuations in the effective quarterly and year to date tax rates from the statutory rates for certain of Alleghenys subsidiaries, depending on the level of pre-tax profitability.



NOTE 2: DEBT



AGC did not issue
any debt during the three months ended March 31, 2005. AGC repaid $10.0 million of its note payable to AE Supply during the three months ended March 31, 2005.



As of March 31, 2005, contractual maturities of long-term debt for the remainder of 2005 and for full years thereafter,
excluding unamortized debt discounts of $0.6 million, are as follows:



|              |  |      |   |      |   |      |  |      |   |      |   |            |  |       |   |  |   |       |  |   |      
|------------- |  | ---- | - | ---- | - | ---- |  | ---- | - | ---- | - | ---------- |  | ----- | - |  | - | ----- |  | - | -----
|(In millions) |  | 2005 |   | 2006 |   | 2007 |  | 2008 |   | 2009 |   | Thereafter |  | Total
|Debentures    |  | $    |  |      | $ |     |  | $    |  |      | $ |           |  | $     |  |  | $ | 100.0 |  | $ | 100.0
|              |  |      |   |      |   |      |  |      |   |      |   |            |  |       |   |  |   |       |  |   |      



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##### Table of Contents

ALLEGHENY GENERATING COMPANY

NOTES TO FINANCIAL STATEMENTS

(unaudited)



NOTE 3: INTANGIBLE ASSETS



Intangible assets included in Property, Plant and Equipment, Net on the Consolidated Balance Sheets were as follows:



|                          |  |                     |     |                         |   |                     |  |                         |     |  |   |    
|------------------------- |  | ------------------- | --- | ----------------------- | - | ------------------- |  | ----------------------- | --- |  | - | ---
|                          |  | March 31, 2005      |     | December 31, 2004      
|(In millions)             |  | GrossCarryingAmount |     | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|Land easements, amortized |  | $                   | 1.4 |                         | $ | 0.7                 |  | $                       | 1.4 |  | $ | 0.7
|Software                  |  |                     | 0.2 |                         |   | 0.1                 |  |                         | 0.2 |  |   | 0.1
|                          |  |                     |     |                         |   |                     |  |                         |     |  |   |    
|Total                     |  | $                   | 1.6 |                         | $ | 0.8                 |  | $                       | 1.6 |  | $ | 0.8
|                          |  |                     |     |                         |   |                     |  |                         |     |  |   |    



Amortization expense
for intangible assets was not material for the three months ended March 31, 2005 and 2004, respectively. Annual amortization expense for 2005 through 2009 is not expected to be material.



NOTE 4: COMMITMENTS AND CONTINGENCIES



Reference is made to Item 8, Note 14, Commitments and Contingencies, in the 2004 Annual Report on Form 10-K.



Ordinary Course of Business



AGC is, from time to time, involved in litigation and other legal disputes in the ordinary course of business. AGC is of the belief that there are no
other legal proceedings that could have a material effect on its business or financial condition.



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion and analysis should be read in conjunction with the Financial Statements and Notes to Financial Statements included in this
report, as well as the Financial Statements and Supplementary Data and Managements Discussion and Analysis of Financial Condition and Results of Operations included in the 2004 Annual Report on Form 10-K.



Forward-Looking Statements



In addition to historical information, this report contains a number of
forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as anticipate, expect, project, intend, plan, believe and words and terms of similar substance used in connection with any discussion of future
plans, actions or events identify forward-looking statements. These include statements with respect to:



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | PLR and power supply contracts;
| | - |  | -------------------------------



| |  |  | results of litigation;
| | - |  | ----------------------



| |  |  | results of operations;
| | - |  | ----------------------



| |  |  | internal controls and procedures;
| | - |  | ---------------------------------



| |  |  | capital expenditures;
| | - |  | ---------------------



| |  |  | status and condition of plants and equipment;
| | - |  | ---------------------------------------------



| |  |  | regulatory matters; and
| | - |  | -----------------------



| |  |  | accounting issues.
| | - |  | ------------------



Forward-looking statements involve estimates, expectations and projections and, as a result, are subject to risks and uncertainties. There can be no
assurance that actual results will not differ materially from expectations. Actual results have varied materially and unpredictably from past expectations.



Factors that could cause actual results to differ materially include, among others, the following:



| |  |  | changes in the price of power and fuel for electric generation;
| | - |  | ---------------------------------------------------------------



| |  |  | general economic and business conditions;
| | - |  | -----------------------------------------



| |  |  | changes in access to capital markets;
| | - |  | -------------------------------------



| |  |  | complications or other factors that make it difficult or impossible to obtain necessary lender consents or regulatory authorizations on a timely basis;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | environmental regulations;
| | - |  | --------------------------



| |  |  | the results of regulatory proceedings, including proceedings related to rates;
| | - |  | ------------------------------------------------------------------------------



| |  |  | changes in industry capacity, development and other activities by Alleghenys competitors;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | changes in the weather and other natural phenomena;
| | - |  | ---------------------------------------------------



63



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##### Table of Contents

| |  |  | changes in the underlying inputs and assumptions, including market conditions, used to estimate the fair values of commodity contracts;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 and gas transportation systems and their constraints or availability;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | changes in PJM, including changes to participant rules and tariffs;
| | - |  | -------------------------------------------------------------------



| |  |  | the effect of accounting guidance issued periodically by accounting standard-setting bodies; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the continuing effects of global instability, terrorism and war.
| | - |  | ----------------------------------------------------------------



A detailed discussion of certain factors affecting the risk profile of the registrants is provided under the caption Item 1, Risk Factors, in
the 2004 Annual Report on Form 10-K.



64



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ALLEGHENY RESULTS OF OPERATIONS



Overview



Allegheny is an integrated energy business that owns and operates electric generation facilities and delivers electric and natural gas services to
customers in Pennsylvania, West Virginia, Maryland, Virginia and Ohio. AE, Alleghenys parent holding company, was incorporated in Maryland in 1925 and is registered as a holding company under PUHCA. Allegheny operates its business primarily
through AEs various directly and indirectly owned subsidiaries. These operations are aligned in two operating segments, the Delivery and Services segment and the Generation and Marketing segment. Additional information regarding the
composition and activities of these segments is included in the 2004 Annual Report on Form 10-K.



65



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ALLEGHENY ENERGY, INC.CONSOLIDATED RESULTS OF OPERATIONS



Income (Loss) Summary



|                                                                                   |  |                       |        |   |                          |   |        |              |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------- |  | --------------------- | ------ | - | ------------------------ | - | ------ | ------------ |  | - | ------ | - |  | - | ------ | -
|(In millions) Three months ended March 31,
2005                                    |  | Delivery and Services |        |   | Generation and Marketing |   |        | Eliminations |  |   | Total  |  
|Operating revenues                                                                 |  | $                     | 739.4  |   |                          | $ | 416.9  |              |  | $ | (402.3 | ) |  | $ | 754.0  |  
|Fuel consumed in electric generation                                               |  |                       |       |   |                          |   | (173.9 | )            |  |   |       |   |  |   | (173.9 | )
|Purchased power and transmission                                                   |  |                       | (485.1 | ) |                          |   | (19.8  | )            |  |   | 400.1  |   |  |   | (104.8 | )
|Deferred energy costs, net                                                         |  |                       | (1.2   | ) |                          |   |       |              |  |   |       |   |  |   | (1.2   | )
|Operations and maintenance                                                         |  |                       | (84.5  | ) |                          |   | (80.3  | )            |  |   | 2.2    |   |  |   | (162.6 | )
|Depreciation and amortization                                                      |  |                       | (38.1  | ) |                          |   | (38.3  | )            |  |   |       |   |  |   | (76.4  | )
|Taxes other than income taxes                                                      |  |                       | (34.6  | ) |                          |   | (20.5  | )            |  |   |       |   |  |   | (55.1  | )
|                                                                                   |  |                       |        |   |                          |   |        |              |  |   |        |   |  |   |        |  
|Operating income                                                                   |  |                       | 95.9   |   |                          |   | 84.1   |              |  |   |       |   |  |   | 180.0  |  
|Other income and (expenses), net                                                   |  |                       | 3.7    |   |                          |   | 1.7    |              |  |   | (0.1   | ) |  |   | 5.3    |  
|Interest expense and preferred dividends                                           |  |                       | (29.7  | ) |                          |   | (97.4  | )            |  |   |       |   |  |   | (127.1 | )
|                                                                                   |  |                       |        |   |                          |   |        |              |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before income taxes and minority interest |  |                       | 69.9   |   |                          |   | (11.6  | )            |  |   | (0.1   | ) |  |   | 58.2   |  
|Income tax expense from continuing operations                                      |  |                       | (20.2  | ) |                          |   | (3.2   | )            |  |   |       |   |  |   | (23.4  | )
|Minority interest                                                                  |  |                       |       |   |                          |   | (0.4   | )            |  |   |       |   |  |   | (0.4   | )
|                                                                                   |  |                       |        |   |                          |   |        |              |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                                           |  |                       | 49.7   |   |                          |   | (15.2  | )            |  |   | (0.1   | ) |  |   | 34.4   |  
|Income (loss) from discontinued operations, net of tax                             |  |                       | 10.8   |   |                          |   | (2.7   | )            |  |   | 0.1    |   |  |   | 8.2    |  
|                                                                                   |  |                       |        |   |                          |   |        |              |  |   |        |   |  |   |        |  
|Net income (loss)                                                                  |  | $                     | 60.5   |   |                          | $ | (17.9  | )            |  | $ |       |   |  | $ | 42.6   |  
|                                                                                   |  |                       |        |   |                          |   |        |              |  |   |        |   |  |   |        |  
|                                                                                   |  |                       |        |  
|Three months ended March 31, 2004                                                  |  |                       |        |   |                          |   |        |              |  |   |        |  
|Operating revenues                                                                 |  | $                     | 721.3  |   |                          | $ | 422.3  |              |  | $ | (408.3 | ) |  | $ | 735.3  |  
|Fuel consumed in electric generation                                               |  |                       |       |   |                          |   | (161.7 | )            |  |   |       |   |  |   | (161.7 | )
|Purchased power and transmission                                                   |  |                       | (468.5 | ) |                          |   | (18.1  | )            |  |   | 405.6  |   |  |   | (81.0  | )
|Deferred energy costs, net                                                         |  |                       | (0.9   | ) |                          |   |       |              |  |   |       |   |  |   | (0.9   | )
|Operations and maintenance                                                         |  |                       | (105.8 | ) |                          |   | (97.7  | )            |  |   | 2.7    |   |  |   | (200.8 | )
|Depreciation and amortization                                                      |  |                       | (37.1  | ) |                          |   | (35.9  | )            |  |   |       |   |  |   | (73.0  | )
|Taxes other than income taxes                                                      |  |                       | (33.1  | ) |                          |   | (16.1  | )            |  |   |       |   |  |   | (49.2  | )
|                                                                                   |  |                       |        |   |                          |   |        |              |  |   |        |   |  |   |        |  
|Operating income and expenses                                                      |  |                       | 75.9   |   |                          |   | 92.8   |              |  |   |       |   |  |   | 168.7  |  
|Other income, net                                                                  |  |                       | 7.2    |   |                          |   | 0.7    |              |  |   |       |   |  |   | 7.9    |  
|Interest expense and preferred dividends                                           |  |                       | (33.2  | ) |                          |   | (87.9  | )            |  |   |       |   |  |   | (121.1 | )
|                                                                                   |  |                       |        |   |                          |   |        |              |  |   |        |   |  |   |        |  
|Income from continuing operations before income taxes and minority interest        |  |                       | 49.9   |   |                          |   | 5.6    |              |  |   |       |   |  |   | 55.5   |  
|Income tax expense from continuing operations                                      |  |                       | (21.9  | ) |                          |   | (1.1   | )            |  |   |       |   |  |   | (23.0  | )
|Minority interest                                                                  |  |                       |       |   |                          |   | (1.9   | )            |  |   |       |   |  |   | (1.9   | )
|                                                                                   |  |                       |        |   |                          |   |        |              |  |   |        |   |  |   |        |  
|Income from continuing operations                                                  |  |                       | 28.0   |   |                          |   | 2.6    |              |  |   |       |   |  |   | 30.6   |  
|Income (loss) from discontinued operations, net of tax                             |  |                       | 11.0   |   |                          |   | (8.3   | )            |  |   |       |   |  |   | 2.7    |  
|                                                                                   |  |                       |        |   |                          |   |        |              |  |   |        |   |  |   |        |  
|Net income (loss)                                                                  |  | $                     | 39.0   |   |                          | $ | (5.7   | )            |  | $ |       |   |  | $ | 33.3   |  
|                                                                                   |  |                       |        |   |                          |   |        |              |  |   |        |   |  |   |        |  



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ALLEGHENY ENERGY, INC.CONSOLIDATED RESULTS



This section is an overview of AEs consolidated results of operations,
which are discussed in greater detail by segment in Allegheny Energy, Inc.  Discussion of Segment Results of Operations, below.



Operating Revenues



Total operating revenues for the three months ended March 31, 2005 and 2004 were as follows:



|                                        |  |                             |        |   |      |   |        |  
|--------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                        |  | Three Months EndedMarch 31, |       
|(In millions)                           |  | 2005                        |        |   | 2004 |  
|Total Delivery and Services revenues    |  | $                           | 739.4  |   |      | $ | 721.3  |  
|Total Generation and Marketing revenues |  |                             | 416.9  |   |      |   | 422.3  |  
|Eliminations                            |  |                             | (402.3 | ) |      |   | (408.3 | )
|                                        |  |                             |        |   |      |   |        |  
|Total operating revenues                |  | $                           | 754.0  |   |      | $ | 735.3  |  
|                                        |  |                             |        |   |      |   |        |  



Operating revenues
increased $18.7 million for the three months ended March 31, 2005 as compared to March 31, 2004, primarily due to:



| |  |  | increased revenues resulting from residential, commercial and industrial customer sales increases,
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | increased rates as a result of the expiration of the rate transition period for certain Maryland and Ohio customers and
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | increased net PJM revenues due to unplanned outages at Hatfields Ferry Unit No. 2 and Pleasants Unit No. 1 during the first quarter of 2004,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | partially offset by CDWR proceeds recorded during the first quarter of 2004.
| | - |  | ----------------------------------------------------------------------------



Operating Income



Operating income increased $11.3 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to:



| |  |  | an $18.7 million increase in operating revenues,
| | - |  | ------------------------------------------------



| |  |  | partially offset by a $7.4 million increase in operating expenses.
| | - |  | ------------------------------------------------------------------



Operating expenses increased as a result of increases in fuel consumed in electric generation, purchased power and transmission expense, depreciation and
amortization expense and taxes other than income tax expense. Fuel consumed in electric generation increased due to increased coal and other fuel prices, partially offset by decreased natural gas purchases, and an increase in MWhs generated at
Alleghenys coal-fired plants. Purchased power and transmission expense increased due to increased rates per MWh purchased due to the expiration of the market-based transition period for large commercial and industrial customers in Ohio and all
commercial and industrial customers in Maryland and qualifying certain contracts as normal purchase normal sale, for the three months ended March 31, 2005. These amounts were partially offset by the release of certain pipeline contracts during 2004.
Depreciation and amortization expense increased due to additions to property, plant and equipment. These increases were partially offset by decreased operation and maintenance expense due to decreased contract work and outside services expense and
salaries and wages expense.



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##### Table of Contents

Continuing Operations



Income from continuing operations before income taxes and minority interest increased $2.7 million for the three months ended March 31, 2005 as compared
to the three months ended March 31, 2004, primarily due to:



| |  |  | an $11.3 million increase in operating income,
| | - |  | ----------------------------------------------



| |  |  | partially offset by a $2.6 million decrease in other income and expenses, net, and a $6.0 million increase in interest expense and preferred dividends.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



Interest expenses increased primarily due to interest expense recorded in
March 2005 related to a court decision in the litigation involving Merrill Lynch, partially offset by lower interest rates, a reduction in average debt outstanding and the write off of debt issuance costs as a result of refinancing during the three
months ended March 31, 2004.



Income Tax Expense



The effective tax rates for Alleghenys continuing operations were
39.3% and 40.5% for the three months ended March 31, 2005 and 2004, respectively. The effective tax rates for the three months ended March 31, 2005 and 2004 were higher than the federal statutory tax rate primarily due to:



| |  |  | state income taxes and
| | - |  | ----------------------



| |  |  | the reversal of book versus tax depreciation differences for which deferred taxes were not provided.
| | - |  | ----------------------------------------------------------------------------------------------------



Discontinued Operations



Allegheny recorded income from discontinued operations of $8.2 million and $2.7 million for the three months ended March 31, 2005 and 2004, respectively,
related to agreements to sell, or decisions to sell, certain non-core assets. The $5.5 million increase for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, was primarily due to:



| |  |  | $2.0 million in operating losses in the first quarter of 2004 at AE Supplys Lincoln generation facility, which was sold in December 2004, and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $7.0 million related to the cessation of depreciation on assets held for sale beginning in the third quarter of 2004 in accordance with SFAS No. 144,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | partially offset by a $2.7 million decrease in income tax expense.
| | - |  | ------------------------------------------------------------------



See Note 3, Assets Held for Sale and Discontinued Operations, to the Consolidated Financial Statements for additional information.



68



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##### Table of Contents

ALLEGHENY ENERGY, INC.DISCUSSION OF SEGMENT RESULTS OF OPERATIONS:



AEs Delivery and Services Segment Results



Net income for the Delivery and Services segment increased $21.5 million for
the three months ended March 31, 2005 as compared to the three months ended March 31, 2004. This increase was primarily due to an $18.1 million increase in operating revenues.



Operating Revenues



The following table provides retail electricity sales information related to the Delivery and Services segment:



|                                         |  |                             |  |        |  |        |   
|---------------------------------------- |  | --------------------------- |  | ------ |  | ------ | --
|                                         |  | Three Months EndedMarch 31, |  |        | 
|                                         |  | 2005                        |  | 2004   |  | Change |   
|Retail electricity sales (million KWhs): |  |                             |  |        |  |        |   
|Residential                              |  | 4,804                       |  | 4,762  |  | 0.9    | % 
|Commercial                               |  | 2,660                       |  | 2,576  |  | 3.3    | % 
|Industrial                               |  | 5,013                       |  | 5,010  |  | 0.1    | % 
|Other                                    |  | 24                          |  | 24     |  |       |   
|                                         |  |                             |  |        |  |        |   
|Total electricity sales                  |  | 12,501                      |  | 12,372 |  | 1.0    | % 
|                                         |  |                             |  |        |  |        |   
|Heating degree days*                     |  | 2,716                       |  | 2,871  |  | (5.4   | )%

---

|* | The operations of the Distribution Companies are weather sensitive. Weather conditions directly influence the volume of electricity delivered by the Distribution Companies, but
represent only one of several factors that impact the volume of electricity. Degree-day data is used to estimate amounts of energy required to maintain comfortable indoor temperature levels based on each days average temperature. Heating
degree days is the measure of the variation in the weather based on the extent to which the average daily temperature falls below 65° Fahrenheit, and cooling degree days 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.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating revenues for the Delivery and Services
segment were as follows:



|                                                   |  |                             |       |      |   |      
|-------------------------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                                   |  | Three Months EndedMarch 31,
|(In millions)                                      |  | 2005                        |       | 2004
|Retail electric:                                   |  |                             |       |      |   |      
|Residential                                        |  | $                           | 327.2 |      | $ | 324.1
|Commercial                                         |  |                             | 162.6 |      |   | 150.7
|Industrial                                         |  |                             | 205.1 |      |   | 202.5
|Other                                              |  |                             | 3.6   |      |   | 3.6  
|                                                   |  |                             |       |      |   |      
|Total retail electric                              |  | $                           | 698.5 |      | $ | 680.9
|                                                   |  |                            
|Transmission services and bulk power               |  |                             | 28.4  |      |   | 31.0 
|Unregulated services                               |  |                             | 6.7   |      |   | 4.4  
|Other affiliated and nonaffiliated energy services |  |                             | 5.8   |      |   | 5.0  
|                                                   |  |                             |       |      |   |      
|Total Delivery and Services revenues               |  | $                           | 739.4 |      | $ | 721.3
|                                                   |  |                             |       |      |   |      



69



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##### Table of Contents

Retail electric revenues increased $17.6 million for the three months ended March 31, 2005 as compared to
the three months ended March 31, 2004, primarily due to:



| |  |  | a $3.1 million increase in residential sales revenue;
| | - |  | -----------------------------------------------------



| |  |  | an $11.9 million increase in commercial sales and
| | - |  | -------------------------------------------------



| |  |  | a $2.6 million increase in industrial sales.
| | - |  | --------------------------------------------



The increase in residential sales was a result of a 0.9% increase in MWh sales due to a 1.1% increase in the average number of customers, partially offset
by a 0.2% decrease in usage per customer. The decrease in usage per customer was primarily the result of a 5.4% decrease in heating degree-days. The increase in commercial sales was a result of a 3.3% increase in MWh sales due to a 1.8% increase in
the average number of customers and a 1.4% increase in usage per customer. The increase in industrial sales was a result of a 0.1% increase in MWh sales due to a 0.9% increase in the average number of customers, partially offset by a 0.9% decrease
in usage per customer.



Transmission services and bulk power
revenues decreased $2.6 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to:



| |  |  | a $5.2 million decrease in transmission revenues primarily as a result of the expiration of certain transition credits that were related to Allegheny joining the PJM regional
transmission system,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | partially offset by a $3.1 million increase in bulk power revenues resulting from increased power sales from the AES Warrior Run cogeneration facility.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



Operating Expenses



Purchased Power and Transmission: Purchased power and transmission represents the Distribution Companies
power purchases from, and exchanges with, other companies (primarily AE Supply) as well as purchases from qualified facilities under PURPA. Purchased power and transmission consists of the following items:



|                                       |  |                             |       |      |   |      
|-------------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                       |  | Three Months EndedMarch 31,
|(In millions)                          |  | 2005                        |       | 2004
|From PURPA generation *                |  | $                           | 52.3  |      | $ | 51.1 
|Other purchased power and transmission |  |                             | 432.8 |      |   | 417.4
|                                       |  |                             |       |      |   |      
|Total purchased power and transmission |  | $                           | 485.1 |      | $ | 468.5
|                                       |  |                             |       |      |   |      
|                                       |  |                             |       |      |   |      
|*  PURPA cost (cents per KWh sold)     |  |                             | 5.3   |      |   | 5.2  



Purchased power and
transmission from PURPA generation increased $1.2 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to increased rates paid by Monongahela and Potomac Edison for MWhs purchased.



Other purchased power primarily consists of the Distribution
Companies purchases of energy from AE Supply. The Distribution Companies have long-term power sales agreements with AE Supply, under which AE Supply provides the Distribution Companies with the majority of the power necessary to meet their PLR
obligations. These agreements have both fixed-price and market-based pricing components. The amount of power purchased under these agreements that is subject to the market-based pricing component increases each year through the applicable transition
period. The transition period for large commercial and industrial customers in Ohio and all commercial and industrial customers



70



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##### Table of Contents

in Maryland has ended. Monongahela and Potomac Edison are purchasing power at market prices for these customers from AE Supply and other nonaffiliated
companies. Other purchased power increased $15.4 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to increased purchased power expense at Monongahela and Potomac Edison related to
these market purchases.



Operations and
Maintenance: Operations and maintenance expenses for the Delivery and Services segment were as follows:



|                           |  |                              |      |      |   |      
|-------------------------- |  | ---------------------------- | ---- | ---- | - | -----
|                           |  | Three Months Ended March 31,
|(In millions)              |  | 2005                         |      | 2004
|Operations and maintenance |  | $                            | 84.5 |      | $ | 105.8



Operations and
maintenance expenses primarily include salaries and wages, employee benefits, materials and supplies, contract work, outside services and other expenses. Operations and maintenance expenses decreased $21.3 million for the three months ended March
31, 2005 as compared to the three months ended March 31, 2004. The decrease was primarily due to:



| |  |  | a $2.1 million decrease in salaries and wages;
| | - |  | ----------------------------------------------



| |  |  | a $3.5 million decrease in contract work and outside services;
| | - |  | --------------------------------------------------------------



| |  |  | $3.5 million of certain inventory write-offs during the three months ended March 31, 2004 and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | a $6.9 million decrease in uncollectible and insurance expenses.
| | - |  | ----------------------------------------------------------------



The decrease in salaries and wages was a result of a decrease in the number of employees and severance costs. The decrease in contract work and outside
services was a result of an initiative to reduce these types of services, primarily through the reduction of outside consultants. The decrease in uncollectible expense was a result of improved collections and the decrease in insurance expense
resulted from a decrease in the amount of claims.



Depreciation and Amortization: Depreciation and amortization expenses for the Delivery and Services segment were as follows:



|                              |  |                             |      |      |   |     
|----------------------------- |  | --------------------------- | ---- | ---- | - | ----
|                              |  | Three Months EndedMarch 31,
|(In millions)                 |  | 2005                        |      | 2004
|Depreciation and amortization |  | $                           | 38.1 |      | $ | 37.1



Depreciation and
amortization expense increased $1.0 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to increased depreciation resulting from capital expenditures during 2004 and $39.5 million in
capital expenditures during 2005.



Taxes Other Than
Income Taxes: Taxes other than income taxes for the Delivery and Services segment were as follows:



|                              |  |                             |      |      |   |     
|----------------------------- |  | --------------------------- | ---- | ---- | - | ----
|                              |  | Three Months EndedMarch 31,
|(In millions)                 |  | 2005                        |      | 2004
|Taxes other than income taxes |  | $                           | 34.6 |      | $ | 33.1



71



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##### Table of Contents

Taxes other than income taxes primarily includes gross receipts taxes, payroll taxes and property taxes.
Taxes other than income taxes increased $1.5 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily as a result of increased gross receipts taxes due to an increase in regulated utility
revenues.



Other Income and Expenses, Net



Other income and expenses, net for the Delivery and Services segment were as
follows:



|                               |  |                             |     |      |   |    
|------------------------------ |  | --------------------------- | --- | ---- | - | ---
|                               |  | Three Months EndedMarch 31,
|(In millions)                  |  | 2005                        |     | 2004
|Other income and expenses, net |  | $                           | 3.7 |      | $ | 7.2



Other income and
expenses, net represent non-operating income and expenses before income taxes. Other income and expenses, net, decreased $3.5 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily as a
result of gains recognized on land sales during the three months ended March 31, 2004.



Interest Expense and Preferred Dividends



Interest expense and preferred dividends for the Delivery and Services segment were as follows:



|                                         |  |                             |      |      |   |     
|---------------------------------------- |  | --------------------------- | ---- | ---- | - | ----
|                                         |  | Three Months EndedMarch 31,
|(In millions)                            |  | 2005                        |      | 2004
|Interest expense and preferred dividends |  | $                           | 29.7 |      | $ | 33.2



Interest expense and
preferred dividends decreased $3.5 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to:



| |  |  | the refinancing during 2004 of first mortgage bonds issued by Monongahela and Potomac Edison at lower interest rates and
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | the repayment of notes and bonds by West Penn during 2004.
| | - |  | ----------------------------------------------------------



For additional information regarding Alleghenys short-term and long-term debt, see Note 2, Debt. Also, see Financial Condition,
Requirements and ResourcesLiquidity and Capital Requirements.



Discontinued Operations



The Delivery and
Services segment recorded income of $10.8 million and $11.0 million from discontinued operations for the three months ended March 31, 2005 and 2004, respectively. See Note 3, Assets Held For Sale and Discontinued Operations, to the
Consolidated Financial Statements for additional information.



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AEs Generation and Marketing Segment Results



Net loss for the Generation and Marketing segment increased $12.2 million
for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004. This increase was primarily due to:



| |  |  | a $5.4 million decrease in operating revenues and
| | - |  | -------------------------------------------------



| |  |  | a $9.5 million increase in interest expense and preferred dividends.
| | - |  | --------------------------------------------------------------------



Operating Revenues



The following table provides electricity sales information related to the Generation and Marketing segment:



|                          |  |                             |  |        |  |        |  
|------------------------- |  | --------------------------- |  | ------ |  | ------ | -
|                          |  | Three Months EndedMarch 31, |  |        | 
|                          |  | 2005                        |  | 2004   |  | Change |  
|Generation (million KWhs) |  | 12,297                      |  | 12,231 |  | 0.5    | %



Operating revenues for
the Generation and Marketing segment were as follows:



|                                        |  |                             |       |      |   |      
|--------------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                        |  | Three Months EndedMarch 31,
|(In millions)                           |  | 2005                        |       | 2004
|Revenue from affiliates                 |  | $                           | 400.1 |      | $ | 393.1
|Wholesale and other revenue, net *      |  |                             | 16.8  |      |   | 29.2 
|                                        |  |                             |       |      |   |      
|Total Generation and Marketing revenues |  | $                           | 416.9 |      | $ | 422.3
|                                        |  |                             |       |      |   |      

---

|* | Amounts are net of energy trading losses as described in Note 5, Derivative Instruments and Hedging Activities, to the Consolidated Financial Statements. Energy trading
losses include unrealized gains (losses) of $4.1 million and $(11.1) million for the three months ended March 31, 2005 and 2004, respectively.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating revenues decreased by $5.4 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004. This decrease
was primarily due to:



| |  |  | $68.1 million in proceeds associated with the sale of the CDWR contract and related hedge transactions that were recorded in operating revenues for the three months ended March 31,
2004,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | partially offset by an increase in PJM revenues of approximately $56.8 million.
| | - |  | -------------------------------------------------------------------------------



The increase in PJM revenues is due to better performance of Alleghenys coal-fired plants as a result of the return to
service of Hatfields Ferry Unit No. 2 and Pleasants Unit No. 1 in June 2004. In addition, load costs were lower because the Generation and Marketing segment no longer serves certain customer classes, primarily as a result of a portion of
Potomac Edisons customers that have transitioned to market.



Revenue from affiliates: Revenue from affiliates results primarily from the sale of power to the Distribution Companies.



The Distribution Companies have long-term power sales agreements with AE Supply under which AE Supply provides the Distribution Companies with a majority
of the power necessary to meet their PLR



73



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##### Table of Contents

obligations. These agreements have both fixed-price and market-based pricing components. The amount of power purchased under these agreements that is subject
to the market-based pricing component increases each year through the applicable transition period. Monongahelas West Virginia generation facilities also provide power to Monongahelas Delivery and Services segment to meet its regulated
load obligations.



The average rate at which the Generation and
Marketing segment sold power to the Distribution Companies was $32.91 and $31.76 per MWh for the three months ended March 31, 2005 and 2004, respectively.



Revenue from affiliates increased $7.0 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily
due to:



| |  |  | a $12.4 million increase in affiliated revenues as a result of the expiration in December 2004 of the Warrior Run contract, which reduced revenue in 2004 due to derivative
accounting,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | partially offset by decreased sales volumes as a result of the provision of a portion of energy sales by nonaffiliated suppliers and certain customers opting to use different
suppliers as a result of customer choice, both beginning January 1, 2005. This decrease in sales volumes was partially mitigated by increases in prices associated with a Potomac Edison market-based power supply contract that became effective on
January 1, 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Wholesale and other
revenues, net: The table below describes the significant components of wholesale revenues for the Generation and Marketing segment.



|                                   |  |                             |        |   |      |   |        |  
|---------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                   |  | Three Months EndedMarch 31, |       
|(In millions)                      |  | 2005                        |        |   | 2004 |  
|PJM Revenue:                       |  |                             |        |   |      |   |        |  
|Generation sold to PJM             |  | $                           | 528.2  |   |      | $ | 533.1  |  
|Power purchased from PJM           |  |                             | (520.4 | ) |      |   | (582.1 | )
|                                   |  |                             |        |   |      |   |        |  
|Net                                |  | $                           | 7.8    |   |      | $ | (49.0  | )
|                                   |  |                            
|Release of CDWR escrow proceeds    |  | $                           |       |   |      | $ | 68.1   |  
|                                   |  |                            
|Trading activities:                |  |                             |        |   |      |   |        |  
|Realized gains                     |  | $                           | (2.6   | ) |      | $ | 20.9   |  
|Unrealized gains (losses)          |  |                             | 4.1    |   |      |   | (11.1  | )
|                                   |  |                             |        |   |      |   |        |  
|Net                                |  | $                           | 1.5    |   |      | $ | 9.8    | *
|                                   |  |                            
|Other (expenses) revenues          |  | $                           | 7.5    |   |      | $ | 0.3    |  
|                                   |  |                             |        |   |      |   |        |  
|Total wholesale and other revenues |  | $                           | 16.8   |   |      | $ | 29.2   |  
|                                   |  |                             |        |   |      |   |        |  

---

|* | Does not include a $12.4 million loss on a contract with an affiliate that was included in affiliated revenues. The net trading loss, including this affiliated transaction, was $2.6
million. This contract expired on December 31, 2004 and was not renewed.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Wholesale and other revenues decreased $12.4 million for the three months ended March 31, 2005 as
compared to the three months ended March 31, 2004, primarily due to:



| |  |  | $68.1 million in proceeds associated with the sale of the CDWR contract and related hedge transactions that were recorded during the three months ended March 31, 2004,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | partially offset by an increase in PJM revenues of approximately $56.8 million.
| | - |  | -------------------------------------------------------------------------------



The increase in PJM revenues is due to better performance of Alleghenys coal-fired plants as a result of the return to
service of Hatfields Ferry Unit No. 2 and Pleasants Unit No. 1 in June 2004. In addition, load costs were lower because the Generation and Marketing segment no longer serves certain customer classes, primarily as a result of portion of Potomac
Edisons customers that have transitioned to market.



Fair Value of Contracts: AE Supply is currently qualifying certain of its new contracts under the normal purchase and normal sale scope exception under SFAS No. 133. As a result, AE accounts for these contracts on
the accrual method, rather than marking these contracts to market value. AE uses derivative accounting for contracts that do not qualify under the scope exception. These contracts are recorded at fair value in the Consolidated Balance Sheets. The
realized and unrealized revenues from energy trading activities are recorded on a net basis in Operating revenues in the Consolidated Statements of Operations in accordance with Emerging Issues Task Force Issue No. 02-3,
Recognition and Reporting Gains and Losses on Energy Trading Contracts. The fair value of the remaining trading portfolio consists primarily of interest rate swap agreements and commodity cash flow hedges as of March 31, 2005.



The fair values of trading contracts, which represent the net
unrealized gain and loss on open positions, are recorded as assets and liabilities, after applying the appropriate counterparty netting agreements in accordance with FASB Interpretation No. 39, Offsetting of Amounts Related to Certain
Contractsan Interpretation of Accounting Principles Board Opinion No. 10 and FASB Statement No. 105. At March 31, 2005, the fair values of trading contract assets and liabilities were $17.5 million and $109.4 million, respectively. At
December 31, 2004, the fair values of trading contract assets and liabilities were $17.2 million and $97.3 million, respectively.



The following table disaggregates the net fair values of derivative contract assets and liabilities for the Generation and Marketing segment, based on the
underlying market price source and the contract settlement periods. The table excludes non-derivatives such as AE Supplys generation assets, PLR requirements and SFAS No. 133 scope exceptions under the normal purchase and normal sale election:



|                                                                  |  |                                           |       |   |                                  |   |       |       |  |   |      |   |  |      |      |   |  |   |      |   |  |   |      |   |  |   |       |  
|----------------------------------------------------------------- |  | ----------------------------------------- | ----- | - | -------------------------------- | - | ----- | ----- |  | - | ---- | - |  | ---- | ---- | - |  | - | ---- | - |  | - | ---- | - |  | - | ----- | -
|                                                                  |  | Fair value of contracts at March 31, 2005 |      
|                                                                  |  | Settlement by:                            |       |   | SettlementIn Excess ofFive Years |   |       | Total | 
|Classification of contracts
by source of fair value (In millions) |  | 2005                                      |       |   | 2006                             |   |       | 2007  |  |   | 2008 |   |  | 2009 |      |   | 
|Prices actively quoted                                            |  | $                                         | (25.8 | ) |                                  | $ | (18.2 | )     |  | $ | (5.6 | ) |  | $    | (5.4 | ) |  | $ | (5.1 | ) |  | $ | (6.4 | ) |  | $ | (66.5 | )
|Prices provided by other external sources                         |  |                                           |      |   |                                  |   | (26.4 | )     |  |   |     |   |  |      |     |   |  |   |     |   |  |   |     |   |  |   | (26.4 | )
|Prices based on models                                            |  |                                           | 0.3   |   |                                  |   | 0.7   |       |  |   |     |   |  |      |     |   |  |   |     |   |  |   |     |   |  |   | 1.0   |  
|                                                                  |  |                                           |       |   |                                  |   |       |       |  |   |      |   |  |      |      |   |  |   |      |   |  |   |      |   |  |   |       |  
|Total                                                             |  | $                                         | (25.5 | ) |                                  | $ | (43.9 | )     |  | $ | (5.6 | ) |  | $    | (5.4 | ) |  | $ | (5.1 | ) |  | $ | (6.4 | ) |  | $ | (91.9 | )
|                                                                  |  |                                           |       |   |                                  |   |       |       |  |   |      |   |  |      |      |   |  |   |      |   |  |   |      |   |  |   |       |  



Approximately $1.0
million of AE Supplys contracts were classified as prices based on models, even though a portion of these contracts is valued based on observable market prices.



For settlements through December 31, 2005, the fair value of AE Supplys contracts was a net liability of $25.5
million, primarily related to interest rate swaps and commodity cash flow hedges. See Note 5, Derivative Instruments and Hedging Activities, to the Consolidated Financial Statements for additional information.



75



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Roll Forward of Fair Value: Net unrealized gains of $4.1 million for the three months ended March
31, 2005 were recorded on the Consolidated Statements of Operations in Operating revenues to reflect the change in fair value of the trading contracts. The following table provides a roll forward of the net fair value, or trading
contract assets less trading contract liabilities, of AE Supplys trading contracts:



|                                                                  |  |                                  |       |  
|----------------------------------------------------------------- |  | -------------------------------- | ----- | -
|(In millions)                                                     |  | Three Months EndedMarch 31, 2005 |      
|Net fair value of contract (liabilities) and assets at January 1, |  | $                                | (80.1 | )
|Changes in fair value of cash flow hedges                         |  |                                  | (15.9 | )
|Unrealized gains on contracts, net                                |  |                                  | 4.1   |  
|Net options received or (paid)                                    |  |                                  |      |  
|                                                                  |  |                                  |       |  
|Net fair value of contract liabilities at March 31                |  | $                                | (91.9 | )
|                                                                  |  |                                  |       |  



As shown in the table,
the net fair value of AE Supplys trading contracts decreased by $11.8 million for the three months ended March 31, primarily due to:



| |  |  | changes in the fair value of cash flow hedges,
| | - |  | ----------------------------------------------



| |  |  | partially offset by the effect of price movements on contracts and settlements.
| | - |  | -------------------------------------------------------------------------------



There has been, and may continue to be, significant volatility in the market prices for electricity and natural gas at the
wholesale level, which will affect AE Supplys operating results and cash flows. Similarly, volatility in interest rates will affect AE Supplys operating results and cash flows.



Operating Expenses



Fuel Consumed in Electric Generation: Fuel consumed in electric generation represents the cost of coal,
natural gas, oil, lime and other materials consumed in the generation of power and emission allowances. Fuel consumed in electric generation for the Generation and Marketing segment was as follows:



|                                     |  |                             |       |      |   |      
|------------------------------------ |  | --------------------------- | ----- | ---- | - | -----
|                                     |  | Three Months EndedMarch 31,
|(In millions)                        |  | 2005                        |       | 2004
|Fuel consumed in electric generation |  | $                           | 173.9 |      | $ | 161.7



Total fuel expenses
increased by $12.2 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to:



| |  |  | an increase in fuel prices, which increased total fuel expenses by $8.4 million, primarily as a result of increased cost of coal and other fuel and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an increase in generation, which increased total fuel expenses by $2.6 million, due to a 0.5% increase in MWhs generated as a result of increased availability at Alleghenys
supercritical plants.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Purchased Power and Transmission: Purchased power and transmission expenses for the
Generation and Marketing segment were as follows:



|                                 |  |                             |      |      |   |     
|-------------------------------- |  | --------------------------- | ---- | ---- | - | ----
|                                 |  | Three Months EndedMarch 31,
|(In millions)                    |  | 2005                        |      | 2004
|Purchased power and transmission |  | $                           | 19.8 |      | $ | 18.1



Purchased power and
transmission increased $1.7 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to qualifying certain contracts as normal purchase normal sale for the three months ended March 31,
2005, partially offset by certain pipeline contracts released during 2004.



Operations and Maintenance: Operations and maintenance expenses for the Generation and Marketing segment were as follows:



|                           |  |                             |      |      |   |     
|-------------------------- |  | --------------------------- | ---- | ---- | - | ----
|                           |  | Three Months EndedMarch 31,
|(In millions)              |  | 2005                        |      | 2004
|Operations and maintenance |  | $                           | 80.3 |      | $ | 97.7



Operations and
maintenance expenses decreased $17.4 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to:



| |  |  | a decrease of $14.6 million in contract work and outside services expenses,
| | - |  | ---------------------------------------------------------------------------



| |  |  | $2.1 million of insurance proceeds related to the outage at Pleasants Unit No. 2 and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | a $1.7 million decrease in salaries and wages expense.
| | - |  | ------------------------------------------------------



The decrease in contract work and outside services expenses was a result of expenditures during the first quarter of 2004 related to repairs and
accelerated special maintenance at Hatfields Ferry Unit No. 2 and Pleasants Unit No. 1. The decrease in salaries and wages expense was a result of a decrease in the number of employees and lower severance and overtime costs.



Depreciation and Amortization: Depreciation and amortization
expenses for the Generation and Marketing segment were as follows:



|                              |  |                             |      |      |   |     
|----------------------------- |  | --------------------------- | ---- | ---- | - | ----
|                              |  | Three Months EndedMarch 31,
|(In millions)                 |  | 2005                        |      | 2004
|Depreciation and amortization |  | $                           | 38.3 |      | $ | 35.9



Depreciation and
amortization expense increased $2.4 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to capital expenditures during 2004 and $13.5 million in capital expenditures during 2005.



Taxes Other Than Income Taxes: Taxes other than
income taxes for the Generation and Marketing segment were as follows:



|                              |  |                             |      |      |   |     
|----------------------------- |  | --------------------------- | ---- | ---- | - | ----
|                              |  | Three Months EndedMarch 31,
|(In millions)                 |  | 2005                        |      | 2004
|Taxes other than income taxes |  | $                           | 20.5 |      | $ | 16.1



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Taxes other than income taxes increased $4.4 million for the three months ended March 31, 2005 as
compared to the three months ended March 31, 2004, primarily due to:



| |  |  | increased property taxes as a result of favorable property tax settlements of $3.5 million recorded during the three months ended March 31, 2004 and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increases in business and occupation taxes due to a larger tax credit of $1.5 million recognized in 2004.
| | - |  | ---------------------------------------------------------------------------------------------------------



Interest Expense and Preferred Dividends



Interest expense and preferred dividends for the Generation and Marketing
segment were as follows:



|                                         |  |                             |      |      |   |     
|---------------------------------------- |  | --------------------------- | ---- | ---- | - | ----
|                                         |  | Three Months EndedMarch 31,
|(In millions)                            |  | 2005                        |      | 2004
|Interest expense and preferred dividends |  | $                           | 97.4 |      | $ | 87.9



Interest expense and
preferred dividends increased $9.5 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to:



| |  |  | $38.5 million in interest expense recorded during March 2005 related to a court decision in the litigation involving Merrill Lynch,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | partially offset by interest expense savings of $14.5 million resulting from lower interest rates due to debt refinancing and lower average debt outstanding and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decreased amortization expense of $14.9 million as a result of write offs of capitalized costs during the three months ended March 31, 2004 in connection with debt refinancing.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For additional information regarding the
litigation involving Merrill Lynch, see Note 16, Interest Expense  Merrill Lynch Litigation to the Consolidated Financial Statements. For additional information regarding Alleghenys short-term and long-term debt, see Note 2,
Debt to the Consolidated Financial Statements. Also, see Financial Condition, Requirements and ResourcesLiquidity and Capital Requirements.



Minority Interest in Net Loss



Minority interest in net loss was $0.4 million and $1.9 million for the three months ended March 31, 2005 and 2004, respectively, which primarily
represents Merrill Lynchs equity interest in AE Supply.



Discontinued
Operations



The Generation and Marketing segment recorded
losses from discontinued operations of $2.7 million and $8.3 million for the three months ended March 31, 2005 and 2004, respectively. The losses primarily related to operating losses at AE Supplys Lincoln, Gleason and Wheatland generation
facilities. The $5.6 million decrease in losses from discontinued operations was primarily due to:



| |  |  | operating losses during the first quarter of 2004 at AE Supplys Lincoln generation facility, which was sold in 2004, and
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | the cessation of depreciation on assets held for sale beginning in the third quarter of 2004 in accordance with SFAS No. 144.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



See Note 3, Assets Held for Sale and Discontinued Operations, to
the Consolidated Financial Statements for additional information.



78



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##### Table of Contents

MONONGAHELA POWER COMPANY AND SUBSIDIARIESRESULTS OF OPERATIONS



Income (Loss) Summary



|                                                             |  |                       |        |   |                          |   |       |              |  |   |       |   |  |   |       |  
|------------------------------------------------------------ |  | --------------------- | ------ | - | ------------------------ | - | ----- | ------------ |  | - | ----- | - |  | - | ----- | -
|(In millions) Three months ended March 31,
2005              |  | Delivery and Services |        |   | Generation and Marketing |   |       | Eliminations |  |   | Total |  
|Operating revenues                                           |  | $                     | 177.3  |   |                          | $ | 91.0  |              |  | $ | (81.7 | ) |  | $ | 186.6 |  
|Fuel consumed in electric generation                         |  |                       |       |   |                          |   | (35.0 | )            |  |   |      |   |  |   | (35.0 | )
|Purchased power and transmission                             |  |                       | (114.5 | ) |                          |   | (25.9 | )            |  | $ | 81.7  |   |  |   | (58.7 | )
|Operations and maintenance                                   |  |                       | (27.0  | ) |                          |   | (16.9 | )            |  |   |      |   |  |   | (43.9 | )
|Depreciation and amortization                                |  |                       | (8.1   | ) |                          |   | (8.7  | )            |  |   |      |   |  |   | (16.8 | )
|Taxes other than income taxes                                |  |                       | (6.8   | ) |                          |   | (5.9  | )            |  |   |      |   |  |   | (12.7 | )
|                                                             |  |                       |        |   |                          |   |       |              |  |   |       |   |  |   |       |  
|Operating income (loss)                                      |  |                       | 20.9   |   |                          |   | (1.4  | )            |  |   |      |   |  |   | 19.5  |  
|Other income and expenses, net                               |  |                       | 0.2    |   |                          |   | 2.0   |              |  |   |      |   |  |   | 2.2   |  
|Interest expense                                             |  |                       | (6.2   | ) |                          |   | (4.5  | )            |  |   |      |   |  |   | (10.7 | )
|                                                             |  |                       |        |   |                          |   |       |              |  |   |       |   |  |   |       |  
|Income (loss) from continuing operations before income taxes |  |                       | 14.9   |   |                          |   | (3.9  | )            |  |   |      |   |  |   | 11.0  |  
|Income tax (expense) benefit from continuing operations      |  |                       | (3.3   | ) |                          |   | 3.6   |              |  |   |      |   |  |   | 0.3   |  
|                                                             |  |                       |        |   |                          |   |       |              |  |   |       |   |  |   |       |  
|Income (loss) from continuing operations                     |  |                       | 11.6   |   |                          |   | (0.3  | )            |  |   |      |   |  |   | 11.3  |  
|Income from discontinued operations, net of tax              |  |                       | 10.9   |   |                          |   |      |              |  |   |      |   |  |   | 10.9  |  
|                                                             |  |                       |        |   |                          |   |       |              |  |   |       |   |  |   |       |  
|Net income (loss)                                            |  |                       | 22.5   |   |                          |   | (0.3  | )            |  |   |      |   |  |   | 22.2  |  
|                                                             |  |                       |        |   |                          |   |       |              |  |   |       |   |  |   |       |  
|                                                             |  |                       |        |  
|Three months ended March 31, 2004                            |  |                       |        |   |                          |   |       |              |  |   |       |  
|Operating revenues                                           |  | $                     | 173.7  |   |                          | $ | 86.3  |              |  | $ | (79.8 | ) |  | $ | 180.2 |  
|Fuel consumed in electric generation                         |  |                       |       |   |                          |   | (32.7 | )            |  |   |      |   |  |   | (32.7 | )
|Purchased power and transmission                             |  |                       | (109.5 | ) |                          |   | (11.6 | )            |  |   | 79.8  |   |  |   | (41.3 | )
|Operations and maintenance                                   |  |                       | (30.7  | ) |                          |   | (21.8 | )            |  |   |      |   |  |   | (52.5 | )
|Depreciation and amortization                                |  |                       | (7.7   | ) |                          |   | (8.6  | )            |  |   |      |   |  |   | (16.3 | )
|Taxes other than income taxes                                |  |                       | (6.8   | ) |                          |   | (5.6  | )            |  |   |      |   |  |   | (12.4 | )
|                                                             |  |                       |        |   |                          |   |       |              |  |   |       |   |  |   |       |  
|Operating income                                             |  |                       | 19.0   |   |                          |   | 6.0   |              |  |   |      |   |  |   | 25.0  |  
|Other income and expenses, net                               |  |                       | 0.3    |   |                          |   | 1.7   |              |  |   |      |   |  |   | 2.0   |  
|Interest expense                                             |  |                       | (5.5   | ) |                          |   | (5.1  | )            |  |   |      |   |  |   | (10.6 | )
|                                                             |  |                       |        |   |                          |   |       |              |  |   |       |   |  |   |       |  
|Income from continuing operations before income taxes        |  |                       | 13.8   |   |                          |   | 2.6   |              |  |   |      |   |  |   | 16.4  |  
|Income tax expense from continuing operations                |  |                       | (8.2   | ) |                          |   | (0.5  | )            |  |   |      |   |  |   | (8.7  | )
|                                                             |  |                       |        |   |                          |   |       |              |  |   |       |   |  |   |       |  
|Income from continuing operations                            |  |                       | 5.6    |   |                          |   | 2.1   |              |  |   |      |   |  |   | 7.7   |  
|Income from discontinued operations, net of tax              |  |                       | 11.0   |   |                          |   |      |              |  |   |      |   |  |   | 11.0  |  
|                                                             |  |                       |        |   |                          |   |       |              |  |   |       |   |  |   |       |  
|Net income                                                   |  | $                     | 16.6   |   |                          | $ | 2.1   |              |  | $ |      |   |  | $ | 18.7  |  
|                                                             |  |                       |        |   |                          |   |       |              |  |   |       |   |  |   |       |  



79



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##### Table of Contents

MONONGAHELA POWER COMPANYCONSOLIDATED RESULTS



This section is an overview of Monongahelas consolidated results of
operations, which are discussed in greater detail for each segment in Monongahela Power CompanyDiscussion of Segment Results of Operations below.



Operating Revenues



Total operating revenues for the three months ended March 31, 2005 and 2004 were as follows:



|                                        |  |                             |       |   |      |   |       |  
|--------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                        |  | Three Months EndedMarch 31, |      
|(In millions)                           |  | 2005                        |       |   | 2004 |  
|Total Delivery and Services revenues    |  | $                           | 177.3 |   |      | $ | 173.7 |  
|Total Generation and Marketing revenues |  |                             | 91.0  |   |      |   | 86.3  |  
|Eliminations                            |  |                             | (81.7 | ) |      |   | (79.8 | )
|                                        |  |                             |       |   |      |   |       |  
|Total operating revenues                |  | $                           | 186.6 |   |      | $ | 180.2 |  
|                                        |  |                             |       |   |      |   |       |  



Operating revenues
increased $6.4 million for the three months ended March 31, 2005 as compared to March 31, 2004, primarily due to:



| |  |  | a $3.6 million increase in operating revenues at the Delivery and Services segment due to increased MWh sales and prices and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | a $4.7 million increase in operating revenues at the Generation and Marketing segment due to increased MWh sales.
| | - |  | -----------------------------------------------------------------------------------------------------------------



Operating Income



Operating income decreased $5.5 million for the three months ended March 31, 2005 as compared to the three months ended
March 31, 2004, primarily due to:



| |  |  | an $11.9 million increase in total operating expenses,
| | - |  | ------------------------------------------------------



| |  |  | partially offset by a $6.4 million increase in operating revenues.
| | - |  | ------------------------------------------------------------------



The increase in total operating expenses was primarily due to an increase in purchased power and transmission expenses as a result of increased volume and
price of purchased power. This increase was partially offset by a decrease in operations and maintenance expenses due to decreased contract work, outside services expense and salaries and wages.



Income Tax Expense



The effective tax rates for Monongahelas continuing operations were (2.7)% and 53.2% for the three months ended March
31, 2005 and 2004, respectively. The effective tax rate for the three months ended March 31, 2005 was lower than the federal statutory tax rate, primarily due to:



| |  |  | the allocation of consolidated tax savings and
| | - |  | ----------------------------------------------



| |  |  | the amortization of deferred investment tax credits.
| | - |  | ----------------------------------------------------



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##### Table of Contents

The effective tax rate for the three months ended March 31, 2004 was higher than the federal tax rate,
primarily due to:



| |  |  | the effect of increased allocated state income taxes and
| | - |  | --------------------------------------------------------



| |  |  | deferred property tax reversals, primarily related to depreciation.
| | - |  | -------------------------------------------------------------------



Allegheny allocates income tax expense or benefit to its subsidiaries pursuant to its consolidated tax sharing agreement. The 2005 effective rate was
significantly lower than 2004, primarily due to an increase in the allocation of consolidated tax savings. This corporate allocation may cause significant fluctuations in the effective income tax rates from the statutory rates for the subsidiaries
depending on the level of pre-tax profitability.



Discontinued Operations



Monongahela recorded income from discontinued operations
of $10.9 million and $11.0 million for the three months ended March 31, 2005 and 2004, respectively. Comparative information has been reclassified for all prior periods to reflect these results as discontinued operations. See Note 3, Assets
Held for Sale and Discontinued Operations, to Monongahelas Consolidated Financial Statements for additional information.



81



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##### Table of Contents

MONONGAHELA POWER COMPANYDISCUSSION OF SEGMENT RESULTS OF OPERATIONS:



Monongahelas Delivery and Services Segment Results



Net income increased $5.9 million for the three months ended March 31, 2005
as compared to the three months ended March 31, 2004, primarily due to a $4.9 million decrease in income tax expense.



Operating Revenues



The following table provides retail electricity sales information related to the Delivery and Services segment:



|                                         |  |                             |  |       |  |        |   
|---------------------------------------- |  | --------------------------- |  | ----- |  | ------ | --
|                                         |  | Three Months EndedMarch 31, |  |       | 
|                                         |  | 2005                        |  | 2004  |  | Change |   
|Retail electricity sales (million KWhs): |  |                             |  |       |  |        |   
|Residential                              |  | 1,009                       |  | 1,032 |  | (2.2   | )%
|Commercial                               |  | 658                         |  | 631   |  | 4.3    | % 
|Industrial                               |  | 1,478                       |  | 1,476 |  | 0.1    | % 
|Other                                    |  | 6                           |  | 6     |  |       | % 
|                                         |  |                             |  |       |  |        |   
|Total retail electricity sales           |  | 3,151                       |  | 3,145 |  | 0.2    | % 
|                                         |  |                             |  |       |  |        |   
|Heating Degree-Days*                     |  | 2,399                       |  | 2,705 |  | (11.3  | )%

---

|* | The operations of the Distribution Companies are weather sensitive. Weather conditions directly influence the volume of electricity delivered by the Distribution Companies, but
represent only one of several factors that impact the volume of electricity. Degree-day data is used to estimate amounts of energy required to maintain comfortable indoor temperature levels based on each days average temperature. Heating
degree days is the measure of the variation in the weather based on the extent to which the average daily temperature falls below 65° Fahrenheit, and cooling degree days 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.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Total operating revenues for the Delivery and
Services segment were as follows:



|                                                    |  |                             |       |      |   |      
|--------------------------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                                    |  | Three Months EndedMarch 31,
|(In millions)                                       |  | 2005                        |       | 2004
|Retail electric:                                    |  |                             |       |      |   |      
|Residential                                         |  | $                           | 72.1  |      | $ | 72.9 
|Commercial                                          |  |                             | 39.6  |      |   | 36.8 
|Industrial                                          |  |                             | 57.6  |      |   | 54.6 
|Other                                               |  |                             | 0.7   |      |   | 0.6  
|                                                    |  |                             |       |      |   |      
|Total retail electric                               |  | $                           | 170.0 |      | $ | 164.9
|                                                    |  |                            
|Transmission services and bulk power                |  |                             | 5.7   |      |   | 7.2  
|Other affiliated and non-affiliated energy services |  |                             | 1.6   |      |   | 1.6  
|                                                    |  |                             |       |      |   |      
|Total Delivery and Services revenues                |  | $                           | 177.3 |      | $ | 173.7
|                                                    |  |                             |       |      |   |      



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##### Table of Contents

Retail electric revenues increased $5.1 million for the three months ended March 31, 2005 as compared to
the three months ended March 31, 2004, primarily due to:



| |  |  | a $2.8 million increase in commercial sales as a result of a 4.3% increase in MWh sales due to a 1.8% increase in the average number of customers served, a 2.4% increase in usage
per customer and a 3.2% increase in rates and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $3.0 million increase in industrial sales as a result of a 5.3% increase in prices, due in part to the expiration of a temporary customer choice credit.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



Transmission services and bulk power decreased $1.5 million for the three
months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to the expiration of certain transition credits that were related to Allegheny joining the PJM regional transmission system.



Operating Expenses



Purchased Power and Transmission: Purchased power and transmission represents power purchases from, and
exchanges with, other companies and purchases from qualified facilities under PURPA. Purchased power and transmission consists of the following items:



|                                       |  |                             |       |      |   |      
|-------------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                       |  | Three Months EndedMarch 31,
|(In millions)                          |  | 2005                        |       | 2004
|From PURPA generation*                 |  | $                           | 14.6  |      | $ | 13.8 
|Other purchased power and transmission |  |                             | 99.9  |      |   | 95.7 
|                                       |  |                             |       |      |   |      
|Total purchased power and transmission |  | $                           | 114.5 |      | $ | 109.5
|                                       |  |                             |       |      |   |      
|*PURPA cost (cents per KWh)            |  |                             | 4.4   |      |   | 4.2  



Other purchased power
primarily consists of Monongahelas Delivery and Services segments purchases of energy from Monongahelas Generation and Marketing segment and purchased power from third party suppliers to meet its obligation. Other purchased power
increased $4.2 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to a price increase of 3.7% related to purchased power from third party suppliers.



Operations and Maintenance: Operations and maintenance expenses
for the Delivery and Services segment were as follows:



|                           |  |                             |      |      |   |     
|-------------------------- |  | --------------------------- | ---- | ---- | - | ----
|                           |  | Three Months EndedMarch 31,
|(In millions)              |  | 2005                        |      | 2004
|Operations and maintenance |  | $                           | 27.0 |      | $ | 30.7



Operations and
maintenance expenses primarily include salaries and wages, employee benefits, materials and supplies, contract work, outside services and other expenses. Operations and maintenance expenses decreased $3.7 million for the three months ended March 31,
2005 as compared to the three months ended March 31, 2004 primarily due to:



| |  |  | a $1.6 million decrease in salaries and wages and
| | - |  | -------------------------------------------------



| |  |  | a $0.6 million decrease in outside services, primarily as a result of a decrease in the use of independent contractors and consultants.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



83



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##### Table of Contents

Discontinued Operations



Monongahela recorded income from discontinued operations of $10.9 million and $11.0 million for the three months ended March 31, 2005 and 2004,
respectively. See Note 3, Assets Held For Sale and Discontinued Operations, to Monongahelas Consolidated Financial Statements for additional information.



Monongahelas Generation and Marketing Segment Results



Net income decreased $2.4 million for the three months ended March 31, 2005 as compared to the three months ended March 31,
2004, primarily due to:



| |  |  | a $12.1 million increase in operating expenses,
| | - |  | -----------------------------------------------



| |  |  | partially offset by a $4.7 million increase in operating revenues and a $4.1 million decrease in income tax expense.
| | - |  | --------------------------------------------------------------------------------------------------------------------



Operating Revenues



Total operating revenues for the Generation and Marketing segment were as follows:



|                                        |  |                             |      |      |   |      |  
|--------------------------------------- |  | --------------------------- | ---- | ---- | - | ---- | -
|                                        |  | Three Months EndedMarch 31, |     
|(In millions)                           |  | 2005                        |      | 2004 |  
|Revenue from affiliates                 |  | $                           | 84.8 |      | $ | 87.4 |  
|Wholesale and other, net                |  |                             | 6.2  |      |   | (1.1 | )
|                                        |  |                             |      |      |   |      |  
|Total Generation and Marketing revenues |  | $                           | 91.0 |      | $ | 86.3 |  
|                                        |  |                             |      |      |   |      |  



Revenues represent
sales to Monongahelas Delivery and Services segment to meet PLR obligations and other energy net sales at market prices. Total revenues increased $4.7 million for the three months ended March 31, 2005 as compared to the three months ended
March 31, 2004, primarily due to increased revenues from PJM congestion credits.



Operating Expenses



Fuel Consumed in
Electric Generation: Fuel consumed in electric generation represents primarily the cost of coal, lime and other materials consumed in the generation of power and emission allowances. Fuel consumed in electric generation for the Generation
and Marketing segment was as follows:



|                                     |  |                             |      |      |   |     
|------------------------------------ |  | --------------------------- | ---- | ---- | - | ----
|                                     |  | Three Months EndedMarch 31,
|(In millions)                        |  | 2005                        |      | 2004
|Fuel consumed in electric generation |  | $                           | 35.0 |      | $ | 32.7



Total fuel expenses
increased by $2.3 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to:



| |  |  | a $3.7 million increase in fuel prices, primarily as a result of increased cost of coal and other fuel,
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | partially offset by a decrease of $0.9 million as a result of decreased MWhs generated.
| | - |  | ---------------------------------------------------------------------------------------



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##### Table of Contents

Purchased Power and Transmission: Purchased power and transmission represents power
purchases from, and exchanges with, other companies. Purchased power and transmission for the Generation and Marketing segment was as follows:



|                                 |  |                             |      |      |   |     
|-------------------------------- |  | --------------------------- | ---- | ---- | - | ----
|                                 |  | Three Months EndedMarch 31,
|(In millions)                    |  | 2005                        |      | 2004
|Purchased power and transmission |  | $                           | 25.9 |      | $ | 11.6



Purchased power and
transmission increased $14.3 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to additional purchases to service load requirements of Monongahelas Delivery and Services
segment in West Virginia that were previously obtained from a third party, PJM congestion charges and additional purchases due to reduced dispatch of generation units.



Operations and Maintenance: Operations and maintenance expenses for the Generation and Marketing segment were
as follows:



|                           |  |                             |      |      |   |     
|-------------------------- |  | --------------------------- | ---- | ---- | - | ----
|                           |  | Three Months EndedMarch 31,
|(In millions)              |  | 2005                        |      | 2004
|Operations and maintenance |  | $                           | 16.9 |      | $ | 21.8



Operations and
maintenance expenses decreased $4.9 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004. This decrease was primarily due to:



| |  |  | a $3.9 million decrease in outside services and contract work expenses and
| | - |  | --------------------------------------------------------------------------



| |  |  | a $0.8 million decrease in salaries and wages expenses.
| | - |  | -------------------------------------------------------



Outside services and contract work expenses decreased as a result of expenditures during the first quarter of 2004 related to repairs and accelerated
special maintenance at Hatfields Ferry Unit No. 2 and Pleasants Unit No. 1 and a decreased use of independent consultants for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004.



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##### Table of Contents

THE POTOMAC EDISON COMPANY AND SUBSIDIARIESRESULTS OF OPERATIONS



Income Summary



|                           |  |                             |       |      |   |      
|-------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                           |  | Three Months EndedMarch 31,
|(In millions)              |  | 2005                        |       | 2004
|Operating revenues         |  | $                           | 257.6 |      | $ | 247.2
|Operating income           |  | $                           | 33.1  |      | $ | 28.5 
|Income before income taxes |  | $                           | 27.2  |      | $ | 21.5 
|Net income                 |  | $                           | 20.1  |      | $ | 13.8 



Net income increased
$6.3 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004. This increase was primarily due to:



| |  |  | a $10.4 million increase in operating revenue,
| | - |  | ----------------------------------------------



| |  |  | partially offset by a $5.7 million increase in operating expenses.
| | - |  | ------------------------------------------------------------------



Operating Revenues



The following table provides electricity sales information related to Potomac Edison:



|                                  |  |                             |  |       |  |        |   
|--------------------------------- |  | --------------------------- |  | ----- |  | ------ | --
|                                  |  | Three Months EndedMarch 31, |  |       | 
|                                  |  | 2005                        |  | 2004  |  | Change |   
|Electricity sales (million KWhs): |  |                             |  |       |  |        |   
|Residential                       |  | 1,820                       |  | 1,788 |  | 1.8    | % 
|Commercial                        |  | 811                         |  | 779   |  | 4.1    | % 
|Industrial                        |  | 1,557                       |  | 1,549 |  | 0.5    | % 
|Other                             |  | 6                           |  | 6     |  |       | % 
|                                  |  |                             |  |       |  |        |   
|Total electricity sales           |  | 4,194                       |  | 4,122 |  | 1.7    | % 
|                                  |  |                             |  |       |  |        |   
|Heating Degree-Days*              |  | 2,645                       |  | 2,851 |  | (7.2   | )%

---

|* | The operations of the Distribution Companies are weather sensitive. Weather conditions directly influence the volume of electricity delivered by the Distribution Companies, but
represent only one of several factors that impact the volume of electricity. Degree-day data is used to estimate amounts of energy required to maintain comfortable indoor temperature levels based on each days average temperature. Heating
degree days is the measure of the variation in the weather based on the extent to which the average daily temperature falls below 65° Fahrenheit, and cooling degree days 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.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



86



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##### Table of Contents

Total operating revenues were as follows:



|                                                   |  |                             |       |      |   |      
|-------------------------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                                   |  | Three Months EndedMarch 31,
|(In millions)                                      |  | 2005                        |       | 2004
|Retail electric:                                   |  |                             |       |      |   |      
|Residential                                        |  | $                           | 121.8 |      | $ | 119.7
|Commercial                                         |  |                             | 54.3  |      |   | 46.6 
|Industrial                                         |  |                             | 57.2  |      |   | 57.9 
|Other                                              |  |                             | 1.2   |      |   | 1.2  
|                                                   |  |                             |       |      |   |      
|Total retail electric                              |  | $                           | 234.5 |      | $ | 225.4
|                                                   |  |                            
|Transmission services and bulk power               |  |                             | 21.2  |      |   | 19.4 
|Other affiliated and nonaffiliated energy services |  |                             | 1.9   |      |   | 2.4  
|                                                   |  |                             |       |      |   |      
|Total operating revenues                           |  | $                           | 257.6 |      | $ | 247.2
|                                                   |  |                             |       |      |   |      



Retail electric
revenues increased $9.1 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to:



| |  |  | a $2.1 million increase in residential sales and
| | - |  | ------------------------------------------------



| |  |  | a $7.7 million increase in commercial sales.
| | - |  | --------------------------------------------



Residential sales increased as a result of a 1.8% increase in MWh sales due to a 2.7% increase in the average number of customers served, partially offset
by 0.8% decrease in usage per average customer. The decrease in usage per average customer was primarily the result of a 7.2% decrease in heating degree-days. Commercial sales increased as a result of a 4.1% increase in MWh sales and a 12.0%
increase in price per MWh. MWh sales increased due to a 2.8% increase in the average number of customers served and a 1.2% increase in usage per average customer. Price per MWh increased as a result of the removal of certain customer generation rate
caps.



Transmission services and bulk power revenues increased
$1.8 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to power sales related to the AES Warrior Run cogeneration facility, partially offset by decreased transmission revenues as a
result of the expiration of certain transition credits.



Operating Expenses



Purchased Power and Transmission: Purchased
power and transmission represents power purchases primarily from AE Supply and qualified facilities under PURPA. Purchased power and transmission consists of the following:



|                                       |  |                             |       |      |   |      
|-------------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                       |  | Three Months EndedMarch 31,
|(In millions)                          |  | 2005                        |       | 2004
|Other purchased power and transmission |  | $                           | 152.2 |      | $ | 146.5
|From PURPA generation*                 |  |                             | 25.6  |      |   | 25.1 
|                                       |  |                             |       |      |   |      
|Total purchased power and transmission |  | $                           | 177.8 |      | $ | 171.6
|                                       |  |                             |       |      |   |      
|* PURPA cost (cents per KWh)           |  |                             | 6.6   |      |   | 6.5  



Purchased power and
transmission expense increased $6.2 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to a $5.7 million increase in other purchased power as a result of a 9.2% increase in cost per
MWh due to the expiration of



87



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##### Table of Contents

capped rate service for commercial and industrial customers under the AE Supply agreement in Maryland and the initiation of service under the new
market-based supply contracts for Maryland commercial and industrial customers. The increase in purchased power was partially offset by a 3.3% decrease in MWhs purchased primarily due to increased customer shopping in Maryland.



Deferred Energy Costs, Net: Deferred energy costs, net, are
primarily related to the recovery of net costs associated with purchases from the AES Warrior Run cogeneration facility.



To satisfy its obligations under PURPA, Potomac Edison entered into a long-term contract to purchase capacity and energy from the AES Warrior Run
cogeneration facility through the beginning of 2030. Effective July 1, 2000, Potomac Edison was authorized by the Maryland PSC to recover all contract costs from the AES Warrior Run cogeneration facility, net of any revenues received from the sale
of AES Warrior Run output into the wholesale energy market, by means of a retail revenue surcharge (the AES Warrior Run Surcharge). Any under-recovery or over-recovery of net costs is being deferred on Potomac Edisons Consolidated
Balance Sheets as deferred energy costs, pending subsequent recovery from, or return to, customers through adjustments to the AES Warrior Run Surcharge. Because the AES Warrior Run Surcharge represents a dollar-for-dollar recovery of net contract
costs, AES Warrior Run Surcharge revenues or revenues from sales of AES Warrior Run output do not impact Potomac Edisons net income. Through a competitive bidding process approved by the Maryland PSC, AE Supply was awarded the contract to
purchase the output of the AES Warrior Run facility for the period from January 1, 2002 through December 31, 2004. This contract expired and Potomac Edison awarded a new contract to a non-affiliated third party.



Operations and Maintenance: Operations and maintenance expenses
were as follows:



|                           |  |                             |      |      |   |     
|-------------------------- |  | --------------------------- | ---- | ---- | - | ----
|                           |  | Three Months EndedMarch 31,
|(In millions)              |  | 2005                        |      | 2004
|Operations and maintenance |  | $                           | 25.5 |      | $ | 27.5



Operations and
maintenance expenses primarily include salaries and wages, employee benefits, materials and supplies, contract work, outside services and other expenses. Operations and maintenance expenses decreased $2.0 million for the three months ended March 31,
2005 as compared to the three months ended March 31, 2004, primarily due to a $1.4 million decrease in contract work and outside services. The decrease in contract work and outside services was a result of a decrease in the use of temporary workers
and outside attorneys.



Depreciation and
Amortization: Depreciation and Amortization expenses were as follows:



|                              |  |                             |      |      |   |    
|----------------------------- |  | --------------------------- | ---- | ---- | - | ---
|                              |  | Three Months EndedMarch 31,
|(In millions)                 |  | 2005                        |      | 2004
|Depreciation and amortization |  | $                           | 10.7 |      | $ | 9.7



Depreciation and
amortization expenses increased $1.0 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, primarily due to increased depreciation resulting from capital expenditures during 2004 and $14.7 million of
capital expenditures during 2005.



Income Tax Expense



The effective income tax rates for the three months ended March 31, 2005 and
2004 were 26.2% and 35.6%, respectively.



88



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##### Table of Contents

The effective tax rate for the three months ended March 31, 2005 is lower than the federal statutory tax
rate, primarily due to:



| |  |  | the allocation of corporate tax savings,
| | - |  | ----------------------------------------



| |  |  | partially offset by the effect of increased allocated state income taxes and
| | - |  | ----------------------------------------------------------------------------



| |  |  | deferred property tax reversals, primarily related to depreciation.
| | - |  | -------------------------------------------------------------------



The effective tax rate for the three months ended March 31, 2004 is higher than the federal statutory tax rate, primarily due to:



| |  |  | the effect of increased allocated state income taxes and
| | - |  | --------------------------------------------------------



| |  |  | deferred property tax reversals, primarily depreciation related.
| | - |  | ----------------------------------------------------------------



Allegheny allocates income tax expense or benefit to its subsidiaries pursuant to its consolidated tax sharing agreement. The 2005 effective rate was
significantly lower than 2004, primarily due to an increase in the allocation of consolidated tax savings. This corporate allocation may cause significant fluctuations in the effective income tax rates from the statutory rates for the subsidiaries
depending on the level of pre-tax profitability.



89



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##### Table of Contents

ALLEGHENY GENERATING COMPANYRESULTS OF OPERATIONS



Income Summary



|                           |  |                             |      |      |   |     
|-------------------------- |  | --------------------------- | ---- | ---- | - | ----
|                           |  | Three Months EndedMarch 31,
|(In millions)              |  | 2005                        |      | 2004
|Operating revenues         |  | $                           | 16.9 |      | $ | 17.2
|Operating income           |  | $                           | 10.7 |      | $ | 10.8
|Income before income taxes |  | $                           | 8.8  |      | $ | 8.5 
|Net income                 |  | $                           | 7.4  |      | $ | 7.0 



Net income increased
$0.4 million for the three months ended March 31, 2005 as compared to March 31, 2004. This increase was primarily due to an increase in the allocated state and federal income tax expenses from Allegheny pursuant to its consolidated tax sharing
agreement.



Operating Revenues and Expenses



AGCs only operating asset is an undivided 40% interest in the Bath
County, Virginia pumped-storage hydroelectric station and its connecting transmission facilities.



Pursuant to an agreement, AE Supply and Monongahela purchase all of AGCs capacity at prices based on a cost-of-service formula wholesale
rate schedule (the revenue requirements) approved by FERC. AE Supply and Monongahela purchase power from AGC on a proportional basis, based on their respective equity ownership of AGC. Under this arrangement, AGC recovers in revenues all
of its operations and maintenance expense, depreciation, taxes other than income taxes, income tax expense at the statutory rate and a component for debt and equity return on its investment.



Income Tax Expense



Allegheny allocates income tax expense or benefit to its subsidiaries pursuant to its consolidated tax sharing agreement.
This corporate allocation may cause significant fluctuations in the effective income tax rates from the statutory rates for the subsidiaries depending on the level of pre-tax profitability.



The effective tax rates were 16.8% and 18.3% for the three months ended March
31, 2005 and 2004, respectively. The effective tax rates for the three months ended March 31, 2005 and 2004 are lower than the federal statutory tax rate, primarily due to:



| |  |  | the allocation of consolidated tax savings;
| | - |  | -------------------------------------------



| |  |  | the amortization of deferred investment tax credits and
| | - |  | -------------------------------------------------------



| |  |  | certain depreciation adjustments recorded in 2004.
| | - |  | --------------------------------------------------



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FINANCIAL CONDITION, REQUIREMENTS AND RESOURCES



Liquidity and Capital Requirements



To meet cash needs for operating expenses, the payment of interest, retirement of debt and acquisitions and construction programs, Allegheny has
historically used internally generated funds (net cash provided by operations less common and preferred dividends) and external financings, including the sale of common and preferred stock, debt instruments, installment loans and lease arrangements.
The timing and amount of external financings depend primarily upon economic and financial market conditions and Alleghenys cash needs and capital structure objectives. The availability and cost of external financings depend upon the financial
condition of the companies seeking those funds and upon market conditions.



Alleghenys consolidated capital structure, including short-term debt and liabilities associated with assets held for sale and excluding minority interest, as of March 31, 2005 and 2004, was as follows:



|                 |  |                |         |                   |       |                |   |         |  |        |  |   |         |  |      
|---------------- |  | -------------- | ------- | ----------------- | ----- | -------------- | - | ------- |  | ------ |  | - | ------- |  | -----
|                 |  | March 31, 2005 |         | December 31, 2004 |       | March 31, 2004
|(In millions)    |  | Amount         |         | %                 |       | Amount         |   | %       |  | Amount |  | %
|Debt             |  | $              | 4,745.2 |                   | 76.4  |                | $ | 5,012.6 |  | 77.8   |  | $ | 5,519.4 |  | 77.3 
|Common equity    |  |                | 1,392.1 |                   | 22.4  |                |   | 1,353.8 |  | 21.0   |  |   | 1,551.4 |  | 21.7 
|Preferred equity |  |                | 74.0    |                   | 1.2   |                |   | 74.0    |  | 1.2    |  |   | 74.0    |  | 1.0  
|                 |  |                |         |                   |       |                |   |         |  |        |  |   |         |  |      
|Total            |  | $              | 6,211.3 |                   | 100.0 |                | $ | 6,440.4 |  | 100.0  |  | $ | 7,144.8 |  | 100.0
|                 |  |                |         |                   |       |                |   |         |  |        |  |   |         |  |      



During the three
months ended March 31, 2005, AE Supply repaid an aggregate $208.4 million outstanding under its secured credit facility that was refinanced in October 2004 (the Refinanced AE Supply Loan). As a result of repayments made during the fourth
quarter of 2004 and a portion of the repayment made during first quarter of 2005, the annual interest rate on the Refinanced AE Supply Loan was reduced to the London Interbank Offering Rate plus 2.50%. See Note 2, Debt, to the
Consolidated Financial Statements for additional information.



In April 2005, the holders of $295.0 million of the outstanding $300.0 million 117/8% Mandatorily
Convertible Trust Preferred Securities (the Trust Preferred Securities) issued by Allegheny Capital Trust I (Capital Trust) accepted AE and Capital Trusts tender offer and consent solicitation. Under the terms of the
offer, for each $1,000 in liquidation amount of Trust Preferred Securities tendered, a holder received 83.33 shares of AE common stock and $160 in cash. On April 22, 2005, AE issued an aggregate of 24.6 million shares of its common stock and $47.2
million in cash to the holders of the tendered Trust Preferred Securities. The $47.2 million cash payment was principally funded by borrowing under AEs revolving credit facility and will be expensed during the second quarter of 2005. In
addition, AE received the required consents from holders of the Trust Preferred Securities for amendments to the indenture governing AEs 117/8% Notes due 2008. The holder of the remaining $5.0 million in liquidation amount of Trust Preferred Securities converted its Trust Preferred Securities into 416,650 shares of AE common stock on May 3,
2005.



Allegheny made various other debt payments
during the three months ended March 31, 2005. See Note 2, Debt for additional information.



Off-Balance Sheet Arrangements



The registrants do not have off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on their financial condition, changes in financial condition, revenues, expenses, results of
operations, liquidity, capital expenditures or capital resources.



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Long-Term Debt



See Note 2, Debt, for additional information and details regarding Alleghenys debt. See also Item 8, Note 3, Capitalization,
in the 2004 Annual Report on Form 10-K for additional details and discussion regarding debt covenants, refinancing and other debt issuances and redemptions.



Allegheny has various obligations and commitments to make future cash payments under debt instruments, lease arrangements, fuel agreements and other
contracts. The table below summarizes the payments due by period for these obligations and commitments, by entity, as of March 31, 2005. The table below does not include expected pension contributions described in Note 11, Pension Benefits and
Post Retirement Benefits other than Pensions, contingent liabilities, liabilities associated with assets held for sale and contractual commitments that were accounted for under fair value accounting. For more information regarding fair value
accounting, see Allegheny Energy, Inc.Discussion of Segment Results of OperationsAEs Generation and Marketing Segment.



|                                                      |  |                                           |       |                                                 |   |                                                 |  |                                        |         |       |   |         |  |   |         
|----------------------------------------------------- |  | ----------------------------------------- | ----- | ----------------------------------------------- | - | ----------------------------------------------- |  | -------------------------------------- | ------- | ----- | - | ------- |  | - | --------
|Contractual Obligations and
Commitments (In millions) |  | Payments from April 1, toDecember 31,2005 |       | Payments fromJanuary 1, 2006to December 31,2007 |   | Payments fromJanuary 1, 2008to December 31,2009 |  | Payments fromJanuary 1, 2010 andbeyond |         | Total
|Long-term debt *                                      |  | $                                         | 361.4 |                                                 | $ | 1,122.1                                         |  | $                                      | 365.1   |       | $ | 2,825.3 |  | $ | 4,673.9 
|Capital lease obligations **                          |  |                                           | 9.4   |                                                 |   | 22.8                                            |  |                                        | 5.0     |       |   | 0.7     |  |   | 37.9    
|Operating lease obligations **                        |  |                                           | 5.6   |                                                 |   | 8.1                                             |  |                                        | 6.4     |       |   | 20.7    |  |   | 40.8    
|PURPA purchased power                                 |  |                                           | 155.1 |                                                 |   | 420.0                                           |  |                                        | 432.9   |       |   | 3,935.6 |  |   | 4,943.6 
|Fuel purchase and transportation commitments **       |  |                                           | 447.5 |                                                 |   | 867.3                                           |  |                                        | 440.9   |       |   | 1,305.2 |  |   | 3,060.9 
|                                                      |  |                                           |       |                                                 |   |                                                 |  |                                        |         |       |   |         |  |   |         
|Total                                                 |  | $                                         | 979.0 |                                                 | $ | 2,440.3                                         |  | $                                      | 1,250.3 |       | $ | 8,087.5 |  | $ | 12,757.1
|                                                      |  |                                           |       |                                                 |   |                                                 |  |                                        |         |       |   |         |  |   |         

---

|* | Does not include debt associated with assets held for sale, unamortized debt expense, discounts and premiums.
|- | -------------------------------------------------------------------------------------------------------------

|** | Does not include amounts associated with assets held for sale.
|-- | --------------------------------------------------------------



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Monongahela has various obligations and commitments to make future cash payments under debt instruments,
lease arrangements, fuel agreements and other contracts. The table below summarizes the payments due by period for these obligations and commitments, by entity, as of March 31, 2005. The table below does not include expected pension contributions,
contingent liabilities and liabilities associated with assets held for sale.



|                                                      |  |                                           |       |                                                 |   |                                                 |  |                                       |       |       |   |         |  |   |        
|----------------------------------------------------- |  | ----------------------------------------- | ----- | ----------------------------------------------- | - | ----------------------------------------------- |  | ------------------------------------- | ----- | ----- | - | ------- |  | - | -------
|Contractual Obligations and Commitments (In millions) |  | Payments from April 1, toDecember 31,2005 |       | Payments fromJanuary 1, 2006to December 31,2007 |   | Payments fromJanuary 1, 2008to December 31,2009 |  | Payments fromJanuary 1,2010 andbeyond |       | Total
|Long-term debt *                                      |  | $                                         |      |                                                 | $ | 315.5                                           |  | $                                     |      |       | $ | 370.2   |  | $ | 685.7  
|Capital lease obligations **                          |  |                                           | 3.7   |                                                 |   | 9.1                                             |  |                                       | 1.8   |       |   | 0.2     |  |   | 14.8   
|Operating lease obligations **                        |  |                                           | 0.5   |                                                 |   | 0.3                                             |  |                                       |      |       |   |        |  |   | 0.8    
|PURPA purchased power                                 |  |                                           | 57.6  |                                                 |   | 116.4                                           |  |                                       | 117.5 |       |   | 1,224.0 |  |   | 1,515.5
|Fuel purchase and transportation commitments **       |  |                                           | 94.4  |                                                 |   | 169.6                                           |  |                                       | 85.3  |       |   | 259.5   |  |   | 608.8  
|                                                      |  |                                           |       |                                                 |   |                                                 |  |                                       |       |       |   |         |  |   |        
|Total                                                 |  | $                                         | 156.2 |                                                 | $ | 610.9                                           |  | $                                     | 204.6 |       | $ | 1,853.9 |  | $ | 2,825.6
|                                                      |  |                                           |       |                                                 |   |                                                 |  |                                       |       |       |   |         |  |   |        

---

|* | Does not include debt associated with assets held for sale, unamortized debt expense, discounts and premiums.
|- | -------------------------------------------------------------------------------------------------------------

|** | Does not include amounts associated with assets held for sale.
|-- | --------------------------------------------------------------



AE Supply has various obligations and commitments to make future cash payments under debt instruments, lease arrangements, fuel agreements and other
contracts. The table below summarizes the payments due by period for these obligations and commitments as of March 31, 2005. The table below does not include expected pension contributions, contingent liabilities, liabilities associated with assets
held for sale and contractual commitments that were accounted for under fair value accounting.



|                                                      |  |                                            |       |                                                 |   |                                                 |  |                                       |       |       |   |         |  |   |        
|----------------------------------------------------- |  | ------------------------------------------ | ----- | ----------------------------------------------- | - | ----------------------------------------------- |  | ------------------------------------- | ----- | ----- | - | ------- |  | - | -------
|Contractual Obligations and Commitments (In millions) |  | Payments from April 1, to December 31,2005 |       | Payments fromJanuary 1, 2006to December 31,2007 |   | Payments fromJanuary 1, 2008to December 31,2009 |  | Payments fromJanuary 1,2010 andbeyond |       | Total
|Long-term debt*                                       |  | $                                          | 7.8   |                                                 | $ | 478.1                                           |  | $                                     | 20.8  |       | $ | 2,065.7 |  | $ | 2,572.4
|Capital lease obligations **                          |  |                                            | 0.3   |                                                 |   | 0.2                                             |  |                                       |      |       |   |        |  |   | 0.5    
|Operating lease obligations**                         |  |                                            | 4.4   |                                                 |   | 7.1                                             |  |                                       | 6.4   |       |   | 20.7    |  |   | 38.6   
|Fuel purchase and transportation commitments**        |  |                                            | 353.1 |                                                 |   | 697.7                                           |  |                                       | 355.7 |       |   | 1,045.7 |  |   | 2,452.2
|                                                      |  |                                            |       |                                                 |   |                                                 |  |                                       |       |       |   |         |  |   |        
|Total                                                 |  | $                                          | 365.6 |                                                 | $ | 1,183.1                                         |  | $                                     | 382.9 |       | $ | 3,132.1 |  | $ | 5,063.7
|                                                      |  |                                            |       |                                                 |   |                                                 |  |                                       |       |       |   |         |  |   |        

---

|* | Does not include unamortized debt expense, discounts and premiums.
|- | ------------------------------------------------------------------

|** | Does not include amounts associated with assets held for sale.
|-- | --------------------------------------------------------------



The obligations and commitments schedules for Potomac Edison, AGC and West Penn did not change materially from the amounts reported in the 2004 Annual
Report on Form 10-K.



Alleghenys capital
expenditures for the last nine months of 2005 and for the full year of 2006 are estimated at $240.0 million and $385.4 million, respectively, and include estimated expenditures of $54.0 million and $136.1 million, respectively, for environmental
control technology. See Item 8, Note 27, Commitments and Contingencies, to the 2004 Annual Report on Form 10-K for additional information.



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Assets Held For Sale



Contractual cash obligations and commitments related to assets held for sale at March 31, 2005 have been excluded from the table. The table below provides
a summary of the payments due by period for these obligations and commitments.



|                                                      |  |                                           |      |                                                 |   |                                                 |  |                                        |      |       |   |       |  |   |      
|----------------------------------------------------- |  | ----------------------------------------- | ---- | ----------------------------------------------- | - | ----------------------------------------------- |  | -------------------------------------- | ---- | ----- | - | ----- |  | - | -----
|Contractual Obligations and
Commitments (In millions) |  | Payments from April 1, toDecember 31,2005 |      | Payments fromJanuary 1, 2006to December 31,2007 |   | Payments fromJanuary 1, 2008to December 31,2009 |  | Payments fromJanuary 1, 2010 andbeyond |      | Total
|Long-term debt                                        |  | $                                         | 3.3  |                                                 | $ | 6.7                                             |  | $                                      | 16.7 |       | $ | 60.0  |  | $ | 86.7 
|Capital lease obligations                             |  |                                           | 0.1  |                                                 |   | 0.1                                             |  |                                        |     |       |   |      |  |   | 0.2  
|Operating lease obligations                           |  |                                           | 0.4  |                                                 |   | 0.5                                             |  |                                        | 0.2  |       |   | 0.4   |  |   | 1.5  
|Fuel purchase and transportation commitments          |  |                                           | 15.8 |                                                 |   | 43.0                                            |  |                                        | 42.8 |       |   | 107.5 |  |   | 209.1
|                                                      |  |                                           |      |                                                 |   |                                                 |  |                                        |      |       |   |       |  |   |      
|Total                                                 |  | $                                         | 19.6 |                                                 | $ | 50.3                                            |  | $                                      | 59.7 |       | $ | 167.9 |  | $ | 297.5
|                                                      |  |                                           |      |                                                 |   |                                                 |  |                                        |      |       |   |       |  |   |      



Financing



Debt: See Note 2, Debt, for a discussion of the issuances
and redemptions of debt by the registrants during the three months ended March 31, 2005.



Short-term Debt: AE manages short-term obligations with cash on hand and amounts available under revolving credit facilities. AE Supply manages short-term obligations with cash on hand. Monongahela, Potomac
Edison, West Penn and AGC manage excess cash and short-term requirements through an internal money pool. The money pool provides funds to approved AE subsidiaries at the lower of the previous days Federal Funds Effective Interest Rate, as
quoted by the Federal Reserve, or the previous days seven day commercial paper rate, as quoted by the same source, less four basis points. AE can only lend money into the money pool. AGC can only borrow money from the money pool. Monongahela,
West Penn and Potomac Edison can either lend money into, or borrow money from, the money pool.



At March 31, 2005, no registrant had access to any short-term revolving credit facilities or lines of credit with third-party financial institutions beyond those described above. AE had $188.5 million of revolving
credit available under its $200 million revolving credit facility. There were $11.5 million of outstanding letters of credit drawn against the revolving credit facility at March 31, 2005. In addition, AE Supply had a $1.6 million letter of credit
outstanding at March 31, 2005 which was collateralized by cash. See Item 8, Note 3, Capitalization, of the 2004 Annual Report on Form 10-K for additional information.



Asset Sales



Land Sales:During the three months ended March 31, 2005, AE Supply and West Penn and its subsidiaries completed land sales for aggregate proceeds
of $2.4 million.



See Note 3, Assets Held for Sale and
Discontinued Operations, for information relating to asset sales.



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Cash Flows



Allegheny



Alleghenys cash flows from operating activities primarily result from the sale of electricity and gas. Future cash flows will be affected by, among
other things, the impact that the economy, weather, customer choice and future regulatory proceedings have on revenues, future demand and market prices for energy, as well as Alleghenys ability to produce and supply its customers with power at
competitive prices.



Operating Activities: Changes in
cash flows from operations are generally consistent with changes in results of operations and are further impacted by changes in working capital. Net income before depreciation and amortization expense is a significant component of cash flows from
operating activities.



Cash flows from operating activities for
the three months ended March 31, 2005 were $96.5 million. Cash flows from operating activities consisted of net income of $42.6 million and discontinued operations and non-cash charges of $96.2 million, partially offset by changes in certain assets
and liabilities of $42.3 million. Cash flows from operating activities for the three months ended March 31, 2004 were $116.4 million, consisting of non-cash charges of $136.6 million and net income of $33.3 million, partially offset by changes in
certain assets and liabilities of $53.5 million.



Significant
cash flows related to operating activities for the three months ended March 31, 2005 included $26.1 million in payments to Alleghenys pension and other postretirement benefit plans, primarily as a result of contributions made to satisfy the
funding requirements of these benefit plans. Significant cash flows related to operating activities for the three months ended March 31, 2004 included $70.8 million in proceeds related to the 2003 sale of the CDWR contract and related hedges to J.
Aron & Company as a result of the exit from Western U.S. energy markets and $23.9 million in payments to Alleghenys pension and other post-retirement benefit plans, primarily as a result of contributions made to satisfy the funding
requirements of these benefits plans.



The changes in certain
assets and liabilities for the three months ended March 31, 2005 resulted in a decrease in operating cash flows of $42.3 million. Operating cash flows were used primarily for a $34.3 million increase in accounts receivable, net, primarily due to the
timing and volume of unbilled utility revenues, a $27.6 million increase in collateral deposits held as security for certain contracts, a $21.4 million decrease in accounts payable as a result of timing differences associated with the payment of
certain obligations and a $19.4 million change in taxes receivable/accrued, net, as a result of timing differences associated with the payment of certain tax obligations. These amounts were partially offset by cash flows generated by operating
activities primarily due to a $61.4 million increase in accrued interest, primarily due to $38.5 million of interest expense accrued for the Merrill Lynch litigation summary judgment.



The changes in certain assets and liabilities for the three months ended March 31, 2004 resulted in a decrease in operating
cash flows of $53.5 million. Operating cash flows were used primarily for a $58.7 million increase collateral deposits held as security for certain contracts, a $30.6 million increase in accounts receivable, net, primarily due to the timing and
volume of unbilled utility revenues, and a $15.8 million change in taxes receivable/accrued, net, primarily as a result of timing differences associated with the payment of certain tax obligations. These amounts were partially offset by cash flows
generated by operating activities primarily due to a $48.4 million decrease in materials, supplies and fuel inventory, primarily as a result of seasonal fuel usage.



Investing Activities: Cash flows from investing activities for the three months ended March 31, 2005 were $157.5
million. Cash flows used in investing activities for the three months ended March 31, 2004 were $27.9 million.



Significant cash flows from investing activities for the three months ended March 31, 2005 included a $208.9 million decrease in restricted funds
primarily due to the release of the proceeds related



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to the 2004 sales of OVEC and the Lincoln generation facility. This amount was partially offset by $53.0 million in
capital expenditures ($39.5 million from the Delivery and Services segment and $13.5 million from the Generation and Marketing segment).



Significant cash flows used in investing activities for the three months ended March 31, 2004 included $53.8 million in capital expenditures ($29.2
million from the Delivery and Services segment and $24.6 million from the Generation and Marketing segment). This amount was partially offset by a $17.4 million decrease in restricted funds and $11.6 million in proceeds from the sale of various
non-core assets.



Financing Activities: Cash flows used
in financing activities for the three months ended March 31, 2005 and 2004 were $266.8 million and $228.1 million, respectively.



Significant cash flows used in financing activities for the three months ended March 31, 2005 included $267.2 million in payments for the retirement of
long-term debt.



Significant cash flows used in financing
activities for the three months ended March 31, 2004 included $1,709.7 million in payments for the retirement of long-term debt. This amount was partially offset by $1,481.6 million (net of $21.7 million related to debt issuance costs) in proceeds
from the issuance of long-term debt.



Monongahela



Monongahelas cash flows from operating activities primarily result
from the sale of electricity and gas. Future cash flows will be affected by, among other things, the impact that the economy, weather, customer choice and future regulatory proceedings have on revenues, future demand and market prices for energy,
Monongahelas ability to obtain and provide its customers with power at competitive prices as well as the potential sale of Mountaineers business.



Internal generation of cash, consisting of cash flows from operating activities reduced by common and preferred dividends, was $60.8 million for the three
months ended March 31, 2005 compared with $46.4 million for the same period in 2004.



Operating Activities: Changes in cash flows from operations are generally consistent with changes in results of operations and are further impacted by changes in working capital. Net income before depreciation
and amortization expense is a significant component of cash flows from operating activities.



Cash flows from operating activities for the three months ended March 31, 2005 were $62.1 million, consisting of changes in certain assets and liabilities of $22.6 million, net income of $22.2 million and discontinued
operations and non-cash charges of $17.3 million. Cash flows from operating activities for the three months ended March 31, 2004 were $55.8 million, consisting of non-cash charges of $39.0 million and $18.7 million of net income, partially offset by
changes in certain assets and liabilities of $1.9 million.



The
changes in certain assets and liabilities for the three months ended March 31, 2005 resulted in an increase in operating cash flows of $22.6 million. Operating cash flows were primarily generated by a $57.4 million change in accounts receivable due
from/payable to affiliates, net, as a result of timing differences associated with the payment of certain obligations. This amount was partially offset by cash flows used for operating activities primarily as a result of an $18.8 million increase in
accounts receivable, net, primarily due to the timing and volume of unbilled utility revenues and a $16.7 million decrease in accrued taxes, primarily as a result of timing differences associated with the payment of certain tax obligations.



The changes in certain assets and liabilities for the three
months ended March 31, 2004 resulted in a decrease in operating cash flows of $1.9 million. Operating cash flows were used primarily for a $32.5 million change in accounts receivable due from/payable to affiliates, net, as a result of timing
differences associated with the payment of certain obligations, and a $23.6 million increase in accounts



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receivable, net, primarily due to the timing and volume of unbilled utility revenues. These amounts were partially offset
by cash flows generated by operating activities primarily due to a $41.7 million decrease in materials, supplies and fuel inventory, primarily as a result of seasonal fuel usage, and a $9.5 million increase in accrued taxes, primarily as a result of
timing differences associated with the payment of certain tax obligations.



Investing Activities: Cash flows used in investing activities for the three months ended March 31, 2005 and 2004 were $12.5 million ($10.1 million from the Delivery and Services segment and $2.4 million from
the Generation and Marketing segment) and $14.2 million ($9.8 million from the Delivery and Services segment and $4.4 million from the Generation and Marketing segment), respectively, consisting of capital expenditures.



Financing Activities: Cash flows used in financing activities for the
three months ended March 31, 2005 and 2004 were $40.0 million and $9.5 million, respectively. Significant cash flows used in financing activities for the three months ended March 31, 2005 were for cash dividends paid on preferred stock and a note
receivable from an affiliate. Significant cash flows used in financing activities for the three months ended March 31, 2004 were for cash dividends paid on preferred and common stock.



Potomac Edison



Potomac Edisons cash flows from operating activities primarily result from the sale of electricity. Future cash flows will be affected by, among
other things, the impact that the economy, weather and future regulatory proceedings have on revenues, future demand and market prices for energy, as well as Potomac Edisons ability to obtain and provide its customers with power at competitive
prices.



Internal generation of cash, consisting of cash flows
from operating activities reduced by common dividends, was $4.1 million for the three months ended March 31, 2005 compared with $11.0 million for the same period in 2004.



Operating Activities: Changes in cash flows from operations are generally consistent with changes in results of
operations and are further impacted by changes in working capital. Net income before depreciation and amortization expense is a significant component of cash flows from operating activities.



Cash flows from operating activities for the three months ended March 31,
2005 were $25.1 million, consisting of net income of $20.1 million and non-cash charges of $10.5 million, partially offset by changes in certain assets and liabilities of $5.5 million. Cash flows from operating activities for the three months ended
March 31, 2004 were $19.8 million, consisting of net income of $13.8 million and non-cash charges of $13.4 million, partially offset by changes in certain assets and liabilities of $7.4 million.



The changes in certain assets and liabilities for the three months ended
March 31, 2005 resulted in a decrease in operating cash flows of $5.5 million. Operating cash flows were used primarily for a $15.5 million increase in accounts receivable, net, primarily due to the timing and volume of unbilled utility revenues.
This amount was partially offset by cash flows generated by operating activities primarily due to a $9.7 million change in taxes receivable/accrued, net, primarily as a result of timing differences associated with the payment of certain tax
obligations.



The changes in certain assets and liabilities for
the three months ended March 31, 2004 resulted in a decrease in operating cash flows of $7.4 million. Operating cash flows were used primarily for an $18.2 million decrease in accounts payable to affiliates, net, as a result of timing differences
associated with the payment of certain obligations, and a $14.6 million increase in accounts receivable, net, primarily due to the timing and volume of unbilled utility revenues. These amounts were partially offset by cash flows generated by
operating activities primarily due to a $7.6 million increase in accounts payable, a $6.2 million change in taxes receivable/accrued, net, and a $5.8 million increase in accrued interest, each as a result of timing differences associated with the
payment of certain obligations.



Investing Activities:
Cash flows used in investing activities for the three months ended March 31, 2005 and 2004 were $5.4 million and $13.9 million, respectively. Significant cash flows used in investing



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activities for both periods were for capital expenditures. The three months ended March 31, 2005 amount also included a
source of $9.2 million resulting from a decrease in restricted funds due to reduced collateral requirements related to an intercompany power agreement.



Financing Activities: Cash flows used in financing activities for the three months ended March 31, 2005 and 2004 were $14.6 million and $8.7
million, respectively. Significant cash flows used in financing activities for both periods were for cash dividends paid on common stock. The three months ended March 31, 2005 amount also included a source of $6.4 million for a reduction in a note
receivable from an affiliate.



AGC



AGCs cash flows from operating activities primarily result from the
sale of electricity. Future cash flows will be affected by, among other things, the impact that the economy and weather have on revenues, future demand and market prices for energy.



Internal generation of cash, consisting of cash flows from operating activities reduced by common dividends, was $14.6
million for the three months ended March 31, 2005 compared with $6.5 million for the same period in 2004.



Operating Activities: Changes in cash flows from operations are generally consistent with changes in results of operations and are further impacted
by changes in working capital. Net income before depreciation and amortization expense is a significant component of cash flows from operating activities.



Cash flows from operating activities for the three months ended March 31, 2005 were $14.6 million, consisting of net income of $7.4 million, changes in
certain assets and liabilities of $4.7 million and non-cash charges of $2.5 million. Cash flows from operating activities for the three months ended March 31, 2004 were $12.0 million, consisting of net income of $7.0 million, non-cash charges of
$2.8 million and changes in certain assets and liabilities of $2.2 million.



The changes in certain assets and liabilities for the three months ended March 31, 2005 resulted in an increase in operating cash flows of $4.7 million. Operating cash flows were primarily generated by a $4.3 million
change in taxes receivable/accrued, net, primarily as a result of timing differences associated with the payment of certain tax obligations.



The changes in certain assets and liabilities for the three months ended March 31, 2004 resulted in an increase in operating cash flows of $2.2 million.
Operating cash flows were primarily generated by a $1.7 million change in accounts receivable due from/payable to affiliates, net, a $1.1 million increase in accounts payable and a $0.9 million change in taxes receivable/accrued, net, each as a
result of timing differences associated with the payment of certain obligations. These amounts were partially offset by cash flows used for operating activities primarily as a result of a $1.7 million decrease in accrued interest.



Investing Activities: Cash flows used in investing activities for the
three months ended March 31, 2005 and 2004 were $2.8 million and $2.0 million, respectively, consisting of capital expenditures.



Financing Activities: Cash flows used in financing activities for the three months ended March 31, 2005 were $10.0 million consisting of a payment
on a note payable to parent. Cash flows used in financing activities for the three months ended March 31, 2004 were $5.5 million consisting of cash dividends paid on common stock.



Change in Credit Ratings





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On February 17, 2005, Standard & Poors (S&P) upgraded its credit rating of AE
Supplys Term B Loan (referred to as the Refinanced AE Supply Loan) and the secured portion of the Amended A-Notes to BB- from B+. S&Ps outlook for AE and its subsidiaries remains positive.



On February 24, 2005, Moodys Investors Service
(Moodys) upgraded its credit rating for AEs senior unsecured debt to B1 from B2 and upgraded AEs Trust Preferred Securities from B3 to B2. Moodys also upgraded its
credit rating for AE Supplys senior secured debt to Ba3 from B1 and upgraded its credit rating for AE Supplys unsecured debt to B2 from B3. Moodys also upgraded its credit rating for
AGCs unsecured debt to B2 from B3. Moodys upgraded its outlook for Monongahela, Potomac Edison and West Penn to positive from stable, making the rating outlook for all of Alleghenys rated entities positive.



On February 25, 2005, Fitch IBCA Ratings Services revised its
outlook of AE, AE Supply and AGC to positive from stable.



On
April 19, 2005 S&P issued a new short-term credit rating for AE of B2. S&P reiterated its positive outlook for AE.



On May 6, 2005, S&P raised all of its credit ratings for AE and its subsidiaries (except for AEs short term rating and West Penns
transition bonds. AEs corporate rating was raised from B+ to BB-. The ratings for unsecured debt of AE, AE Supply and AGC and for Monongahelas preferred equity were raised from B- to B. The
ratings from unsecured debt of Monongahela and Potomac Edison were raised from B to B+. The rating for unsecured debt of West Penn was raised from B+ to BB-. The rating for secured debt of AE Supply
was raised from BB- to BB+. The ratings for first mortgage bonds issued by Monongahela and Potomac Edison were raised from BB+ to BBB-. S&Ps outlook for AE and its subsidiaries remains
positive.



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The following table lists Alleghenys credit ratings, as of May 9, 2005:



|                                    |  |          |  |          |  |                    
|----------------------------------- |  | -------- |  | -------- |  | -------------------
|                                    |  | Moodys  |  | S & P    |  | Fitch              
|Outlook                             |  | Positive |  | Positive |  | Positive/Stable (a)
|AE:                                 |  |          |  |          |  |                    
|Corporate credit rating             |  | NR       |  | BB-      |  | NR                 
|Unsecured Debt                      |  | B1       |  | B        |  | BB-                
|Short term rating                   |  | NR       |  | B2       |  | NR                 
|                                    |  |          | 
|AE Supply:                          |  |          |  |          |  |                    
|Unsecured Debt                      |  | B2       |  | B        |  | B-                 
|Term Loan B                         |  | Ba3      |  | BB       |  | BB-                
|Pollution Control Bonds             |  | NR       |  | NR       |  | AAA                
|AE Supply Statutory Trust (secured) |  | Ba3      |  | BB       |  | BB-                
|                                    |  |          | 
|Monongahela:                        |  |          |  |          |  |                    
|First Mortgage Bonds                |  | Ba1      |  | BBB-     |  | BBB                
|Unsecured Debt                      |  | Ba2      |  | B+       |  | BBB-               
|Preferred Stock                     |  | B1       |  | B        |  | BB+                
|                                    |  |          | 
|Potomac Edison:                     |  |          |  |          |  |                    
|First Mortgage Bonds                |  | Ba1      |  | BBB-     |  | BBB                
|Unsecured Debt                      |  | Ba2      |  | B+       |  | BBB-               
|                                    |  |          | 
|West Penn:                          |  |          |  |          |  |                    
|Transition Bonds                    |  | Aaa      |  | AAA      |  | AAA                
|Unsecured Debt                      |  | Ba1      |  | BB-      |  | BBB-               
|                                    |  |          | 
|AGC:                                |  |          |  |          |  |                    
|Unsecured Debt                      |  | B2       |  | B        |  | B-                 

---

|(a) | Rating outlook positive for AE, AE Supply and AGC. All other entities are stable.
|--- | ---------------------------------------------------------------------------------



OTHER MATTERS



Critical Accounting Policies



A summary of Alleghenys critical accounting policies is included under Item 8, Note 2, Basis of Presentation, in the 2004 Annual Report on Form
10-K. Alleghenys critical accounting policies have not changed materially from those reported in the 2004 Annual Report on Form 10-K.



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REGULATORY MATTERS



See, Item 1, Regulatory Framework Affecting Allegheny in the 2004 Annual Report on Form 10-K for a summary of regulatory matters.



Federal Legislation, Regulation and Rate Matters



Beginning in November 2003, FERC issued a series of orders related to
transmission rate design for the PJM and Midwest Independent Transmission System Operator regions. Specifically, FERC ordered the elimination of multiple and additive (i.e., pancaked) rates and called for the implementation of a
long-term rate design for the region. In November 2004, FERC rejected long-term regional rate proposals from the Distribution Companies and others and ordered the continuation of the existing rate design and the implementation of a transition charge
for this region through March 31, 2006. FERC also authorized three transmission owners to submit filings that would enable them to assess additional transition charges against the Distribution Companies and other utilities in PJM. Allegheny
estimates that these additional charges, if accepted by FERC, will result in net transmission charges to the Distribution Companies of approximately $1.3 million for the four-month period ended March 31, 2005 and approximately $7.2 million for the
twelve-month period ended March 31, 2006. In February 2005, FERC accepted these transition charges, effective December 1, 2004, subject to an evidentiary hearing regarding the data and methodology used to determine the charges and proposed
adjustments. The order expected to be issued by FERC may require the Distribution Companies to refund some portion of the amounts received from these transition charges or entitle the Distribution Companies to receive additional revenue from these
charges. In addition, the Distribution Companies may be required to pay additional amounts as a result of surcharges imposed on the transition charges previously billed to the Distribution Companies.



Substantially all of Alleghenys generation assets and power supply
obligations are located within the PJM market. Any changes in PJM policies and/or market rules, including changes that are currently under consideration by FERC, could adversely affect Alleghenys financial results. These matters include
proposed revisions to PJMs tariff concerning the auction of financial transmission rights and the allocation mechanism for the auction revenues; changes in transmission congestion patterns due to the proposed implementation of PJMs
regional transmission expansion planning protocol or other required transmission system upgrades; the effects throughout the system of new members joining PJM and new generation retirement rules and reliability pricing issues.



By September 30, 2005, AE Supply, the Distribution Companies and other
Allegheny entities that had market-based rate authority granted by FERC are required to file a triennial analysis of market power with FERC. This filing is required as a condition to continuing to sell electric energy at wholesale and market rates.



State Legislation, Regulation and Rate Matters



Pennsylvania: In November 2003, West Penn requested approval to issue
additional transition bonds up to amounts originally authorized to securitize the portion of West Penns stranded costs that are not recoverable on a timely basis due to operation of the generation rate cap. In September 2004, West Penn, the
Pennsylvania Office of Consumer Advocate, the Office of Small Business Advocate and The West Penn Power Industrial Intervenors filed a Joint Petition for Settlement and for Modification of the 1998 Restructuring Settlement (the Joint
Petition). In March 2005, the parties filed an amendment to the Joint Petition, adding additional parties. On April 21, 2005, the Pennsylvania Public Utility Commission approved the amended Joint Petition, which allows West Penn to securitize
up to $115 million of additional transition costs (including the deferred portion of the competitive transition charge (CTC) from 1999 through 2004) through the issuance of transition bonds. Distribution rate caps will be extended from
2005 to 2007, and generation rate caps will be extended from 2008 to 2010, with additional generation rate increases occurring in 2007, 2009 and 2010. These increases will gradually move generation rates closer to market-based rates.



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West Virginia: On September 27, 2004, Monongahela, Mountaineer and Mountaineer Gas Holding Limited
Partnership (Mountaineer Holdings) filed a joint petition with the West Virginia PSC for approval to transfer the stock of Mountaineer and certain other natural gas distribution assets owned by Monongahela to Mountaineer Holdings, the
prospective buyer of Monongahelas West Virginia natural gas business. In a separate petition also filed on September 27, 2004, Mountaineer filed to increase its distribution rates by approximately $23 million, or 9.6%, annually. Mountaineer
Holdings obligation to close this transaction is conditioned on approval of a rate increase that is not materially different from the increase requested. The West Virginia PSC issued an order suspending the rates until September 8, 2005 and
directing the administrative law judge to render a decision in this matter no later than July 11, 2005. On April 27, 2005, Mountaineer moved for emergency relief and asked the West Virginia PSC to rescind the referral of these cases to the
administrative law judge, delay the evidentiary hearing and further toll the rate suspension period to allow the parties sufficient time for full discussion of these issues. On April 29, 2005, the West Virginia PSC granted Mountaineers motion,
tolling the suspension period until October 31, 2005.



In March
2005, Monongahela and Potomac Edison filed a joint motion to consolidate several cases pending before the West Virginia PSC related to the generation asset transfer requests previously filed with the PSC and partially granted. Monongahela and
Potomac Edison filed a Stipulation in July 2003 resolving these issues, but since that filing, Monongahela and Potomac Edison and parties to the Stipulation have been in discussions to identify an alternate resolution on these issues, including
gaining the ability to recover the capital costs associated with the installation of pollution control equipment on the Ft. Martin generation station. Monongahela and Potomac Edison have proposed to securitize these costs. Legislation in West
Virginia to permit the securitization was enacted on May 4, 2005.



Ohio:In July 2003, PUCO authorized Monongahela to issue a request for proposals for wholesale power to supply approximately 130 MW of new standard market-based retail rate service to its large industrial and commercial customers and
to its street lighting customers. In October 2003, PUCO denied approval of the wholesale bid and new retail rates and froze the current fixed rates for these customer classes until December 31, 2005. In February 2004, Monongahela appealed
PUCOs decision to the Ohio Supreme Court. On December 30, 2004, the Ohio Supreme Court affirmed PUCOs October 2003 order extending Monongahelas rate freeze for large commercial and industrial customers past the end of 2003.



In February 2004, Monongahela filed for an injunction in
federal court seeking to recover, in retail rates, its costs of purchasing power in the wholesale market. In May 2004, the court partially granted Monongahelas request, ruling that the Ohio legislation adopted in 1999 to restructure the
electric utility industry was unconstitutional to the extent it did not permit Monongahela to make a claim with PUCO that its rates are confiscatory. Monongahela requested reconsideration of the courts order, which the court partially granted
by retaining jurisdiction over this matter. PUCO initiated a proceeding in compliance with the federal courts directive. In June 2004, Monongahela filed its application for rate relief, which PUCO denied in December 2004 with respect to
certain large industrial and commercial customers and street lighting customers. Monongahela requested rehearing of PUCOs ruling on January 7, 2005, which was denied. Monongahela appealed this ruling on February 25, 2005. On January 12, 2005,
Monongahela renewed its request for a preliminary injunction against PUCO in federal court. If these challenges are not successful, Monongahelas current rates for these customer classes will be fixed through December 31, 2005.



Since January 2004, Monongahela has been purchasing power at PJM market
prices for these customers and anticipates that the price for that power will continue to be higher than the current retail generation rates it charges customers. Monongahela has expensed $2.7 million of costs in excess of its rates for the three
months ended March 31, 2004 and $5.7 million for the three months ended March 31, 2005, pending the final outcome of Monongahelas legal challenges.



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In July 2004, Monongahela filed a proposal with PUCO for a competitive bidding process, similar to the
2003 request for proposal (RFP) process, for the procurement of supply for all customers beginning on January 1, 2006, when Monongahelas frozen rate standard service offer expires. In April 2005, PUCO issued a ruling directing
Monongahela to re-file its RFP with minor modifications within thirty days to permit final review by PUCO in time to allow Monongahela the requested four months to conduct the bidding process and provide adequate advance notice to consumers prior to
the implementation of the resulting rates on January 1, 2006. In addition, the ruling established a procedural schedule, including a hearing on June 28, to determine the reasonableness of the Administrative Adder requested by Monongahela.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Alleghenys primary market risk exposures are associated with interest rates and commodity prices. Allegheny has risk management policies to monitor
and assist in controlling these market risks and uses derivative instruments to manage some of the exposures.



A summary of Alleghenys market risks is included under Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the 2004
Annual Report on Form 10-K. Alleghenys market risks have not changed materially from those reported in the 2004 Annual Report on Form 10-K.



As reported in the 2004 Annual Report on Form 10-K, Allegheny uses various methods to measure their exposure to market risk on a daily basis, including a
value at risk model (VaR). Allegheny calculates VaR using the full term of all remaining positions being marked-to-market. This calculation is based upon managements best estimates and modeling assumptions, which could materially
differ from actual results. As of March 31, 2005 and December 31, 2004, this calculation yielded a VaR of $0.3 million.



ITEM 4. CONTROLS AND PROCEDURES



See, Item 9a, Controls and Procedures, in the 2004 Annual Report on Form 10-K for additional information relating to Controls and Procedures.



Disclosure Controls and Procedures. Each registrant carried out
an evaluation, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, of the effectiveness of its disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period covered by this report (the Evaluation Date). Based on that evaluation, the principal executive officer and principal financial officer of each registrant have
concluded that the applicable registrants disclosure controls and procedures as of the Evaluation Date were effective to ensure that (a) material information relating to each registrant is accumulated and made known to the registrants
management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure and (b) is recorded, processed, summarized and reported within the time periods specified in SECs
rules and forms.



It should be noted that any system of
controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that each registrants controls will succeed in achieving



Changes in Internal Control Over Financial Reporting. To
increase productivity in the income tax compliance, provision and disclosure processes, during the quarter ended March 31, 2005, Allegheny implemented a new tax provision software system, redesigned supporting processes and, consequently, modified
the design of the related internal controls over financial reporting in this area. There have been no other changes in the registrants internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.



PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



See
Note 15, Commitments and Contingencies, to the Consolidated Financial Statements for AE for information about legal proceedings. In addition, the registrants from time to time are involved in litigation and other legal disputes in the
ordinary course of business.



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



None



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



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



No matters were submitted to a vote of security holders of any of the registrants during the first quarter of 2005.



ITEM 5. OTHER INFORMATION



None.



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ITEM 6. EXHIBITS



EXHIBIT INDEX



Allegheny Energy, Inc.



|     |  |                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  | Documents                                                                                                                                                                                                      
|10.1 |  | Amendment No. 3, dated as of March 18, 2005, in respect of the Credit Agreement, dated as of March 8, 2004, among AE, the Lenders, the Issuing Banks and Citicorp North America, Inc., as
Administrative Agent.
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934                                                                                                      
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934                                                                                                      
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350                                                                                                                                    
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350                                                                                                                                    



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EXHIBIT INDEX



Monongahela Power Company



|     |  |                                                                                                          
|---- |  | ---------------------------------------------------------------------------------------------------------
|     |  | Documents                                                                                                
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350                              
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350                              



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EXHIBIT INDEX



The Potomac Edison Company



|     |  |                                                                                                          
|---- |  | ---------------------------------------------------------------------------------------------------------
|     |  | Documents                                                                                                
|3.1  |  | Amended Bylaws of The Potomac Edison Company, as amended February 7, 2005.                               
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350                              
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350                              



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EXHIBIT INDEX



Allegheny Generating Company



|     |  |                                                                                                          
|---- |  | ---------------------------------------------------------------------------------------------------------
|     |  | Documents                                                                                                
|3.1  |  | Amended Bylaws of Allegheny Generating Company, as amended February 7, 2005.                             
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350                              
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350                              



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SIGNATURE



Pursuant to the
requirements of the Securities Exchange Act of 1934, each of the registrants has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                   |  |                              |  |                                                                    
|------------------ |  | ---------------------------- |  | -------------------------------------------------------------------
|                   |  | ALLEGHENY ENERGY, INC.      
|                   |  |                             
|Date: May 10, 2005 |  | By:                          |  | /s/ Jeffrey D. Serkes                                              
|                   |  |                              |  | Jeffrey D. Serkes Senior Vice President
and Chief Financial Officer
|                   | 
|                   |  | MONONGAHELA POWER COMPANY   
|                   |  |                             
|Date: May 10, 2005 |  | By:                          |  | /s/ Jeffrey D. Serkes                                              
|                   |  |                              |  | Jeffrey D. Serkes Vice President and Principal Financial Officer   
|                   | 
|                   |  | THE POTOMAC EDISON COMPANY  
|                   |  |                             
|Date: May 10, 2005 |  | By:                          |  | /s/ Jeffrey D. Serkes                                              
|                   |  |                              |  | Jeffrey D. Serkes Vice President and Principal Financial Officer   
|                   | 
|                   |  | ALLEGHENY GENERATING COMPANY
|                   |  |                             
|Date: May 10, 2005 |  | By:                          |  | /s/ Jeffrey D. Serkes                                              
|                   |  |                              |  | Jeffrey D. Serkes Vice President and Principal Financial Officer   



109