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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 
 Name of RegistrantState of IncorporationAddress of Principal
    
    IRS EmployerCommission
    
    Executive
    
    IdentificationFile Number
    
    Offices and Telephone Number
    
    Number1-267
    
    ALLEGHENY ENERGY, INC.
    
    13-5531602(A Maryland Corporation)800 Cabin Hill DriveGreensburg, Pennsylvania 15601Telephone (724) 837-30001-5164
    
    MONONGAHELA POWER COMPANY
    
    13-5229392(An Ohio Corporation)1310 Fairmont AvenueFairmont, West Virginia 26554Telephone (304) 366-30000-14688
    
    ALLEGHENY
    
    13-3079675GENERATING COMPANY(A Virginia Corporation)800 Cabin Hill DriveGreensburg, Pennsylvania 15601Telephone (724) 837-3000
 
  þ o
  Allegheny Energy, Inc.
    
    Yes þ
    
    No oMonongahela Power Company
    
    Yes o
    
    No þAllegheny Generating Company
    
    Yes o
    
    No þ
 þ o
  Large accelerated filer
    
    Accelerated filer
    
    Non-accelerated filerAllegheny Energy, Inc.
    
    þ
    
    o
    
    oMonongahela Power Company
    
    o
    
    o
    
    þAllegheny Generating Company
    
    o
    
    o
    
    þ
  Allegheny Energy, Inc.
    
    Yes o
    
    No þMonongahela Power Company
    
    Yes o
    
    No þAllegheny Generating Company
    
    Yes o
    
    No þ
  Allegheny Energy, Inc.
    
    
    165,262,790
    
    
    ($1.25 par value)Monongahela Power Company
    
    
    5,891,000
    
    
    ($50.00 par value)Allegheny Generating Company
    
    
    1,000
    
    
    ($1.00 par value)




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TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Allegheny Energy, Inc. and Subsidiaries
    
    
    4Monongahela Power Company and Subsidiaries
    
    
    37Allegheny Generating Company
    
    
    53Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
    
    
    61Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    100Item 4. Controls and Procedures
    
    
    100PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    101Item 1A. Risk Factors
    
    
    101Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    102Item 3. Defaults Upon Senior Securities
    
    
    102Item 4. Submission of Matters to a Vote of Security Holders
    
    
    102Item 5. Other Information
    
    
    102Item 6. Exhibits
    
    
    103Signatures
    
    
    106EX-31.1EX-31.2EX-32.1EX-32.2
 2




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GLOSSARY
 I. The following abbreviations and terms are used in this report to identify Allegheny Energy, Inc.
and its subsidiaries:
 AE
    
    Allegheny Energy, Inc., a diversified utility holding company.Allegheny Ventures
    
    Allegheny Ventures, Inc., an unregulated subsidiary of AE.AE Solutions
    
    Allegheny Energy Solutions, Inc., a subsidiary of Allegheny Ventures.AE Supply
    
    Allegheny Energy Supply Company, LLC, an unregulated generation subsidiary of AE.AGC
    
    Allegheny Generating Company, an unregulated generation subsidiary of AE Supply and Monongahela.Allegheny
    
    AE together with its consolidated subsidiaries.Distribution Companies
    
    Collectively, Monongahela, Potomac Edison and West Penn. The Distribution Companies do business
as Allegheny Power.Monongahela
    
    Monongahela Power Company, a regulated subsidiary of AE.Mountaineer
    
    Mountaineer Gas Company, a former subsidiary of Monongahela that was sold on September 30, 2005.Potomac Edison
    
    The Potomac Edison Company, a regulated subsidiary of AE.West Penn
    
    West Penn Power Company, a regulated subsidiary of AE.
 3




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenues
    
    $
    816,645
    
    
    $
    845,064
    
    
    $
    2,384,526
    
    
    $
    2,313,744Operating expenses:Fuel consumed in electric generation
    
    
    223,810
    
    
    
    211,428
    
    
    
    623,202
    
    
    
    551,454Purchased power and transmission
    
    
    101,972
    
    
    
    124,111
    
    
    
    298,301
    
    
    
    337,176Gain on sale of OVEC power agreement and shares
    
    
    
    
    
    
    
    
    
    
    (6,124
    )
    
    
    Impairment charge on Ohio T&D assets
    
    
    
    
    
    
    30,500
    
    
    
    
    
    
    
    30,500Deferred energy costs, net
    
    
    (181
    )
    
    
    (4,181
    )
    
    
    5,225
    
    
    
    (4,800
    )Operations and maintenance
    
    
    157,809
    
    
    
    182,095
    
    
    
    525,543
    
    
    
    545,678Depreciation and amortization
    
    
    68,308
    
    
    
    76,724
    
    
    
    204,319
    
    
    
    230,493Taxes other than income taxes
    
    
    53,762
    
    
    
    53,300
    
    
    
    159,630
    
    
    
    160,096Total operating expenses
    
    
    605,480
    
    
    
    673,977
    
    
    
    1,810,096
    
    
    
    1,850,597Operating income
    
    
    211,165
    
    
    
    171,087
    
    
    
    574,430
    
    
    
    463,147Other income and expenses, net
    
    
    7,841
    
    
    
    7,294
    
    
    
    25,770
    
    
    
    33,781Interest expense and preferred dividends:Interest expense
    
    
    66,073
    
    
    
    111,803
    
    
    
    209,886
    
    
    
    365,874Preferred dividends of subsidiary
    
    
    293
    
    
    
    1,259
    
    
    
    879
    
    
    
    3,778Total interest expense and preferred dividends
    
    
    66,366
    
    
    
    113,062
    
    
    
    210,765
    
    
    
    369,652Income from continuing operations before income taxes and minority
interest
    
    
    152,640
    
    
    
    65,319
    
    
    
    389,435
    
    
    
    127,276Income tax expense
    
    
    40,883
    
    
    
    21,428
    
    
    
    130,128
    
    
    
    54,619Minority interest in net income of subsidiaries
    
    
    1,011
    
    
    
    433
    
    
    
    2,380
    
    
    
    900Income from continuing operations
    
    
    110,746
    
    
    
    43,458
    
    
    
    256,927
    
    
    
    71,757Loss from discontinued operations, net of tax (Note 6)
    
    
    (539
    )
    
    
    (7,758
    )
    
    
    (2,203
    )
    
    
    (11,822
    )Net income
    
    $
    110,207
    
    
    $
    35,700
    
    
    $
    254,724
    
    
    $
    59,935Common share data:Weighted-average common shares outstandingBasic
    
    
    164,813
    
    
    
    162,711
    
    
    
    163,813
    
    
    
    152,379Diluted
    
    
    168,629
    
    
    
    166,784
    
    
    
    168,587
    
    
    
    166,017Basic income (loss) per common share:Income from continuing operations
    
    $
    0.67
    
    
    $
    0.27
    
    
    $
    1.56
    
    
    $
    0.47Loss from discontinued operations
    
    
    
    
    
    
    (0.05
    )
    
    
    (0.01
    )
    
    
    (0.08
    )Net income per common share
    
    $
    0.67
    
    
    $
    0.22
    
    
    $
    1.55
    
    
    $
    0.39Diluted income (loss) per common share:Income from continuing operations
    
    $
    0.65
    
    
    $
    0.26
    
    
    $
    1.52
    
    
    $
    0.45Loss from discontinued operations
    
    
    
    
    
    
    (0.05
    )
    
    
    (0.01
    )
    
    
    (0.07
    )Net income per common share
    
    $
    0.65
    
    
    $
    0.21
    
    
    $
    1.51
    
    
    $
    0.38
  4




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Nine Months EndedSeptember 30,(In thousands)
    
    2006
    
    
    2005(Revised-Note 1)Cash Flows From Operating Activities:Net income
    
    $
    254,724
    
    
    $
    59,935Loss from discontinued operations, net of tax
    
    
    2,203
    
    
    
    11,822Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    204,319
    
    
    
    230,493Amortization of debt issuance costs
    
    
    20,504
    
    
    
    19,728Amortization of power sale liability related to Ohio sale
    
    
    (22,700
    )
    
    
    Impairment charge on Ohio T&D assets
    
    
    
    
    
    
    30,500Amortization of liability for adverse power purchase commitment
    
    
    (12,866
    )
    
    
    (12,545
    )Amortization of Pennsylvania stranded cost recovery asset
    
    
    11,457
    
    
    
    12,086Gain on asset sales and disposals
    
    
    (1,205
    )
    
    
    (2,238
    )Minority interest in net income of subsidiaries
    
    
    2,379
    
    
    
    900Deferred income taxes and investment tax credit, net
    
    
    109,524
    
    
    
    (21,436
    )Stock-based compensation expense
    
    
    10,988
    
    
    
    8,552Unrealized gains on commodity contracts, net
    
    
    (26,831
    )
    
    
    (18,176
    )Pension and other postretirement employee benefit plan expense
    
    
    31,419
    
    
    
    36,146Pension and other postretirement employee benefit plan contributions
    
    
    (75,255
    )
    
    
    (80,297
    )Other, net
    
    
    17,978
    
    
    
    1,995Changes in certain assets and liabilities:Accounts receivable, net
    
    
    50,770
    
    
    
    (83,996
    )Materials, supplies and fuel
    
    
    2,446
    
    
    
    3,281Prepaid taxes
    
    
    (9,623
    )
    
    
    (8,971
    )Collateral deposits
    
    
    127,350
    
    
    
    (55,274
    )Prepayments
    
    
    (2,553
    )
    
    
    2,243Other current assets
    
    
    2,601
    
    
    
    2,170Accounts payable
    
    
    (123,299
    )
    
    
    29,719Accrued taxes
    
    
    20,146
    
    
    
    61,984Accrued interest
    
    
    20,707
    
    
    
    46,826Other current liabilities
    
    
    1,435
    
    
    
    2,709Other assets
    
    
    2,753
    
    
    
    6,558Other liabilities
    
    
    (293
    )
    
    
    (7,432
    )Net cash provided by (used in) operating activities of discontinued operations
    
    
    (3,406
    )
    
    
    55,552Net cash provided by operating activities
    
    
    615,672
    
    
    
    332,834Cash Flows From Investing Activities:Capital expenditures
    
    
    (310,590
    )
    
    
    (204,387
    )Proceeds from asset sales
    
    
    2,308
    
    
    
    247,404Purchase of minority interest in Hunlock Creek Energy Ventures
    
    
    (13,900
    )
    
    
    Decrease (increase) in restricted funds
    
    
    (140,247
    )
    
    
    205,969Other investments
    
    
    (4,181
    )
    
    
    (2,947
    )Net cash provided by (used in) investing activities of discontinued operations
    
    
    27,795
    
    
    
    (6,524
    )Net cash provided by (used in) investing activities
    
    
    (438,815
    )
    
    
    239,515Cash Flows From Financing Activities:Issuance of long-term debt
    
    
    1,433,115
    
    
    
    1,782,361Repayment of long-term debt
    
    
    (1,644,261
    )
    
    
    (2,202,021
    )Payments on capital lease obligations
    
    
    (45
    )
    
    
    Proceeds from exercise of employee stock options
    
    
    22,110
    
    
    
    1,892Cash dividends paid to minority shareholder in Hunlock Creek Energy Ventures
    
    
    (400
    )
    
    
    Net cash used in financing activities of discontinued operations
    
    
    
    
    
    
    (11
    )Net cash used in financing activities
    
    
    (189,481
    )
    
    
    (417,779
    )Net increase (decrease) in cash and cash equivalents
    
    
    (12,624
    )
    
    
    154,570Cash and cash equivalents at beginning of period
    
    
    262,212
    
    
    
    189,482Cash and cash equivalents at end of period
    
    $
    249,588
    
    
    $
    344,052Supplemental Cash Flow Information:Cash paid for interest (net of amount capitalized)
    
    $
    170,879
    
    
    $
    322,379
  5




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 September 30,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    249,588
    
    
    $
    262,212Accounts receivable:Customer
    
    
    175,412
    
    
    
    179,634Unbilled utility revenue
    
    
    85,460
    
    
    
    129,111Wholesale and other
    
    
    66,856
    
    
    
    82,261Allowance for uncollectible accounts
    
    
    (15,538
    )
    
    
    (16,778
    )Materials and supplies
    
    
    95,069
    
    
    
    98,069Fuel
    
    
    65,466
    
    
    
    67,273Deferred income taxes
    
    
    42,308
    
    
    
    93,404Prepaid taxes
    
    
    55,381
    
    
    
    45,758Assets held for sale (Note 6)
    
    
    911
    
    
    
    1,521Collateral deposits
    
    
    44,965
    
    
    
    147,775Commodity contracts
    
    
    2,617
    
    
    
    9,325Restricted funds
    
    
    161,836
    
    
    
    21,589Regulatory assets
    
    
    38,023
    
    
    
    38,418Other
    
    
    13,880
    
    
    
    14,246Total current assets
    
    
    1,082,234
    
    
    
    1,173,818Property, Plant and Equipment, Net:Generation
    
    
    5,765,260
    
    
    
    5,751,077Transmission
    
    
    1,048,050
    
    
    
    1,028,323Distribution
    
    
    3,556,970
    
    
    
    3,448,350Other
    
    
    398,902
    
    
    
    429,108Accumulated depreciation
    
    
    (4,600,105
    )
    
    
    (4,508,707
    )Subtotal
    
    
    6,169,077
    
    
    
    6,148,151Construction work in progress
    
    
    242,646
    
    
    
    129,277Total property, plant and equipment, net
    
    
    6,411,723
    
    
    
    6,277,428Investments and Other Assets:Non-current assets held for sale (Note 6)
    
    
    21,182
    
    
    
    48,559Goodwill
    
    
    367,287
    
    
    
    367,287Investments in unconsolidated affiliates
    
    
    28,081
    
    
    
    28,555Intangible assets
    
    
    27,396
    
    
    
    27,396Other
    
    
    27,633
    
    
    
    49,413Total investments and other assets
    
    
    471,579
    
    
    
    521,210Deferred Charges:Regulatory assets
    
    
    513,750
    
    
    
    544,810Other
    
    
    31,039
    
    
    
    41,546Total deferred charges
    
    
    544,789
    
    
    
    586,356Total Assets
    
    $
    8,510,325
    
    
    $
    8,558,812
  6




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
 September 30,
    
    
    December 31,(In thousands, except share amounts)
    
    2006
    
    
    2005LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Long-term debt due within one year (Note 5)
    
    $
    494,212
    
    
    $
    477,217Accounts payable
    
    
    202,211
    
    
    
    316,713Accrued taxes
    
    
    167,849
    
    
    
    154,587Commodity contracts
    
    
    14,589
    
    
    
    92,934Accrued interest
    
    
    112,140
    
    
    
    91,433Other
    
    
    142,443
    
    
    
    153,570Total current liabilities
    
    
    1,133,444
    
    
    
    1,286,454Long-term Debt (Note 5)
    
    
    3,408,148
    
    
    
    3,624,483Deferred Credits and Other Liabilities:Commodity contracts
    
    
    17,773
    
    
    
    22,994Investment tax credit
    
    
    72,666
    
    
    
    76,965Deferred income taxes
    
    
    781,817
    
    
    
    692,241Obligations under capital leases
    
    
    17,407
    
    
    
    16,427Regulatory liabilities
    
    
    460,435
    
    
    
    454,275Adverse power purchase commitment
    
    
    171,259
    
    
    
    184,224Other
    
    
    407,820
    
    
    
    459,465Total deferred credits and other liabilities
    
    
    1,929,177
    
    
    
    1,906,591Commitments and Contingencies (Note 20)Minority Interest
    
    
    10,531
    
    
    
    21,989Preferred Stock of Subsidiary
    
    
    24,000
    
    
    
    24,000Common Stockholders Equity:Common stock, $1.25 par value, 260 million shares
authorized; 165,287,497 and 163,002,295 shares
issued at September 30, 2006 and December 31, 2005,
respectively
    
    
    206,609
    
    
    
    203,753Other paid-in capital
    
    
    1,902,896
    
    
    
    1,880,644Retained earnings (accumulated deficit)
    
    
    10,101
    
    
    
    (244,625
    )Treasury stock at cost; 49,493 shares
    
    
    (1,756
    )
    
    
    (1,756
    )Accumulated other comprehensive loss
    
    
    (112,825
    )
    
    
    (142,721
    )Total common stockholders equity
    
    
    2,005,025
    
    
    
    1,695,295Total Liabilities and Stockholders Equity
    
    $
    8,510,325
    
    
    $
    8,558,812
  7




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(unaudited)
 AccumulatedOther
    
    
    Retained
    
    
    
    
    
    
    other
    
    
    TotalShares
    
    
    Common
    
    
    paid-in
    
    
    earnings
    
    
    Treasury
    
    
    comprehensive
    
    
    stockholders(In thousands, except shares)
    
    outstanding
    
    
    stock
    
    
    capital
    
    
    (deficit)
    
    
    stock
    
    
    income (loss)
    
    
    equityBalance at January 1, 2006
    
    
    162,952,802
    
    
    $
    203,753
    
    
    $
    1,880,644
    
    
    $
    (244,625
    )
    
    $
    (1,756
    )
    
    $
    (142,721
    )
    
    $
    1,695,295Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    254,724
    
    
    
    
    
    
    
    
    
    
    
    254,724Stock compensation expense:Stock units
    
    
    
    
    
    
    
    
    
    
    4,262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,262Non-employee stock awards
    
    
    3,000
    
    
    
    3
    
    
    
    885
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    888Stock options
    
    
    
    
    
    
    
    
    
    
    5,837
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,837Exercise of stock options
    
    
    1,132,534
    
    
    
    1,416
    
    
    
    20,695
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,111Conversion of stock units
    
    
    1,149,668
    
    
    
    1,437
    
    
    
    (10,234
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,797
    )Settlement of performance
share plan
    
    
    
    
    
    
    
    
    
    
    807
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    807Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,896
    
    
    
    29,896Balance at September 30, 2006
    
    
    165,238,004
    
    
    $
    206,609
    
    
    $
    1,902,896
    
    
    $
    10,101
    
    
    $
    (1,756
    )
    
    $
    (112,825
    )
    
    $
    2,005,025
  8




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Note No.
    
    
    
    Page No.1
    
    Basis of Presentation
    
    
    102
    
    Recent Accounting Pronouncements
    
    
    113
    
    Stock-Based Compensation
    
    
    124
    
    Review of Estimated Remaining Service Lives and Depreciation Practices
    
    
    165
    
    Debt
    
    
    176
    
    Discontinued Operations and Assets Held for Sale
    
    
    197
    
    Derivative Instruments and Hedging Activities
    
    
    208
    
    Asset Retirement Obligations (AROs)
    
    
    209
    
    Business Segments
    
    
    2110
    
    Goodwill and Intangible Assets
    
    
    2211
    
    Comprehensive Income
    
    
    2212
    
    Pension Benefits and Postretirement Benefits Other Than Pensions
    
    
    2313
    
    Income (Loss) Per Share
    
    
    2614
    
    Adverse Power Purchase Commitment Liability
    
    
    2715
    
    Regulatory Assets and Liabilities
    
    
    2716
    
    Other Income and Expenses, Net
    
    
    2817
    
    Guarantees and Letters of Credit
    
    
    2918
    
    Variable Interest Entities (VIE)
    
    
    2919
    
    HCEV Partnership Interest
    
    
    3020
    
    Commitments and Contingencies
    
    
    30
 9




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##### Table of Contents



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




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
    
 NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
  Share-Based Payment
 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of
FASB Statements No. 87, 88, 106, and 132(R) Accounting for the Effects of Certain Types of Regulation
 Fair Value Measurements
 Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
 11




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109 .
 
 NOTE 3: STOCK-BASED COMPENSATION
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Stock options
    
    $
    1.8
    
    
    $
    
    
    
    $
    5.8
    
    
    $
    Stock units
    
    
    1.0
    
    
    
    2.0
    
    
    
    4.3
    
    
    
    8.1Other
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.9
    
    
    
    0.5Stock-based compensation expense included in operations
and maintenance expense
    
    
    3.1
    
    
    
    2.2
    
    
    
    11.0
    
    
    
    8.6Income tax benefit
    
    
    1.3
    
    
    
    0.9
    
    
    
    4.5
    
    
    
    3.6Total stock-based compensation expense, net of tax
    
    $
    1.8
    
    
    $
    1.3
    
    
    $
    6.5
    
    
    $
    5.0
  12




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2005
    
    
    2005Consolidated net income, as reported
    
    $
    35.7
    
    
    $
    59.9Add:Stock-based employee
compensation expense included in
consolidated net income, net of
related tax effects
    
    
    1.2
    
    
    
    4.8Deduct:Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects
    
    
    2.5
    
    
    
    8.6Consolidated net income, pro forma
    
    $
    34.4
    
    
    $
    56.1Basic income per share:As reported
    
    $
    0.22
    
    
    $
    0.39Pro forma
    
    $
    0.21
    
    
    $
    0.37Diluted income per share:As reported
    
    $
    0.21
    
    
    $
    0.38Pro forma
    
    $
    0.21
    
    
    $
    0.36
 Stock Options
  13




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Annual risk-free interest rate
    
    
    4.98
    %
    
    
    
    
    
    
    4.64
    %
    
    
    4.15
    %Expected term of the option (in years)
    
    
    5.75
    
    
    
    
    
    
    
    6.34
    
    
    
    6.5Expected annual dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected stock price volatility
    
    
    28.6
    %
    
    
    
    
    
    
    29.31
    %
    
    
    35.0
    %Grant date fair value per stock option
    
    $
    14.35
    
    
    
    
    
    
    $
    14.22
    
    
    $
    8.77
  Number of
    
    Weighted-AverageStock Options
    
    Exercise PriceOutstanding at June 30, 2006
    
    
    5,631,013
    
    
    $
    16.56Granted
    
    
    38,800
    
    
    $
    38.16Exercised
    
    
    (740,950
    )
    
    $
    16.00Forfeited
    
    
    (11,700
    )
    
    $
    22.22Outstanding at September 30, 2006
    
    
    4,917,163
    
    
    $
    16.80
  Number of
    
    Weighted-AverageStock Options
    
    Exercise PriceOutstanding at December 31, 2005
    
    
    6,141,357
    
    
    $
    17.04Granted
    
    
    176,800
    
    
    $
    36.08Exercised
    
    
    (1,131,934
    )
    
    $
    19.53Forfeited
    
    
    (269,060
    )
    
    $
    23.31Outstanding at September 30, 2006
    
    
    4,917,163
    
    
    $
    16.80
  14




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Weighted-AverageRemaining
    
    
    
    
    
    
    AggregateNumber of
    
    
    Contractual Term
    
    
    
    
    
    
    Intrinsic ValueRange of Exercise Prices
    
    Stock Options
    
    
    (in Years)
    
    
    Exercise Price
    
    
    (in millions)$10.00 - $14.99
    
    
    3,932,646
    
    
    
    7.42
    
    
    $
    13.45
    
    
    $
    105.1$15.00 - $19.99
    
    
    154,000
    
    
    
    8.31
    
    
    $
    18.91
    
    
    
    3.3$20.00 - $24.99
    
    
    215,000
    
    
    
    8.27
    
    
    $
    21.03
    
    
    
    4.1$25.00 - $29.99
    
    
    75,000
    
    
    
    9.17
    
    
    $
    28.49
    
    
    
    0.9$30.00 - $34.99
    
    
    154,500
    
    
    
    3.40
    
    
    $
    32.03
    
    
    
    1.3$35.00 - $39.99
    
    
    197,600
    
    
    
    9.02
    
    
    $
    36.41
    
    
    
    0.7$40.00 - $44.99
    
    
    173,417
    
    
    
    4.19
    
    
    $
    42.28
    
    
    
    *$45.00 - $49.99
    
    
    15,000
    
    
    
    4.50
    
    
    $
    46.26
    
    
    
    *Total
    
    
    4,917,163
    
    
    
    7.33
    
    
    $
    16.80
    
    
    $
    115.4
 
 *
    
    The aggregate intrinsic value of these stock options is zero, because the exercise prices
of these stock options exceeded the market price of Alleghenys stock at September 30, 2006.  Weighted-AverageRemaining
    
    
    
    
    
    
    AggregateNumber of
    
    
    Contractual Term
    
    
    
    
    
    
    Intrinsic ValueRange of Exercise Prices
    
    Stock Options
    
    
    (in Years)
    
    
    Exercise Price
    
    
    (in millions)$10.00 - $14.99
    
    
    1,796,302
    
    
    
    7.41
    
    
    $
    13.42
    
    
    $
    48.1$15.00 - $19.99
    
    
    34,133
    
    
    
    8.27
    
    
    $
    18.77
    
    
    
    0.7$20.00 - $24.99
    
    
    59,000
    
    
    
    7.63
    
    
    $
    20.92
    
    
    
    1.1$25.00 - $29.99
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    $30.00 - $34.99
    
    
    154,500
    
    
    
    3.40
    
    
    $
    32.03
    
    
    
    1.3$35.00 - $39.99
    
    
    20,800
    
    
    
    5.02
    
    
    $
    39.25
    
    
    
    $40.00 - $44.99
    
    
    173,417
    
    
    
    4.19
    
    
    $
    42.28
    
    
    
    *$45.00 - $49.99
    
    
    15,000
    
    
    
    4.50
    
    
    $
    46.26
    
    
    
    *Total
    
    
    2,253,152
    
    
    
    6.86
    
    
    $
    17.66
    
    
    $
    51.2
 
 *
    
    The aggregate intrinsic value of these stock options is zero, because the exercise prices
of these stock options exceeded the market price of Alleghenys stock at September 30, 2006.  Stock Units
  15




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Weighted-Average
    
    AggregateNumber of
    
    Grant Date
    
    Intrinsic ValueStock Units
    
    Fair Value
    
    (in millions)Outstanding at June 30, 2006
    
    
    1,639,625
    
    
    $
    15.43Units converted into 321,484 common shares
    
    
    (523,659
    )
    
    $
    15.29Outstanding at September 30, 2006
    
    
    1,115,966
    
    
    $
    15.50
    
    
    $
    44.8Units convertible at September 30, 2006
    
    
    107,220
    
    
    $
    15.30
    
    
    $
    4.3
  Weighted-Average
    
    AggregateNumber of
    
    Grant Date
    
    Intrinsic ValueStock Units
    
    Fair Value
    
    (in millions)Outstanding at December 31, 2005
    
    
    3,006,506
    
    
    $
    15.39Units converted into 1,149,669 common shares
    
    
    (1,870,540
    )
    
    $
    15.33Forfeited
    
    
    (20,000
    )
    
    $
    14.74Outstanding at September 30, 2006
    
    
    1,115,966
    
    
    $
    15.50
    
    
    $
    44.8Units convertible at September 30, 2006
    
    
    107,220
    
    
    $
    15.30
    
    
    $
    4.3
   
 NOTE 4: REVIEW OF ESTIMATED REMAINING SERVICE LIVES AND DEPRECIATION PRACTICES
  16




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##### Table of Contents



ALLEGHENY
ENERGY, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 5: DEBT
  (In millions)
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalAE Supply:Pollution Control Bonds
    
    $
    
    
    
    $
    91.7
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    191.4
    
    
    $
    283.1Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,050.0
    
    
    
    1,050.0Debentures-AGC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0
    
    
    
    100.0AE Supply Credit Facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    747.0
    
    
    
    747.0Total AE Supply
    
    $
    
    
    
    $
    91.7
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,088.4
    
    
    $
    2,180.1Monongahela:First Mortgage Bonds
    
    $
    300.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    340.0
    
    
    $
    640.0Pollution Control Bonds
    
    
    
    
    
    
    15.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70.3
    
    
    
    85.8Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110.0
    
    
    
    
    
    
    
    110.0Total Monongahela
    
    $
    300.0
    
    
    $
    15.5
    
    
    $
    
    
    
    $
    
    
    
    $
    110.0
    
    
    $
    410.3
    
    
    $
    835.8Potomac Edison:First Mortgage Bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    320.0
    
    
    $
    320.0Medium-Term Notes
    
    
    100.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0Total Potomac Edison
    
    $
    100.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    320.0
    
    
    $
    420.0West Penn:Transition Bonds
    
    $
    18.6
    
    
    $
    79.9
    
    
    $
    75.8
    
    
    $
    73.9
    
    
    $
    14.8
    
    
    $
    
    
    
    $
    263.0Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80.0
    
    
    
    80.0First Mortgage Bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145.0
    
    
    
    145.0Total West Penn
    
    $
    18.6
    
    
    $
    79.9
    
    
    $
    75.8
    
    
    $
    73.9
    
    
    $
    14.8
    
    
    $
    225.0
    
    
    $
    488.0AGC:Debentures
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100.0
    
    
    $
    100.0Total AGC
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100.0
    
    
    $
    100.0Unamortized debt discounts and
premiums
    
    
    (0.3
    )
    
    
    (1.3
    )
    
    
    (1.4
    )
    
    
    (1.4
    )
    
    
    (1.2
    )
    
    
    (3.1
    )
    
    
    (8.7
    )Eliminations (a)
    
    
    
    
    
    
    (2.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (110.5
    )
    
    
    (112.8
    )Total consolidated debt
    
    $
    418.3
    
    
    $
    183.5
    
    
    $
    74.4
    
    
    $
    72.5
    
    
    $
    123.6
    
    
    $
    3,030.1
    
    
    $
    3,902.4
 
 (a)
    
    Represents the elimination of AGCs $100 million 6 7/8% Debentures due 2023, which are
also included above under AE Supply, and $12.8 million in the aggregate of Pollution Control
Bonds, for which Monongahela and AE Supply are co-obligors.    17




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
    Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2006(In millions)
    
    Issuances
    
    
    Repayments
    
    
    Issuances
    
    
    RepaymentsAE:AE Credit Facility
    
    $
    
    
    
    $
    169.1
    
    
    $
    179.1
    
    
    $
    179.1Prior Credit Facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    199.0Total AE
    
    $
    
    
    
    $
    169.1
    
    
    $
    179.1
    
    
    $
    378.1Monongahela:First Mortgage Bonds
    
    $
    150.0
    
    
    $
    
    
    
    $
    150.0
    
    
    $
    AE Supply:AE Supply Credit Facility
    
    $
    
    
    
    $
    105.0
    
    
    $
    967.0
    
    
    $
    220.0Prior AE Supply Loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    989.0Total AE Supply
    
    $
    
    
    
    $
    105.0
    
    
    $
    967.0
    
    
    $
    1,209.0West Penn:First Mortgage Bonds
    
    $
    145.0
    
    
    $
    
    
    
    $
    145.0
    
    
    $
    Transition Bonds (a)
    
    
    1.3
    
    
    
    18.1
    
    
    
    3.9
    
    
    
    57.2Total West Penn
    
    $
    146.3
    
    
    $
    18.1
    
    
    $
    148.9
    
    
    $
    57.2Consolidated Total
    
    $
    296.3
    
    
    $
    292.2
    
    
    $
    1,445.0
    
    
    $
    1,644.3
 
 (a)
    
    The issuance amounts represent interest that was accrued and added to the principal amount
of certain of the bonds. Subsequent issuance and redemptions:
   18




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 6: DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005AE Supply:Operating revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.4Operating expenses
    
    
    (0.4
    )
    
    
    8.5
    
    
    
    (1.2
    )
    
    
    6.2Other income
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Interest expense
    
    
    (0.4
    )
    
    
    (3.2
    )
    
    
    (2.2
    )
    
    
    (9.4
    )Income (loss) before income taxes
    
    
    (0.8
    )
    
    
    5.4
    
    
    
    (3.4
    )
    
    
    (2.7
    )Income tax benefit (expense)
    
    
    0.3
    
    
    
    (1.9
    )
    
    
    1.3
    
    
    
    0.9Impairment charge, net of tax
    
    
    
    
    
    
    (4.4
    )
    
    
    (0.1
    )
    
    
    (7.6
    )Loss from discontinued operations, net of tax
    
    $
    (0.5
    )
    
    $
    (0.9
    )
    
    $
    (2.2
    )
    
    $
    (9.4
    )Monongahela:Operating revenues
    
    $
    
    
    
    $
    21.3
    
    
    $
    
    
    
    $
    218.1Operating expenses
    
    
    
    
    
    
    (25.3
    )
    
    
    
    
    
    
    (201.5
    )Other income and expenses, net
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    1.0Interest expense
    
    
    
    
    
    
    (2.0
    )
    
    
    
    
    
    
    (6.1
    )Income (loss) before income taxes
    
    
    
    
    
    
    (5.9
    )
    
    
    
    
    
    
    11.5Income tax benefit (expense)
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    (4.5
    )Impairment charge, net of tax
    
    
    
    
    
    
    (3.1
    )
    
    
    
    
    
    
    (9.4
    )Loss from discontinued operations, net of tax
    
    $
    
    
    
    $
    (6.8
    )
    
    $
    
    
    
    $
    (2.4
    )Allegheny:Operating revenues
    
    $
    
    
    
    $
    21.3
    
    
    $
    
    
    
    $
    218.5Operating expenses
    
    
    (0.4
    )
    
    
    (16.8
    )
    
    
    (1.2
    )
    
    
    (195.3
    )Other income and expenses, net
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    1.1Interest expense
    
    
    (0.4
    )
    
    
    (5.2
    )
    
    
    (2.2
    )
    
    
    (15.5
    )Income (loss) before income taxes
    
    
    (0.8
    )
    
    
    (0.5
    )
    
    
    (3.4
    )
    
    
    8.8Income tax benefit (expense)
    
    
    0.3
    
    
    
    0.3
    
    
    
    1.3
    
    
    
    (3.6
    )Impairment charge, net of tax
    
    
    
    
    
    
    (7.5
    )
    
    
    (0.1
    )
    
    
    (17.0
    )Loss from discontinued operations, net of tax
    
    $
    (0.5
    )
    
    $
    (7.7
    )
    
    $
    (2.2
    )
    
    $
    (11.8
    )
   September 30,
    
    
    December 31,(In millions)
    
    2006
    
    
    2005Current assets
    
    $
    0.9
    
    
    $
    1.5Property, plant and equipment
    
    
    21.2
    
    
    
    23.1Receivable from TVA
    
    
    
    
    
    
    25.5Total
    
    $
    22.1
    
    
    $
    50.1
 19




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 7: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
    
 NOTE 8: ASSET RETIREMENT OBLIGATIONS (AROs)
 Accounting for
Conditional Asset Retirement Obligations (Conditional AROs)
   (In millions)
    
    ARO LiabilityBalance at December 31, 2005
    
    $
    48.8Accretion of the liability
    
    
    4.0New ARO liability
    
    
    1.8Settlements of ARO liabilities
    
    
    (1.0
    )Balance at September 30, 2006
    
    $
    53.6
  20




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 9: BUSINESS SEGMENTS
  Three Months Ended September 30, 2006
    
    
    Three Months Ended September 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    700.4
    
    
    $
    116.2
    
    
    $
    
    
    
    $
    816.6
    
    
    $
    728.2
    
    
    $
    116.8
    
    
    $
    
    
    
    $
    845.0Internal operating revenues
    
    
    1.8
    
    
    
    372.4
    
    
    
    (374.2
    )
    
    
    
    
    
    
    2.8
    
    
    
    379.6
    
    
    
    (382.4
    )
    
    
    Total operating revenues
    
    $
    702.2
    
    
    $
    488.6
    
    
    $
    (374.2
    )
    
    $
    816.6
    
    
    $
    731.0
    
    
    $
    496.4
    
    
    $
    (382.4
    )
    
    $
    845.0Depreciation and amortization
    
    $
    37.7
    
    
    $
    30.6
    
    
    $
    
    
    
    $
    68.3
    
    
    $
    38.2
    
    
    $
    38.5
    
    
    $
    
    
    
    $
    76.7Operating income
    
    $
    80.7
    
    
    $
    130.4
    
    
    $
    
    
    
    $
    211.1
    
    
    $
    36.3
    
    
    $
    134.7
    
    
    $
    
    
    
    $
    171.0Interest expense
    
    $
    20.1
    
    
    $
    46.8
    
    
    $
    (0.8
    )
    
    $
    66.1
    
    
    $
    24.2
    
    
    $
    88.0
    
    
    $
    (0.4
    )
    
    $
    111.8Income from continuing
operations
    
    $
    43.8
    
    
    $
    66.9
    
    
    $
    
    
    
    $
    110.7
    
    
    $
    10.7
    
    
    $
    32.7
    
    
    $
    
    
    
    $
    43.4Loss from discontinued
operations, net of tax
    
    $
    
    
    
    $
    (0.5
    )
    
    $
    
    
    
    $
    (0.5
    )
    
    $
    (6.8
    )
    
    $
    (0.9
    )
    
    $
    
    
    
    $
    (7.7
    )Net income
    
    $
    43.8
    
    
    $
    66.4
    
    
    $
    
    
    
    $
    110.2
    
    
    $
    3.9
    
    
    $
    31.8
    
    
    $
    
    
    
    $
    35.7
 Nine Months ended September 30, 2006
    
    
    Nine Months ended September 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    2,031.8
    
    
    $
    352.7
    
    
    $
    
    
    
    $
    2,384.5
    
    
    $
    2,126.5
    
    
    $
    187.2
    
    
    $
    
    
    
    $
    2.313.7Internal operating revenues
    
    
    5.5
    
    
    
    1,057.1
    
    
    
    (1,062.6
    )
    
    
    
    
    
    
    7.1
    
    
    
    1,130.6
    
    
    
    (1,137.7
    )
    
    
    Total operating revenues
    
    $
    2,037.3
    
    
    $
    1,409.8
    
    
    $
    (1,062.6
    )
    
    $
    2,384.5
    
    
    $
    2,133.6
    
    
    $
    1,317.8
    
    
    $
    (1,137.7
    )
    
    $
    2,313.7Depreciation and amortization
    
    $
    113.3
    
    
    $
    91.0
    
    
    $
    
    
    
    $
    204.3
    
    
    $
    115.3
    
    
    $
    115.2
    
    
    $
    
    
    
    $
    230.5Operating income
    
    $
    227.1
    
    
    $
    347.3
    
    
    $
    
    
    
    $
    574.4
    
    
    $
    191.1
    
    
    $
    272.0
    
    
    $
    
    
    
    $
    463.1Interest expense
    
    $
    61.9
    
    
    $
    150.2
    
    
    $
    (2.2
    )
    
    $
    209.9
    
    
    $
    99.5
    
    
    $
    267.0
    
    
    $
    (0.6
    )
    
    $
    365.9Income (loss) from continuing operations
    
    $
    113.5
    
    
    $
    143.4
    
    
    $
    
    
    
    $
    256.9
    
    
    $
    77.3
    
    
    $
    (5.5
    )
    
    $
    (0.1
    )
    
    $
    71.7Loss from discontinued operations, net of tax
    
    $
    
    
    
    $
    (2.2
    )
    
    $
    
    
    
    $
    (2.2
    )
    
    $
    (2.5
    )
    
    $
    (9.4
    )
    
    $
    0.1
    
    
    $
    (11.8
    )Net income (loss)
    
    $
    113.5
    
    
    $
    141.2
    
    
    $
    
    
    
    $
    254.7
    
    
    $
    74.8
    
    
    $
    (14.9
    )
    
    $
    
    
    
    $
    59.9
 21




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 10: GOODWILL AND INTANGIBLE ASSETS
    September 30, 2006
    
    
    December 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    Accumulated(In millions)
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationLand easements, amortized
    
    $
    97.8
    
    
    $
    28.1
    
    
    $
    97.7
    
    
    $
    27.1Land easements, unamortized
    
    
    30.7
    
    
    
    
    
    
    
    30.6
    
    
    
    Software
    
    
    45.9
    
    
    
    28.4
    
    
    
    72.3
    
    
    
    50.9Total
    
    $
    174.4
    
    
    $
    56.5
    
    
    $
    200.6
    
    
    $
    78.0
   (In millions)
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Annual amortization expense
    
    $
    14.7
    
    
    $
    8.0
    
    
    $
    3.1
    
    
    $
    2.3
    
    
    $
    1.7
 
 NOTE 11: COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    110.2
    
    
    $
    35.7
    
    
    $
    254.7
    
    
    $
    59.9Other comprehensive income (loss), net of tax:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Changes in value of available for sale securities
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    (0.2
    )Changes in fair value of cash flow hedges
    
    
    6.0
    
    
    
    (26.8
    )
    
    
    29.9
    
    
    
    (36.2
    )Comprehensive income, net of income taxes
    
    $
    116.2
    
    
    $
    9.0
    
    
    $
    284.6
    
    
    $
    23.3
 22




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  (In millions)
    
    September 30, 2006
    
    
    December 31, 2005Accumulated other comprehensive loss on cash flow hedges, net of
tax
    
    $
    (1.6
    )
    
    $
    (31.5
    )Accumulated minimum pension liability
    
    
    (111.2
    )
    
    
    (111.2
    )Total
    
    $
    (112.8
    )
    
    $
    (142.7
    )
 
 NOTE 12: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
   23




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Pension BenefitsThree Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Components of net periodic cost:Service cost
    
    $
    5.4
    
    
    $
    6.0
    
    
    $
    16.3
    
    
    $
    17.7Interest cost
    
    
    15.4
    
    
    
    15.8
    
    
    
    46.1
    
    
    
    47.6Expected return on plan assets
    
    
    (17.4
    )
    
    
    (17.3
    )
    
    
    (52.2
    )
    
    
    (51.9
    )Amortization of unrecognized transition obligation
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.3Amortization of prior service cost
    
    
    0.8
    
    
    
    0.9
    
    
    
    2.6
    
    
    
    2.7Recognized actuarial loss
    
    
    3.2
    
    
    
    2.3
    
    
    
    9.4
    
    
    
    6.9Subtotal
    
    
    7.5
    
    
    
    7.8
    
    
    
    22.5
    
    
    
    23.3Curtailments and settlements
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    1.3Net periodic cost
    
    $
    7.5
    
    
    $
    8.9
    
    
    $
    22.5
    
    
    $
    24.6Allocation of net periodic cost:AE Supply
    
    $
    2.3
    
    
    $
    2.4
    
    
    $
    6.8
    
    
    $
    6.8Monongahela
    
    
    1.9
    
    
    
    3.0
    
    
    
    5.8
    
    
    
    8.0West Penn
    
    
    1.8
    
    
    
    1.9
    
    
    
    5.5
    
    
    
    5.4Potomac Edison
    
    
    1.4
    
    
    
    1.4
    
    
    
    4.1
    
    
    
    4.0AE
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.4Net periodic cost
    
    $
    7.5
    
    
    $
    8.9
    
    
    $
    22.5
    
    
    $
    24.6Portion of net periodic cost above included in discontinued operations
    
    $
    
    
    
    $
    1.0
    
    
    $
    
    
    
    $
    1.7
 Postretirement Benefits Other Than PensionsThree Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)

    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Components of net periodic cost:Service cost
    
    $
    1.2
    
    
    $
    1.0
    
    
    $
    3.8
    
    
    $
    3.0Interest cost
    
    
    4.2
    
    
    
    4.2
    
    
    
    12.6
    
    
    
    12.6Expected return on plan assets
    
    
    (1.7
    )
    
    
    (1.6
    )
    
    
    (5.2
    )
    
    
    (4.6
    )Amortization of unrecognized transition obligation
    
    
    1.4
    
    
    
    1.5
    
    
    
    4.3
    
    
    
    4.4Recognized actuarial loss
    
    
    1.0
    
    
    
    0.6
    
    
    
    2.9
    
    
    
    1.6Subtotal
    
    
    6.1
    
    
    
    5.7
    
    
    
    18.4
    
    
    
    17.0Curtailments and settlements
    
    
    
    
    
    
    3.3
    
    
    
    
    
    
    
    3.3Net periodic cost
    
    $
    6.1
    
    
    $
    9.0
    
    
    $
    18.4
    
    
    $
    20.3Allocation of net periodic cost:Monongahela
    
    $
    1.7
    
    
    $
    4.3
    
    
    $
    5.1
    
    
    $
    7.5West Penn
    
    
    1.6
    
    
    
    1.8
    
    
    
    5.0
    
    
    
    4.9Potomac Edison
    
    
    1.4
    
    
    
    1.3
    
    
    
    4.0
    
    
    
    3.7AE Supply
    
    
    1.4
    
    
    
    1.5
    
    
    
    4.2
    
    
    
    4.0AE
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2Net periodic cost
    
    $
    6.1
    
    
    $
    9.0
    
    
    $
    18.4
    
    
    $
    20.3Portion of net periodic cost above included in discontinued operations
    
    $
    
    
    
    $
    1.9
    
    
    $
    
    
    
    $
    2.6
  24




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
    25




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 13: INCOME (LOSS) PER SHARE
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions, except share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Basic Income (Loss) per Share:Numerator:Income from continuing operations, net of tax
    
    $
    110.7
    
    
    $
    43.4
    
    
    $
    256.9
    
    
    $
    71.7Loss from discontinued operations, net of tax
    
    
    (0.5
    )
    
    
    (7.7
    )
    
    
    (2.2
    )
    
    
    (11.8
    )Net income
    
    $
    110.2
    
    
    $
    35.7
    
    
    $
    254.7
    
    
    $
    59.9Denominator:Weighted-average common shares outstanding
    
    
    164,813,343
    
    
    
    162,710,523
    
    
    
    163,812,973
    
    
    
    152,379,059Basic Income (Loss) per Share:Income from continuing operations, net of tax
    
    $
    0.67
    
    
    $
    0.27
    
    
    $
    1.56
    
    
    $
    0.47Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.05
    )
    
    
    (0.01
    )
    
    
    (0.08
    )Net income
    
    $
    0.67
    
    
    $
    0.22
    
    
    $
    1.55
    
    
    $
    0.39Diluted Income (Loss) per Share:Numerator:Income from continuing operations, net of tax
    
    $
    110.7
    
    
    $
    43.4
    
    
    $
    256.9
    
    
    $
    71.7Add back: Interest expense on Trust Preferred Securities, net of
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.9Income from continuing operations, net of tax after interest
    
    
    110.7
    
    
    
    43.4
    
    
    
    256.9
    
    
    
    74.6Loss from discontinued operations, net of tax
    
    
    (0.5
    )
    
    
    (7.7
    )
    
    
    (2.2
    )
    
    
    (11.8
    )Net income
    
    $
    110.2
    
    
    $
    35.7
    
    
    $
    254.7
    
    
    $
    62.8Denominator:Weighted-average common shares outstanding
    
    
    164,813,343
    
    
    
    162,710,523
    
    
    
    163,812,973
    
    
    
    152,379,059Effect of dilutive securities:Stock options
    
    
    2,692,136
    
    
    
    1,822,821
    
    
    
    2,619,057
    
    
    
    1,273,654Performance shares
    
    
    25,497
    
    
    
    41,100
    
    
    
    32,391
    
    
    
    54,410Non-employee stock awards
    
    
    47,676
    
    
    
    28,000
    
    
    
    40,677
    
    
    
    22,400Stock units
    
    
    1,050,672
    
    
    
    2,181,176
    
    
    
    2,081,523
    
    
    
    2,106,382Trust Preferred Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,181,215Total shares
    
    
    168,629,324
    
    
    
    166,783,620
    
    
    
    168,586,621
    
    
    
    166,017,120Diluted Income (Loss) per Share:Income from continuing operations, net of tax
    
    $
    0.65
    
    
    $
    0.26
    
    
    $
    1.52
    
    
    $
    0.45Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.05
    )
    
    
    (0.01
    )
    
    
    (0.07
    )Net income
    
    $
    0.65
    
    
    $
    0.21
    
    
    $
    1.51
    
    
    $
    0.38
 26




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 14: ADVERSE POWER PURCHASE COMMITMENT LIABILITY
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Amortization of liability for adverse power purchase commitments
    
    $
    4.3
    
    
    $
    4.2
    
    
    $
    12.9
    
    
    $
    12.6
  
 NOTE 15: REGULATORY ASSETS AND LIABILITIES
  September 30,
    
    
    December 31,(In millions)
    
    2006
    
    
    2005Regulatory assets, including current portion:Income taxes
    
    $
    312.0
    
    
    $
    312.2Pennsylvania stranded cost recovery
    
    
    63.6
    
    
    
    88.1Pennsylvania Competitive Transition Charge (CTC) reconciliation
    
    
    105.0
    
    
    
    97.7Unamortized loss on reacquired debt
    
    
    40.8
    
    
    
    44.8Other
    
    
    30.3
    
    
    
    40.4Subtotal
    
    
    551.7
    
    
    
    583.2Regulatory liabilities:Net asset removal costs
    
    
    420.6
    
    
    
    413.0Income taxes
    
    
    38.6
    
    
    
    41.3Other
    
    
    1.2
    
    
    
    Subtotal
    
    
    460.4
    
    
    
    454.3Net regulatory assets
    
    $
    91.3
    
    
    $
    128.9
   September 30,
    
    December 31,(In millions)
    
    2006
    
    2005Property, plant and equipment
    
    $
    4,287.9
    
    
    $
    4,160.4Amounts under construction included above
    
    $
    134.2
    
    
    $
    62.7Accumulated depreciation
    
    $
    (2,048.0
    )
    
    $
    (1,992.4
    )
 27




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 16: OTHER INCOME AND EXPENSES, NET
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Interest and dividend income
    
    $
    4.2
    
    
    $
    4.4
    
    
    $
    15.0
    
    
    $
    9.4Coal brokering income
    
    
    0.4
    
    
    
    0.4
    
    
    
    1.3
    
    
    
    1.5Gain on sale of land
    
    
    0.2
    
    
    
    
    
    
    
    1.0
    
    
    
    1.6Premium services
    
    
    0.7
    
    
    
    1.5
    
    
    
    2.7
    
    
    
    3.3Gain on sale of investments
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    0.8Cash received from a former trading executives forfeited assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11.2Proceeds from sale of Americas Fiber Network LLC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.0Other
    
    
    2.4
    
    
    
    1.0
    
    
    
    5.5
    
    
    
    3.0Total
    
    $
    7.9
    
    
    $
    7.3
    
    
    $
    25.8
    
    
    $
    33.8
 28




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 17: GUARANTEES AND LETTERS OF CREDIT
  September 30, 2006
    
    
    December 31, 2005Amounts
    
    
    TotalRecorded on
    
    
    Guarantees
    
    
    Amounts Recorded
    
    
    Totalthe Consolidated
    
    
    and Letters
    
    
    on the Consolidated
    
    
    Guarantees and Letters(In millions)
    
    Balance Sheet
    
    
    of Credit
    
    
    Balance Sheet
    
    
    of CreditGuarantees:Performance of a put option issued in connection
with an asset sale (a)
    
    $
    
    
    
    $
    
    
    
    $
    6.4
    
    
    $
    6.4Loans and other financing-related matters
    
    
    
    
    
    
    8.4
    
    
    
    
    
    
    
    8.7Lease agreement
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    4.7Purchase, sale, exchange or transportation of
wholesale natural gas, electric power and related
services
    
    
    
    
    
    
    20.4
    
    
    
    
    
    
    
    3.9Other
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Total Guarantees
    
    $
    0.2
    
    
    $
    33.7
    
    
    $
    6.6
    
    
    $
    23.9Letters of Credit:Under AEs Revolving Facility (b)
    
    $
    
    
    
    $
    135.5
    
    
    $
    
    
    
    $
    136.5Other (c)
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    1.6Total Letters of Credit
    
    
    
    
    
    
    137.6
    
    
    
    
    
    
    
    138.1Total Guarantees and Letters of Credit
    
    $
    0.2
    
    
    $
    171.3
    
    
    $
    6.6
    
    
    $
    162.0
 
 (a)
    
    The $6.4 million guarantee outstanding at December 31, 2005 was terminated during the first quarter of 2006 in connection with the purchase
by Allegheny Energy Hunlock Creek LLC (AE Hunlock), a wholly owned subsidiary of AE, of a 50% interest owned by UGI Hunlock Creek
Development Company (UGI) in Hunlock Creek Energy Ventures, LLC (HCEV). See Note 19, HCEV Partnership Interest, for additional
information.(b)
    
    These amounts are comprised of a letter of credit for $125.0 million that expires in June 2007 and was issued on September 23, 2005 on
behalf of Allegheny as collateral to stay enforcement of the judgment in Alleghenys litigation against Merrill Lynch while an appeal is
pending and a letter of credit for $9.5 million issued due to an AE Ventures contractual obligation that expires in July 2007. The
September 30, 2006 amount also includes a $1.0 million letter of credit that is related to an interconnection agreement with TVA that was
issued during May 2006 and expires in May 2007. The December 31, 2005 amount included a $2.0 million letter of credit related to AE
Solutions.(c)
    
    These amounts are not issued under either the AE Revolving Credit Facility or the AE Supply Revolving Facility. 
 NOTE 18: VARIABLE INTEREST ENTITIES (VIE)
   29




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
    
 NOTE 19: HCEV PARTNERSHIP INTEREST
   
 NOTE 20: COMMITMENTS AND CONTINGENCIES
 Environmental Matters and Litigation
  Clean Air Act Matters. 2
  30




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  2 2 2 2 2
  2 X
  2
 31




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
        32




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Canadian Toxic-Tort Class Action:
 Global Warming Class Action:
 Claims Related to Alleged Asbestos Exposure: ,
   33




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) Claim:
 Other Litigation
 Nevada Power Contracts .
   Sierra/Nevada .
  Claim by California Parties .
 34




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Litigation Involving Merrill Lynch .
    .
  Putative Shareholder, Benefit Plan Class Actions and Derivative Action .
 35




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
    Suits Related to the Gleason Generation Facility .
 Harrison Fuel Litigation.
 Ordinary Course of Business .
 36




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenues
    
    $
    213,910
    
    
    $
    220,534
    
    
    $
    588,526
    
    
    $
    585,232Operating expenses:Fuel consumed in electric generation
    
    
    45,275
    
    
    
    41,820
    
    
    
    129,861
    
    
    
    110,078Purchased power and transmission
    
    
    71,196
    
    
    
    76,157
    
    
    
    155,028
    
    
    
    189,654Impairment charge on Ohio T&D assets
    
    
    
    
    
    
    30,500
    
    
    
    
    
    
    
    30,500Deferred energy costs, net
    
    
    (578
    )
    
    
    
    
    
    
    (1,201
    )
    
    
    Operations and maintenance
    
    
    41,236
    
    
    
    45,314
    
    
    
    131,935
    
    
    
    141,430Depreciation and amortization
    
    
    16,410
    
    
    
    16,563
    
    
    
    49,130
    
    
    
    50,067Taxes other than income taxes
    
    
    11,282
    
    
    
    11,987
    
    
    
    35,365
    
    
    
    37,413Total operating expenses
    
    
    184,821
    
    
    
    222,341
    
    
    
    500,118
    
    
    
    559,142Operating income (loss)
    
    
    29,089
    
    
    
    (1,807
    )
    
    
    88,408
    
    
    
    26,090Other income and expenses, net
    
    
    4,597
    
    
    
    2,915
    
    
    
    12,434
    
    
    
    8,627Interest expense
    
    
    10,918
    
    
    
    10,843
    
    
    
    32,229
    
    
    
    32,204Income (loss) from continuing operations before income taxes
    
    
    22,768
    
    
    
    (9,735
    )
    
    
    68,613
    
    
    
    2,513Income tax expense (benefit)
    
    
    9,064
    
    
    
    (4,339
    )
    
    
    26,320
    
    
    
    (12,502
    )Income (loss) from continuing operations
    
    
    13,704
    
    
    
    (5,396
    )
    
    
    42,293
    
    
    
    15,015Loss from discontinued operations, net of tax (Note 3)
    
    
    
    
    
    
    (6,810
    )
    
    
    
    
    
    
    (2,440
    )Net income (loss)
    
    $
    13,704
    
    
    $
    (12,206
    )
    
    $
    42,293
    
    
    $
    12,575
  37




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Nine Months EndedSeptember 30,(In thousands)
    
    2006
    
    
    2005(Revised-Note 1)Cash Flows From Operating Activities:Net income
    
    $
    42,293
    
    
    $
    12,575Income from discontinued operations, net of tax
    
    
    
    
    
    
    2,440Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    49,130
    
    
    
    50,067Amortization of power sale liability related to Ohio sale
    
    
    (22,700
    )
    
    
    Impairment charge on Ohio T&D assets
    
    
    
    
    
    
    30,500Gain on asset sales
    
    
    (79
    )
    
    
    (65
    )Deferred income taxes and investment tax credit, net
    
    
    21,765
    
    
    
    (5,416
    )Other, net
    
    
    4,265
    
    
    
    2,648Changes in certain assets and liabilities:Accounts receivable, net
    
    
    26,525
    
    
    
    (14,830
    )Accounts receivable due from/payable to affiliates, net
    
    
    (4,284
    )
    
    
    (43,623
    )Materials, supplies and fuel
    
    
    212
    
    
    
    2,712Prepaid taxes
    
    
    (3,346
    )
    
    
    (1,778
    )Collateral deposits
    
    
    14,358
    
    
    
    (11,123
    )Prepayments
    
    
    (1,123
    )
    
    
    190Other current assets
    
    
    142
    
    
    
    500Accounts payable
    
    
    (18,978
    )
    
    
    4,529Accrued taxes
    
    
    4,828
    
    
    
    (4,459
    )Accrued interest
    
    
    5,861
    
    
    
    6,119Other current liabilities
    
    
    (5,783
    )
    
    
    3,246Other assets
    
    
    189
    
    
    
    2,112Other liabilities
    
    
    1,184
    
    
    
    565Net cash provided by operating activities of discontinued operations
    
    
    
    
    
    
    64,216Net cash provided by operating activities
    
    
    114,459
    
    
    
    101,125Cash Flows From Investing Activities:Capital expenditures
    
    
    (64,317
    )
    
    
    (47,851
    )Proceeds from asset sales
    
    
    141
    
    
    
    134,365Note receivable from affiliate
    
    
    (35,160
    )
    
    
    (44,987
    )Increase in restricted funds
    
    
    (148,478
    )
    
    
    Net cash used in investing activities of discontinued operations
    
    
    
    
    
    
    (6,524
    )Net cash provided by (used in) investing activities
    
    
    (247,814
    )
    
    
    35,003Cash Flows From Financing Activities:Issuance of long-term debt
    
    
    149,452
    
    
    
    Deferred financing costs
    
    
    (1,130
    )
    
    
    Cash dividends paid on capital stock:Preferred stock
    
    
    (879
    )
    
    
    (3,777
    )Common stock
    
    
    (10,015
    )
    
    
    Net cash used in financing activities of discontinued operations
    
    
    
    
    
    
    (67,061
    )Net cash provided by (used in) financing activities
    
    
    137,428
    
    
    
    (70,838
    )Net increase in cash and cash equivalents
    
    
    4,073
    
    
    
    65,290Cash and cash equivalents at beginning of period
    
    
    136,491
    
    
    
    45,092Cash and cash equivalents at end of period
    
    $
    140,564
    
    
    $
    110,382Supplemental Cash Flow Information:Cash paid for interest (net of amount capitalized)
    
    $
    23,560
    
    
    $
    31,131
  38




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 September 30,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    140,564
    
    
    $
    136,491Accounts receivable:Customer
    
    
    39,693
    
    
    
    45,061Unbilled utility revenue
    
    
    26,568
    
    
    
    38,200Wholesale and other
    
    
    8,824
    
    
    
    20,598Allowance for uncollectible accounts
    
    
    (2,469
    )
    
    
    (2,489
    )Note receivable from affiliate
    
    
    60,633
    
    
    
    25,473Materials and supplies
    
    
    15,020
    
    
    
    15,916Fuel
    
    
    15,435
    
    
    
    14,751Prepaid taxes
    
    
    23,421
    
    
    
    20,075Collateral deposits
    
    
    
    
    
    
    9,533Restricted funds
    
    
    148,478
    
    
    
    Regulatory assets
    
    
    5,581
    
    
    
    4,379Other
    
    
    4,542
    
    
    
    3,827Total current assets
    
    
    486,290
    
    
    
    331,815Property, Plant and Equipment, Net:Generation
    
    
    957,739
    
    
    
    951,636Transmission
    
    
    283,283
    
    
    
    281,048Distribution
    
    
    958,272
    
    
    
    930,817Other
    
    
    71,251
    
    
    
    73,807Accumulated depreciation
    
    
    (924,373
    )
    
    
    (890,548
    )Subtotal
    
    
    1,346,172
    
    
    
    1,346,760Construction work in progress
    
    
    35,969
    
    
    
    17,401Total property, plant and equipment, net
    
    
    1,382,141
    
    
    
    1,364,161Investments and Other Assets:Investment in AGC
    
    
    47,234
    
    
    
    48,197Other
    
    
    2,093
    
    
    
    6,904Total investments and other assets
    
    
    49,327
    
    
    
    55,101Deferred Charges:Regulatory assets
    
    
    94,140
    
    
    
    101,117Other
    
    
    7,084
    
    
    
    6,985Total deferred charges
    
    
    101,224
    
    
    
    108,102Total Assets
    
    $
    2,018,982
    
    
    $
    1,859,179
  39




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
 September 30,
    
    
    December 31,(In thousands, except share amounts)
    
    2006
    
    
    2005LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Long-term debt due within one year (Note 2)
    
    $
    301,000
    
    
    $
    299,959Accounts payable
    
    
    29,254
    
    
    
    48,232Accounts payable to affiliates, net
    
    
    53,013
    
    
    
    57,434Deferred income taxes
    
    
    1,873
    
    
    
    Accrued taxes
    
    
    46,594
    
    
    
    41,766Accrued interest
    
    
    14,790
    
    
    
    8,929Ohio power commitment
    
    
    13,700
    
    
    
    25,900Other
    
    
    16,916
    
    
    
    24,378Total current liabilities
    
    
    477,140
    
    
    
    506,598Long-term Debt (Note 2)
    
    
    533,605
    
    
    
    385,067Deferred Credits and Other Liabilities:Investment tax credit
    
    
    
    
    
    
    442Non-current income taxes payable
    
    
    45,671
    
    
    
    45,671Deferred income taxes
    
    
    215,172
    
    
    
    194,248Obligations under capital leases
    
    
    5,034
    
    
    
    5,554Regulatory liabilities
    
    
    239,804
    
    
    
    242,416Other
    
    
    32,758
    
    
    
    41,219Total deferred credits and other liabilities
    
    
    538,439
    
    
    
    529,550Commitments and Contingencies (Note 10)Preferred Stock
    
    
    24,000
    
    
    
    24,000Common Stockholders Equity:Common stock, $50 par value, 8 million shares authorized
and 5,891,000 shares outstanding
    
    
    294,550
    
    
    
    294,550Other paid-in capital
    
    
    41,153
    
    
    
    40,719Retained earnings
    
    
    110,094
    
    
    
    78,694Accumulated other comprehensive income
    
    
    1
    
    
    
    1Total common stockholders equity
    
    
    445,798
    
    
    
    413,964Total Liabilities and Stockholders Equity
    
    $
    2,018,982
    
    
    $
    1,859,179
  40




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(unaudited)
 Accumulated
    
    
    TotalOther
    
    
    
    
    
    
    other
    
    
    commonShares
    
    
    Common
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    stockholders(In thousands, except shares)
    
    outstanding
    
    
    stock
    
    
    capital
    
    
    earnings
    
    
    income
    
    
    equityBalance at January 1, 2006
    
    
    5,891,000
    
    
    $
    294,550
    
    
    $
    40,719
    
    
    $
    78,694
    
    
    $
    1
    
    
    $
    413,964Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,293
    
    
    
    
    
    
    
    42,293Pollution control bond
interest paid by AE
Supply
    
    
    
    
    
    
    
    
    
    
    434
    
    
    
    
    
    
    
    
    
    
    
    434Dividends declared on
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (878
    )
    
    
    
    
    
    
    (878
    )Dividends declared on
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,015
    )
    
    
    
    
    
    
    (10,015
    )Balance at September 30, 2006
    
    
    5,891,000
    
    
    $
    294,550
    
    
    $
    41,153
    
    
    $
    110,094
    
    
    $
    1
    
    
    $
    445,798
  41




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Note No.
    
    
    
    Page No.1
    
    Basis of Presentation
    
    
    432
    
    Debt
    
    
    443
    
    Discontinued Operations
    
    
    444
    
    Asset Retirement Obligations (AROs)
    
    
    455
    
    Business Segments
    
    
    466
    
    Intangible Assets
    
    
    477
    
    Pension Benefits and Postretirement Benefits Other Than Pensions
    
    
    478
    
    Regulatory Assets and Liabilities
    
    
    489
    
    Other Income and Expenses, Net
    
    
    4810
    
    Commitments and Contingencies
    
    
    48
 42




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 1: BASIS OF PRESENTATION
        Federal and State Income Taxes
  43




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Recent Accounting Pronouncements Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
 
 NOTE 2: DEBT
  (In millions)
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalFirst Mortgage Bonds
    
    $
    300.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    340.0
    
    
    $
    640.0Pollution Control Bonds
    
    
    
    
    
    
    15.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70.3
    
    
    
    85.8Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110.0
    
    
    
    
    
    
    
    110.0Total
    
    $
    300.0
    
    
    $
    15.5
    
    
    $
    
    
    
    $
    
    
    
    $
    110.0
    
    
    $
    410.3
    
    
    $
    835.8
    
 NOTE 3: DISCONTINUED OPERATIONS
  Three Months Ended
    
    
    Nine Months Ended(In millions)
    
    September 30, 2005
    
    
    September 30, 2005Operating revenues
    
    $
    21.3
    
    
    $
    218.1Operating expenses
    
    
    (25.3
    )
    
    
    (201.5
    )Other income and expenses, net
    
    
    0.1
    
    
    
    1.0Interest expense
    
    
    (2.0
    )
    
    
    (6.1
    )Income (loss) before income taxes
    
    
    (5.9
    )
    
    
    11.5Income tax benefit (expense)
    
    
    2.2
    
    
    
    (4.5
    )Impairment charge, net of tax
    
    
    (3.1
    )
    
    
    (9.4
    )Loss from discontinued operations, net of tax
    
    $
    (6.8
    )
    
    $
    (2.4
    )
  44




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 4: ASSET RETIREMENT OBLIGATIONS (AROs)
 Accounting for Conditional Asset Retirement Obligations (Conditional AROs)
   45




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 5: BUSINESS SEGMENTS
  Three Months Ended September 30, 2006
    
    
    Three Months Ended September 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    173.7
    
    
    $
    40.2
    
    
    $
    
    
    
    $
    213.9
    
    
    $
    176.6
    
    
    $
    43.9
    
    
    $
    
    
    
    $
    220.5Internal operating revenues
    
    
    
    
    
    
    78.0
    
    
    
    (78.0
    )
    
    
    
    
    
    
    
    
    
    
    79.6
    
    
    
    (79.6
    )
    
    
    Total operating revenues
    
    $
    173.7
    
    
    $
    118.2
    
    
    $
    (78.0
    )
    
    $
    213.9
    
    
    $
    176.6
    
    
    $
    123.5
    
    
    $
    (79.6
    )
    
    $
    220.5Depreciation and amortization
    
    $
    7.7
    
    
    $
    8.7
    
    
    $
    
    
    
    $
    16.4
    
    
    $
    7.9
    
    
    $
    8.7
    
    
    $
    
    
    
    $
    16.6Operating income (loss)
    
    $
    27.4
    
    
    $
    1.7
    
    
    $
    
    
    
    $
    29.1
    
    
    $
    (14.7
    )
    
    $
    12.9
    
    
    $
    
    
    
    $
    (1.8
    )Interest expense
    
    $
    6.4
    
    
    $
    4.5
    
    
    $
    
    
    
    $
    10.9
    
    
    $
    6.2
    
    
    $
    4.6
    
    
    $
    
    
    
    $
    10.8Income (loss) from continuing
operations
    
    $
    14.9
    
    
    $
    (1.2
    )
    
    $
    
    
    
    $
    13.7
    
    
    $
    (13.8
    )
    
    $
    8.4
    
    
    $
    
    
    
    $
    (5.4
    )Loss from discontinued
operations, net of tax
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (6.8
    )
    
    $
    
    
    
    $
    
    
    
    $
    (6.8
    )Net income (loss)
    
    $
    14.9
    
    
    $
    (1.2
    )
    
    $
    
    
    
    $
    13.7
    
    
    $
    (20.6
    )
    
    $
    8.4
    
    
    $
    
    
    
    $
    (12.2
    )
 Nine Months Ended September 30, 2006
    
    
    Nine Months Ended September 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    504.5
    
    
    $
    84.0
    
    
    $
    
    
    
    $
    588.5
    
    
    $
    515.6
    
    
    $
    69.6
    
    
    $
    
    
    
    $
    585.2Internal operating revenues
    
    
    
    
    
    
    225.6
    
    
    
    (225.6
    )
    
    
    
    
    
    
    
    
    
    
    236.6
    
    
    
    (236.6
    )
    
    
    Total operating revenues
    
    $
    504.5
    
    
    $
    309.6
    
    
    $
    (225.6
    )
    
    $
    588.5
    
    
    $
    515.6
    
    
    $
    306.2
    
    
    $
    (236.6
    )
    
    $
    585.2Depreciation and amortization
    
    $
    22.8
    
    
    $
    26.3
    
    
    $
    
    
    
    $
    49.1
    
    
    $
    24.0
    
    
    $
    26.1
    
    
    $
    
    
    
    $
    50.1Operating income
    
    $
    84.1
    
    
    $
    4.3
    
    
    $
    
    
    
    $
    88.4
    
    
    $
    16.4
    
    
    $
    9.7
    
    
    $
    
    
    
    $
    26.1Interest expense
    
    $
    18.6
    
    
    $
    13.6
    
    
    $
    
    
    
    $
    32.2
    
    
    $
    18.5
    
    
    $
    13.7
    
    
    $
    
    
    
    $
    32.2Income (loss) from continuing
operations
    
    $
    43.3
    
    
    $
    (1.0
    )
    
    $
    
    
    
    $
    42.3
    
    
    $
    5.7
    
    
    $
    9.3
    
    
    $
    
    
    
    $
    15.0Loss from discontinued
operations, net of tax
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (2.4
    )
    
    $
    
    
    
    $
    
    
    
    $
    (2.4
    )Net income (loss)
    
    $
    43.3
    
    
    $
    (1.0
    )
    
    $
    
    
    
    $
    42.3
    
    
    $
    3.3
    
    
    $
    9.3
    
    
    $
    
    
    
    $
    12.6
 46




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 6: INTANGIBLE ASSETS
  September 30, 2006
    
    
    December 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    Accumulated(In millions)
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationLand easements, amortized
    
    $
    0.5
    
    
    $
    0.2
    
    
    $
    0.5
    
    
    $
    0.2Land easements, unamortized
    
    
    30.7
    
    
    
    
    
    
    
    30.6
    
    
    
    Software
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3Total
    
    $
    31.5
    
    
    $
    0.5
    
    
    $
    31.4
    
    
    $
    0.5
  
 NOTE 7: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Pension benefits (a)
    
    $
    1.9
    
    
    $
    3.0
    
    
    $
    5.8
    
    
    $
    8.0Postretirement benefits other than pensions (b)
    
    $
    1.7
    
    
    $
    4.3
    
    
    $
    5.1
    
    
    $
    7.5
 
 (a)
    
    Includes $1.0 million and $1.7 million of net periodic costs recorded in discontinued operations for the
three and nine months ended September 30, 2005, respectively.(b)
    
    Includes $1.9 million and $2.6 million of net periodic costs recorded in discontinued operations for the
three and nine months ended September 30, 2005, respectively. 47




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 8: REGULATORY ASSETS AND LIABILITIES
 Accounting for the Effects of Certain Price
Regulation
 September 30,
    
    
    December 31,(In millions)
    
    2006
    
    
    2005Regulatory assets, including current portion:Income taxes
    
    $
    77.1
    
    
    $
    77.4Unamortized loss on reacquired debt
    
    
    14.6
    
    
    
    16.2Other
    
    
    8.0
    
    
    
    11.9Subtotal
    
    
    99.7
    
    
    
    105.5Regulatory liabilities:Net asset removal costs
    
    
    240.6
    
    
    
    242.1Other
    
    
    (0.8
    )
    
    
    0.3Subtotal
    
    
    239.8
    
    
    
    242.4Net regulatory liabilities
    
    $
    140.1
    
    
    $
    136.9
 
 NOTE 9: OTHER INCOME AND EXPENSES, NET
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Interest income
    
    $
    2.8
    
    
    $
    1.1
    
    
    $
    6.9
    
    
    $
    2.6Equity in earnings of AGC
    
    
    1.3
    
    
    
    1.7
    
    
    
    4.3
    
    
    
    5.2Premium services
    
    
    0.1
    
    
    
    
    
    
    
    0.5
    
    
    
    0.2Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    Other
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.6
    
    
    
    0.6Total
    
    $
    4.6
    
    
    $
    2.9
    
    
    $
    12.4
    
    
    $
    8.6
 
 NOTE 10: COMMITMENTS AND CONTINGENCIES
 Environmental Matters and Litigation
  Clean Air Act Matters. 2
 48




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  2 2 2 2 2
  2 X
   49




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
       50




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Canadian Toxic-Tort Class Action:
 Claims Related to Alleged Asbestos Exposure: ,
    Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) Claim:
 51




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MONONGAHELA POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Harrison Fuel Litigation.
 Ordinary Course of Business .
 52




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##### Table of Contents



ALLEGHENY GENERATING COMPANY
 
 STATEMENTS OF OPERATIONS
 (unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In thousands)
    
    2006
    
    2005
    
    2006
    
    2005Operating revenues
    
    $
    16,858
    
    
    $
    17,358
    
    
    $
    48,097
    
    
    $
    50,941Operating expenses:Operations and maintenance
    
    
    1,357
    
    
    
    1,152
    
    
    
    3,919
    
    
    
    3,358Depreciation
    
    
    4,279
    
    
    
    4,338
    
    
    
    12,854
    
    
    
    12,884Taxes other than income taxes
    
    
    798
    
    
    
    737
    
    
    
    2,395
    
    
    
    2,211Total operating expenses
    
    
    6,434
    
    
    
    6,227
    
    
    
    19,168
    
    
    
    18,453Operating income
    
    
    10,424
    
    
    
    11,131
    
    
    
    28,929
    
    
    
    32,488Other income and expenses, net
    
    
    98
    
    
    
    58
    
    
    
    844
    
    
    
    187Interest expense
    
    
    1,792
    
    
    
    1,795
    
    
    
    5,390
    
    
    
    5,598Income before income taxes
    
    
    8,730
    
    
    
    9,394
    
    
    
    24,383
    
    
    
    27,077Income tax expense
    
    
    2,800
    
    
    
    1,985
    
    
    
    5,572
    
    
    
    4,547Net income
    
    $
    5,930
    
    
    $
    7,409
    
    
    $
    18,811
    
    
    $
    22,530
  53




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ALLEGHENY GENERATING COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
 Nine Months EndedSeptember 30,(In thousands)
    
    2006
    
    
    2005Cash Flows From Operating Activities:Net income
    
    $
    18,811
    
    
    $
    22,530Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    12,854
    
    
    
    12,884Deferred income taxes and investment tax credit, net
    
    
    (5,285
    )
    
    
    (5,329
    )Other, net
    
    
    214
    
    
    
    214Changes in certain assets and liabilities:Materials and supplies
    
    
    (115
    )
    
    
    (157
    )Taxes receivable/accrued, net
    
    
    2,871
    
    
    
    1,015Prepayments
    
    
    210
    
    
    
    249Other current assets
    
    
    11
    
    
    
    (5
    )Accounts payable
    
    
    (2,633
    )
    
    
    (21
    )Accounts payable to affiliates, net
    
    
    206
    
    
    
    473Accrued interest
    
    
    (1,719
    )
    
    
    (1,719
    )Other current liabilities
    
    
    524
    
    
    
    395Other assets
    
    
    
    
    
    
    (1
    )Other liabilities
    
    
    2
    
    
    
    2Net cash provided by operating activities
    
    
    25,951
    
    
    
    30,530Cash Flows From Investing Activities:Capital expenditures
    
    
    (3,382
    )
    
    
    (6,504
    )Cash Flows From Financing Activities:Note payable to parent
    
    
    
    
    
    
    (15,000
    )Cash dividends paid on common stock
    
    
    (23,000
    )
    
    
    (16,200
    )Net cash used in financing activities
    
    
    (23,000
    )
    
    
    (31,200
    )Net decrease in cash and cash equivalents
    
    
    (431
    )
    
    
    (7,174
    )Cash and cash equivalents at beginning of period
    
    
    1,858
    
    
    
    7,500Cash and cash equivalents at end of period
    
    $
    1,427
    
    
    $
    326Supplemental Cash Flow Information:Cash paid for interest
    
    $
    6,894
    
    
    $
    7,102
  54




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ALLEGHENY GENERATING COMPANY
BALANCE SHEETS
(unaudited)
 September 30,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,427
    
    
    $
    1,858Materials and supplies
    
    
    1,666
    
    
    
    1,551Taxes receivable
    
    
    974
    
    
    
    3,004Other
    
    
    4
    
    
    
    225Total current assets
    
    
    4,071
    
    
    
    6,638Property, Plant and Equipment, Net:Generation
    
    
    782,195
    
    
    
    788,952Transmission
    
    
    48,510
    
    
    
    47,098Other
    
    
    2,949
    
    
    
    2,960Accumulated depreciation
    
    
    (318,854
    )
    
    
    (316,250
    )Subtotal
    
    
    514,800
    
    
    
    522,760Construction work in progress
    
    
    10,859
    
    
    
    12,372Total property, plant and equipment, net
    
    
    525,659
    
    
    
    535,132Deferred Charges:Regulatory assets
    
    
    8,109
    
    
    
    8,295Other
    
    
    94
    
    
    
    97Total deferred charges
    
    
    8,203
    
    
    
    8,392Total Assets
    
    $
    537,933
    
    
    $
    550,162
  55




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##### Table of Contents



ALLEGHENY GENERATING COMPANY
BALANCE SHEETS (continued)
(unaudited)
 September 30,
    
    
    December 31,(In thousands, except share amounts)
    
    2006
    
    
    2005LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    55
    
    
    $
    2,687Accounts payable to affiliates, net
    
    
    4,902
    
    
    
    4,696Accrued taxes
    
    
    841
    
    
    
    Accrued interest
    
    
    573
    
    
    
    2,292Other
    
    
    523
    
    
    
    Total current liabilities
    
    
    6,894
    
    
    
    9,675Long-term Debt (Note 2)
    
    
    99,450
    
    
    
    99,425Deferred Credits and Other Liabilities:Investment tax credit
    
    
    36,283
    
    
    
    37,273Non-current income taxes payable
    
    
    17,545
    
    
    
    17,544Deferred income taxes
    
    
    149,926
    
    
    
    153,630Regulatory liabilities
    
    
    22,214
    
    
    
    22,806Total deferred credits and other liabilities
    
    
    225,968
    
    
    
    231,253Commitments and Contingencies (Note 4)Stockholders Equity:Common stock, $1.00 par value, 5,000 shares authorized and 1,000 shares outstanding
    
    
    1
    
    
    
    1Other paid-in capital
    
    
    172,669
    
    
    
    172,669Retained earnings
    
    
    32,951
    
    
    
    37,139Total stockholders equity
    
    
    205,621
    
    
    
    209,809Total Liabilities and Stockholders Equity
    
    $
    537,933
    
    
    $
    550,162
  56




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ALLEGHENY GENERATING COMPANY
STATEMENT OF STOCKHOLDERS EQUITY
(unaudited)
 Other
    
    
    
    
    
    
    TotalShares
    
    
    Common
    
    
    paid-in
    
    
    Retained
    
    
    stockholders(In thousands, except shares)
    
    outstanding
    
    
    stock
    
    
    capital
    
    
    earnings
    
    
    equityBalance at January 1, 2006
    
    
    1,000
    
    
    $
    1
    
    
    $
    172,669
    
    
    $
    37,139
    
    
    $
    209,809Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,811
    
    
    
    18,811Dividends declared on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,000
    )
    
    
    (23,000
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Balance at September 30, 2006
    
    
    1,000
    
    
    $
    1
    
    
    $
    172,669
    
    
    $
    32,951
    
    
    $
    205,621
  57




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ALLEGHENY GENERATING COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 Note No.
    
    
    
    Page No.1
    
    Basis of Presentation
    
    
    592
    
    Debt
    
    
    593
    
    Intangible Assets
    
    
    604
    
    Commitments and Contingencies
    
    
    60
 58




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##### Table of Contents



ALLEGHENY GENERATING COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 1: BASIS OF PRESENTATION
      Federal and State Income Taxes
 Recent Accounting Pronouncements Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
 
 NOTE 2: DEBT
   59




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ALLEGHENY GENERATING COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 3: INTANGIBLE ASSETS
  September 30, 2006
    
    
    December 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    Accumulated(In millions)
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationLand easements, amortized
    
    $
    1.4
    
    
    $
    0.8
    
    
    $
    1.5
    
    
    $
    0.8Software
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1Total
    
    $
    1.6
    
    
    $
    0.9
    
    
    $
    1.7
    
    
    $
    0.9
  
 NOTE 4: COMMITMENTS AND CONTINGENCIES
 Canadian Toxic-Tort Class Action:
 Ordinary Course of Business .
 60




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward-Looking Statements
  
    
    rate regulation and the status of retail generation service supply competition
in states served by the Distribution Companies;
    
    financing plans;
    
    demand for energy and the cost and availability of raw materials, including coal;
    
    provider-of-last resort (PLR) and power supply contracts;
    
    results of litigation;
    
    results of operations;
    
    internal controls and procedures;
    
    capital expenditures;
    
    status and condition of plants and equipment;
    
    capacity purchase commitments;
    
    regulatory matters; and
    
    asset sales and transfers.
   
    
    plant performance and unplanned outages;
    
    volatility and changes in the price of power, coal, natural gas and other energy-related commodities;
    
    general economic and business conditions;
    
    changes in access to capital markets and actions of rating agencies;
    
    complications or other factors that make it difficult or impossible to obtain
necessary lender consents or regulatory authorizations on a timely basis;
    
    environmental regulations;
    
    the results of regulatory proceedings, including proceedings related to rates;
    
    changes in industry capacity, development and other activities by competitors
of AE and its consolidated subsidiaries;
    
    changes in the weather and other natural phenomena;
    
    changes in the underlying inputs and assumptions, including market conditions,
used to estimate the fair values of commodity contracts;
 61




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##### Table of Contents




    
    changes in customer switching behavior and their resulting effects on existing
and future PLR load requirements;
    
    changes in laws and regulations applicable to Allegheny, its markets or its activities;
    
    the loss of any significant customers or suppliers;
    
    dependence on other electric transmission systems and their constraints on availability;
    
    inflationary and interest rate trends;
    
    changes in the market rules, including changes to participant rules and
tariffs in the energy market operated by PJM Interconnection, LLC (PJM), which is a
regional transmission organization;
    
    the effect of accounting pronouncements issued periodically by accounting
standard-setting bodies and accounting issues facing our organization; and
    
    other risks, including the effects of global instability, terrorism and
war.
  62




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##### Table of Contents



ALLEGHENY RESULTS OF OPERATIONS
 Overview
  Key Indicators and Performance Factors
 The Delivery and Services Segment
  Revenue per Megawatt-hour (MWh) sold
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Revenue per MWh sold
    
    $
    59.01
    
    
    $
    55.73
    
    
    $
    58.78
    
    
    $
    55.39
  Three Months Ended
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    
    September 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeDelivery and Services:Retail electricity sales (million Kilowatt-hour (kWhs))
    
    
    11,026
    
    
    
    12,247
    
    
    
    (10.0
    )%
    
    
    32,257
    
    
    
    36,117
    
    
    
    (10.7
    )%HDD (a)
    
    
    113
    
    
    
    23
    
    
    
    391.3
    %
    
    
    3,069
    
    
    
    3,337
    
    
    
    (8.0
    )%CDD (a)
    
    
    606
    
    
    
    799
    
    
    
    (24.2
    )%
    
    
    778
    
    
    
    1,065
    
    
    
    (26.9
    )%
 
 (a)
    
    Heating degree-days (HDD) and cooling degree-days (CDD).The operations of the Distribution Companies are
weather sensitive. Weather conditions directly influence the volume of electricity delivered by the Distribution
Companies but represent only one of several factors that impact the volume of electricity. Accordingly, deviations
in weather from normal levels can affect Alleghenys financial performance. HDD and CDD are most likely to impact
the usage of Alleghenys residential and commercial customers. Industrial customers are less weather sensitive.
Degree-day data is used to estimate amounts of energy required to maintain comfortable indoor temperature levels
based on each days average temperature. HDD is the measure of the variation in the weather based on the extent to
which the average daily temperature falls below 65° Fahrenheit, and CDD is the measure of the variation in the
weather based on the extent to which the average daily temperature rises above 65° Fahrenheit. Each degree of
temperature above 65° Fahrenheit is counted as one cooling degree-day, and each degree of temperature below 65°
Fahrenheit is counted as one heating degree-day. Normal (historical) HDDs are 97 and 3,594 for the three and nine
months ended September 30, respectively, and normal (historical) CDDs are 561 and 767 for the three and nine months
ended September 30, calculated on a load weighted-average basis across the geographic areas served by the
Distribution Companies. The Generation and Marketing Segment
  Equivalent Availability Factor (EAF).
 63




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##### Table of Contents



kWhs generated.
  Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    September 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSupercritical Units:EAF
    
    
    89.6
    %
    
    
    89.4
    %
    
    
    0.2
    %
    
    
    86.2
    %
    
    
    85.3
    %
    
    
    0.9
    %All Generation Units:EAF
    
    
    91.9
    %
    
    
    90.0
    %
    
    
    1.9
    %
    
    
    88.8
    %
    
    
    88.3
    %
    
    
    0.5
    %kWhs generated (in millions)
    
    
    12,798
    
    
    
    13,188
    
    
    
    (3.0
    )%
    
    
    37,048
    
    
    
    36,574
    
    
    
    1.3
    %
 64




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##### Table of Contents



ALLEGHENY ENERGY, INC.CONSOLIDATED RESULTS OF OPERATIONS
 Income (Loss) Summary
 Three Months Ended
    
    
    Three Months EndedSeptember 30, 2006
    
    
    September 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    702.2
    
    
    $
    488.6
    
    
    $
    (374.2
    )
    
    $
    816.6
    
    
    $
    731.0
    
    
    $
    496.4
    
    
    $
    (382.4
    )
    
    $
    845.0Fuel consumed in electric generation
    
    
    
    
    
    
    223.8
    
    
    
    
    
    
    
    223.8
    
    
    
    
    
    
    
    211.5
    
    
    
    
    
    
    
    211.5Purchased power and transmission
    
    
    466.2
    
    
    
    8.2
    
    
    
    (372.4
    )
    
    
    102.0
    
    
    
    485.2
    
    
    
    18.5
    
    
    
    (379.6
    )
    
    
    124.1Impairment charge on Ohio T&D assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30.5
    
    
    
    
    
    
    
    
    
    
    
    30.5Deferred energy costs, net
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    (4.2
    )
    
    
    
    
    
    
    
    
    
    
    (4.2
    )Operations and maintenance
    
    
    84.3
    
    
    
    75.4
    
    
    
    (1.8
    )
    
    
    157.9
    
    
    
    112.1
    
    
    
    72.8
    
    
    
    (2.8
    )
    
    
    182.1Depreciation and amortization
    
    
    37.7
    
    
    
    30.6
    
    
    
    
    
    
    
    68.3
    
    
    
    38.2
    
    
    
    38.5
    
    
    
    
    
    
    
    76.7Taxes other than income taxes
    
    
    33.5
    
    
    
    20.2
    
    
    
    
    
    
    
    53.7
    
    
    
    32.9
    
    
    
    20.4
    
    
    
    
    
    
    
    53.3Total operating expenses
    
    
    621.5
    
    
    
    358.2
    
    
    
    (374.2
    )
    
    
    605.5
    
    
    
    694.7
    
    
    
    361.7
    
    
    
    (382.4
    )
    
    
    674.0Operating income
    
    
    80.7
    
    
    
    130.4
    
    
    
    
    
    
    
    211.1
    
    
    
    36.3
    
    
    
    134.7
    
    
    
    
    
    
    
    171.0Other income and expenses, net
    
    
    5.3
    
    
    
    3.4
    
    
    
    (0.8
    )
    
    
    7.9
    
    
    
    4.7
    
    
    
    3.0
    
    
    
    (0.4
    )
    
    
    7.3Interest expense and preferred dividends
    
    
    20.2
    
    
    
    47.0
    
    
    
    (0.8
    )
    
    
    66.4
    
    
    
    25.0
    
    
    
    88.5
    
    
    
    (0.4
    )
    
    
    113.1Income from continuing operations
before income taxes and minority
interest
    
    
    65.8
    
    
    
    86.8
    
    
    
    
    
    
    
    152.6
    
    
    
    16.0
    
    
    
    49.2
    
    
    
    
    
    
    
    65.2Income tax expense
    
    
    22.0
    
    
    
    18.9
    
    
    
    
    
    
    
    40.9
    
    
    
    5.3
    
    
    
    16.1
    
    
    
    
    
    
    
    21.4Minority interest
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    0.4Income from continuing operations
    
    
    43.8
    
    
    
    66.9
    
    
    
    
    
    
    
    110.7
    
    
    
    10.7
    
    
    
    32.7
    
    
    
    
    
    
    
    43.4Loss from discontinued operations, net
of tax
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.5
    )
    
    
    (6.8
    )
    
    
    (0.9
    )
    
    
    
    
    
    
    (7.7
    )Net income
    
    $
    43.8
    
    
    $
    66.4
    
    
    $
    
    
    
    $
    110.2
    
    
    $
    3.9
    
    
    $
    31.8
    
    
    $
    
    
    
    $
    35.7
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    2,037.3
    
    
    $
    1,409.8
    
    
    $
    (1,062.6
    )
    
    $
    2,384.5
    
    
    $
    2,133.6
    
    
    $
    1,317.8
    
    
    $
    (1,137.7
    )
    
    $
    2,313.7Fuel consumed in electric generation
    
    
    
    
    
    
    623.2
    
    
    
    
    
    
    
    623.2
    
    
    
    
    
    
    
    551.5
    
    
    
    
    
    
    
    551.5Purchased power and transmission
    
    
    1,328.8
    
    
    
    26.6
    
    
    
    (1,057.1
    )
    
    
    298.3
    
    
    
    1,406.3
    
    
    
    61.5
    
    
    
    (1,130.6
    )
    
    
    337.2Gain on sale of OVEC power agreement
and shares
    
    
    
    
    
    
    (6.1
    )
    
    
    
    
    
    
    (6.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment charge on Ohio T&D assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30.5
    
    
    
    
    
    
    
    
    
    
    
    30.5Deferred energy costs, net
    
    
    5.2
    
    
    
    
    
    
    
    
    
    
    
    5.2
    
    
    
    (4.8
    )
    
    
    
    
    
    
    
    
    
    
    (4.8
    )Operations and maintenance
    
    
    264.2
    
    
    
    266.9
    
    
    
    (5.5
    )
    
    
    525.6
    
    
    
    296.3
    
    
    
    256.4
    
    
    
    (7.1
    )
    
    
    545.6Depreciation and amortization
    
    
    113.3
    
    
    
    91.0
    
    
    
    
    
    
    
    204.3
    
    
    
    115.3
    
    
    
    115.2
    
    
    
    
    
    
    
    230.5Taxes other than income taxes
    
    
    98.7
    
    
    
    60.9
    
    
    
    
    
    
    
    159.6
    
    
    
    98.9
    
    
    
    61.2
    
    
    
    
    
    
    
    160.1Total operating expenses
    
    
    1,810.2
    
    
    
    1,062.5
    
    
    
    (1,062.6
    )
    
    
    1,810.1
    
    
    
    1,942.5
    
    
    
    1,045.8
    
    
    
    (1,137.7
    )
    
    
    1,850.6Operating income
    
    
    227.1
    
    
    
    347.3
    
    
    
    
    
    
    
    574.4
    
    
    
    191.1
    
    
    
    272.0
    
    
    
    
    
    
    
    463.1Other income and expenses, net
    
    
    16.5
    
    
    
    11.5
    
    
    
    (2.2
    )
    
    
    25.8
    
    
    
    16.9
    
    
    
    17.6
    
    
    
    (0.7
    )
    
    
    33.8Interest expense and preferred dividends
    
    
    62.4
    
    
    
    150.6
    
    
    
    (2.2
    )
    
    
    210.8
    
    
    
    102.0
    
    
    
    268.3
    
    
    
    (0.6
    )
    
    
    369.7Income from continuing operations
before income taxes and minority
interest
    
    
    181.2
    
    
    
    208.2
    
    
    
    
    
    
    
    389.4
    
    
    
    106.0
    
    
    
    21.3
    
    
    
    (0.1
    )
    
    
    127.2Income tax expense
    
    
    67.7
    
    
    
    62.4
    
    
    
    
    
    
    
    130.1
    
    
    
    28.7
    
    
    
    25.9
    
    
    
    
    
    
    
    54.6Minority interest
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    0.9Income (loss) from continuing operations
    
    
    113.5
    
    
    
    143.4
    
    
    
    
    
    
    
    256.9
    
    
    
    77.3
    
    
    
    (5.5
    )
    
    
    (0.1
    )
    
    
    71.7Loss from discontinued operations, net
of tax
    
    
    
    
    
    
    (2.2
    )
    
    
    
    
    
    
    (2.2
    )
    
    
    (2.5
    )
    
    
    (9.4
    )
    
    
    0.1
    
    
    
    (11.8
    )Net income (loss)
    
    $
    113.5
    
    
    $
    141.2
    
    
    $
    
    
    
    $
    254.7
    
    
    $
    74.8
    
    
    $
    (14.9
    )
    
    $
    
    
    
    $
    59.9
 65




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##### Table of Contents



ALLEGHENY ENERGY, INC.CONSOLIDATED RESULTS
 Operating Revenues
  
    
    a decrease in average market prices,
    
    the March 2006 assignment of AE Supplys rights to generation from the Ohio
Valley Electric Corporation (OVEC) in connection with the December 31, 2004 sale of a
portion of AEs equity interest in OVEC,
    
    decreased revenues associated with the Harrison transformer failure,
    
    the expiration of a third-party transmission capacity contract and
    
    decreased revenues associated with a construction services project that was
completed during the second quarter of 2006,
    
    partially offset by the expiration of a PLR contract with one large industrial
customer in Maryland in December 2005, which resulted in greater net sales into PJM at
market prices,
    
    higher generation rates charged to Pennsylvania customers effective January 1,
2006 as a result of a West Penn settlement with the Pennsylvania Public Utility
Commission (the Pennsylvania PUC) and
    
    Monongahelas agreement to provide power to Columbus Southern Power Company
(Columbus Southern), a subsidiary of American Electric Power that serves Monongahelas
former Ohio service territory as of January 1, 2006, under a fixed price power supply
agreement at a higher rate per kWh net of lost transmission and distribution (T&D)
revenues.
  
    
    the expiration of a PLR contract with one large industrial customer in
Maryland in December 2005, which resulted in greater net sales into PJM at market prices,
    
    higher generation rates charged to Pennsylvania customers effective January 1,
2006 as a result of a West Penn settlement with the Pennsylvania PUC,
    
    Monongahelas agreement to provide power to Columbus Southern as of January 1,
2006 under a fixed price power supply agreement at a higher rate per kWh net of lost T&D
revenues and
    
    increased MWhs generated,
    
    partially offset by a decrease in average market prices,
    
    the March 2006 assignment of AE Supplys rights to generation from OVEC in
connection with the December 31, 2004 sale of a portion of AEs equity interest in OVEC,
    
    decreased revenues associated with the Harrison transformer failure,
    
    the expiration of a third-party transmission capacity contract and
    
    decreased revenues associated with a construction services project that was
completed during the second quarter of 2006.
 Operating Income
  
    
    a $68.5 million decrease in operating expenses,
    
    partially offset by the $28.4 million decrease in operating revenues discussed above.
  66




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##### Table of Contents




    
    the $70.8 million increase in operating revenues discussed above and
    
    a $40.5 million decrease in operating expenses.
  Income from Continuing Operations Before Income Taxes and Minority Interest
  
    
    the $40.1 million increase in operating income discussed above and
    
    a $46.7 million decrease in interest expense and preferred dividends,
primarily due to lower average debt outstanding and the premium and associated costs
recorded during 2005 to redeem AE Supplys outstanding 10.25% and 13% Senior Notes.
  
    
    the $111.3 million increase in operating income discussed above and
    
    a $158.9 million decrease in interest expense and preferred dividends,
primarily due to the premium and associated costs recorded during 2005 to redeem AE
Supplys outstanding 10.25% and 13% Senior Notes, costs related to the April 2005 tender
offer for AEs outstanding Trust Preferred Securities, $38.5 million of interest recorded
during the first quarter of 2005 related to a court decision in the litigation involving
Merrill Lynch and lower average debt outstanding.
 67




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##### Table of Contents



Income Tax Expense
    
    
    two charges to adjust state deferred and accrued income taxes taken during the
three months ended September 30, 2005 in the amounts of $3.8 million and $1.9 million,
respectively, as described in Note 1, Basis of Presentation and
    
    state income taxes, tax credits, the effects of utility rate making and
certain non-deductible expenses.
 Discontinued Operations
     68




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##### Table of Contents



ALLEGHENY ENERGY, INC.DISCUSSION OF SEGMENT RESULTS OF OPERATIONS:
 Delivery and Services
  Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    September 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeRetail electricity sales (million kWhs)
    
    
    11,026
    
    
    
    12,247
    
    
    
    (10.0
    )%
    
    
    32,257
    
    
    
    36,117
    
    
    
    (10.7
    )%HDD (a)
    
    
    113
    
    
    
    23
    
    
    
    391.3
    %
    
    
    3,069
    
    
    
    3,337
    
    
    
    (8.0
    )%CDD (a)
    
    
    606
    
    
    
    799
    
    
    
    (24.2
    )%
    
    
    778
    
    
    
    1,065
    
    
    
    (26.9
    )%
 
 (a)
    
    Normal (historical) HDDs are 97 and 3,594 for the three and nine months ended September 30, respectively, and
normal (historical) CDDs are 561 and 767 for the three and nine months ended September 30, respectively,
calculated on a load weighted-average basis across the geographic areas served by the Distribution Companies. Operating Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail electric:Generation
    
    $
    435.5
    
    
    $
    455.8
    
    
    $
    1,266.8
    
    
    $
    1,337.5Transmission
    
    
    40.7
    
    
    
    44.7
    
    
    
    119.9
    
    
    
    131.6Distribution
    
    
    174.4
    
    
    
    182.0
    
    
    
    509.3
    
    
    
    531.3Total retail electric
    
    
    650.6
    
    
    
    682.5
    
    
    
    1,896.0
    
    
    
    2,000.4Transmission services and bulk power
    
    
    41.8
    
    
    
    29.3
    
    
    
    115.7
    
    
    
    86.8Other affiliated and nonaffiliated energy services
    
    
    9.8
    
    
    
    19.2
    
    
    
    25.6
    
    
    
    46.4Total operating revenues
    
    $
    702.2
    
    
    $
    731.0
    
    
    $
    2,037.3
    
    
    $
    2,133.6
  
    
    a $55.9 million decrease in generation revenues as a result of decreased usage
due to the expiration of a contract with one large industrial customer in Maryland in
December 2005, the sale of Monongahelas Ohio service territory on December 31, 2005 and
milder weather and
    
    an $11.6 million decrease in T&D revenues as a result of decreased customer
usage due to milder weather, the loss of one large industrial customer in Maryland and the
sale of Monongahelas Ohio service territory on December 31, 2005,
    
    partially offset by a $35.6 million increase in generation revenues due to
higher generation rates charged to Pennsylvania customers, effective January 1, 2006, as a
result of a West Penn settlement with the Pennsylvania PUC and an increase in the average
generation rates for non-residential customers at Potomac Edison.
  
    
    a $147.8 million decrease in generation revenues as a result of decreased
usage due to the expiration of a contract with one large industrial customer in Maryland
in December 2005, the sale of Monongahelas Ohio service territory on December 31, 2005
and milder weather and
    
    a $33.7 million decrease in T&D revenues as a result of decreased customer
usage due to milder weather, the loss of one large industrial customer in Maryland and the
sale of Monongahelas Ohio service territory on December 31, 2005,
 69




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##### Table of Contents




    
    partially offset by a $79.1 million increase in generation revenues due to
higher generation rates charged to Pennsylvania customers, effective January 1, 2006, as a
result of a West Penn settlement with the Pennsylvania PUC and an increase in the average
generation rates for non-residential customers at Potomac Edison.
  
    
    a $20.8 million increase in bulk power revenues related to the fixed price
power supply agreement with Columbus Southern to serve Monongahelas former Ohio service
territory as of January 1, 2006,
    
    partially offset by a $7.6 million decrease in transmission revenues related
to the expiration of a third-party transmission capacity contract and
    
    a $1.2 million decrease in bulk power revenues resulting from decreased power
sales from the AES Warrior Run generation facility due to a contractual reduction in the
capacity rate.
  
    
    a $59.2 million increase in bulk power revenues related to the fixed price
power supply agreement with Columbus Southern to serve Monongahelas former Ohio service
territory as of January 1, 2006,
    
    partially offset by a $22.7 million decrease in transmission revenues related
to the expiration of a third-party transmission capacity contract and
    
    an $8.7 million decrease in bulk power revenues resulting from decreased power
sales from the AES Warrior Run generation facility due to a scheduled outage at that
facility during the first quarter of 2006 and a contractual reduction in the capacity
rate.
  Operating Expenses
 Purchased Power and Transmission:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Other purchased power and transmission
    
    $
    412.5
    
    
    $
    432.0
    
    
    $
    1,175.9
    
    
    $
    1,250.4From PURPA generation (a)
    
    
    53.7
    
    
    
    53.2
    
    
    
    152.9
    
    
    
    155.9Total purchased power and transmission
    
    $
    466.2
    
    
    $
    485.2
    
    
    $
    1,328.8
    
    
    $
    1,406.3
 
 (a) PURPA cost (cents per kWh sold)
    
    
    5.6
    
    
    
    5.5
    
    
    
    5.4
    
    
    
    5.4
   70




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##### Table of Contents




    
    a $20.9 million decrease in other purchased power and transmission due to the
expiration of a contract with one large industrial customer in Maryland in December 2005,
    
    a $9.7 million decrease in other purchased power and transmission due to the
sale of Monongahelas Ohio electric service territory and
    
    a reduction in other purchased power as a result of milder weather,
    
    partially offset by an $11.7 million increase in other purchased power and
transmission, primarily due to a net increase in the price of purchased power from AE
Supply for Pennsylvania customers effective January 1, 2006 as a result of a rate increase
resulting from a West Penn settlement with the Pennsylvania PUC.
  
    
    a $50.9 million decrease in other purchased power and transmission related to
the expiration of a contract with one large industrial customer in Maryland in December
2005,
    
    a $41.2 million decrease in other purchased power and transmission due to the
sale of Monongahelas Ohio electric service territory and
    
    a reduction in other purchased power as a result of milder weather,
    
    partially offset by a $35.8 million increase in other purchased power and
transmission, primarily due to a net increase in the price of purchased power from AE
Supply for Pennsylvania customers, effective January 1, 2006, as a result of a rate
increase resulting from a West Penn settlement with the Pennsylvania PUC.
  Impairment Charge on Ohio T&D Assets:
 Deferred Energy Costs, Net:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Deferred energy costs, net
    
    $
    (0.2
    )
    
    $
    (4.2
    )
    
    $
    5.2
    
    
    $
    (4.8
    )
  AES Warrior Run PURPA Generation
  71




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##### Table of Contents



Market-based Generation Costs
    Operations and Maintenance:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Operations and maintenance
    
    $
    84.3
    
    
    $
    112.1
    
    
    $
    264.2
    
    
    $
    296.3
  
    
    approximately $15 million of reduced litigation settlement costs,
    
    a $9.6 million decrease in equipment procurement and subcontracting costs
associated with a construction services project that was completed during the second
quarter of 2006 and
    
    a $4.7 million decrease in salaries and wages expenses, primarily due to a
decrease in the number of information technology employees as a result of the outsourcing
of this function during 2005,
    
    partially offset by a $4.3 million increase due to costs associated with the
implementation of Alleghenys information technology initiatives.
  
    
    approximately $15 million of reduced litigation settlement costs,
    
    an $18.1 million decrease in equipment procurement and subcontracting costs
associated with a construction services project that was completed during the second
quarter of 2006 and
    
    a $10.1 million decrease in salaries and wages expenses, primarily due to a
decrease in the number of information technology employees as a result of the outsourcing
of this function during 2005,
    
    partially offset by a $6.9 million increase in outside services expenses,
primarily due to costs associated with the implementation of Alleghenys information
technology initiatives.
 72




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##### Table of Contents



Depreciation and Amortization:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Depreciation and amortization
    
    $
    37.7
    
    
    $
    38.2
    
    
    $
    113.3
    
    
    $
    115.3
  Interest Expense and Preferred Dividends:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Interest expense and preferred dividends
    
    $
    20.2
    
    
    $
    25.0
    
    
    $
    62.4
    
    
    $
    102.0
   
    
    $21.0 million of costs related to the April 2005 tender offer for AEs
outstanding Trust Preferred Securities and
    
    a $17.0 million decrease in interest expense on long-term debt, primarily due
to lower average debt outstanding.
  Discontinued Operations:
 Generation and Marketing
  Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    September 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeGeneration (million kWhs)
    
    
    12,798
    
    
    
    13,188
    
    
    
    (3.0
    )%
    
    
    37,048
    
    
    
    36,574
    
    
    
    1.3
    %
 Operating Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue from affiliates
    
    $
    372.4
    
    
    $
    379.6
    
    
    $
    1,057.0
    
    
    $
    1,130.6Wholesale and other revenues, net (a)
    
    
    116.2
    
    
    
    116.8
    
    
    
    352.8
    
    
    
    187.2Total revenues
    
    $
    488.6
    
    
    $
    496.4
    
    
    $
    1,409.8
    
    
    $
    1,317.8
 
 (a)
    
    Amounts are net of energy trading gains and losses as described in Note 7, Derivative Instruments and
Hedging Activities. Energy trading gains (losses) are presented in the wholesale and other revenues
table below. 73




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##### Table of Contents



Revenue from affiliates:
     
    
    an $18.8 million decrease in revenue due to the expiration of a contract with
one large industrial customer in Maryland in December 2005,
    
    a $4.3 million decrease in revenue related to decreased sales volumes as a
result of a decrease in the number of Monongahelas customers as the result of the sale of
its Ohio service territory on December 31, 2005 and the concurrent expiration of a power
supply contract between Monongahela and AE Supply and
    
    decreased sales volumes as a result of milder weather, which caused a decrease
in electricity demand by the Delivery and Services segment,
    
    partially offset by an $18.1 million increase in affiliated revenues related
to higher generation rates charged to Pennsylvania customers, effective January 1, 2006,
as a result of a West Penn settlement with the Pennsylvania PUC and
    
    a $6.6 million increase in revenue related to increased contractual rates with
decreased sales volumes from certain of Potomac Edisons customers in Maryland.
  
    
    a $55.2 million decrease in revenue related to the expiration of a contract
with one large industrial customer in Maryland in December 2005,
    
    a $27.0 million decrease in revenue related to decreased sales volumes from
certain of Potomac Edisons customers in Maryland,
    
    an $11.3 million decrease in revenue related to decreased sales volumes as a
result of Monongahela no longer serving customers in its former Ohio service territory,
which was sold on December 31, 2005, and the concurrent expiration of a power supply
contract between Monongahela and AE Supply and
    
    decreased sales volumes as a result of milder weather, which caused a decrease
in electricity demand by the Delivery and Services segment,
    
    partially offset by a $51.0 million increase in affiliated revenues related to
higher generation rates charged to Pennsylvania customers, effective January 1, 2006, as a
result of a West Penn settlement with the Pennsylvania PUC.
 74




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##### Table of Contents



Wholesale and other revenues, net:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2006
    
    
    2005 (a)
    
    
    2006
    
    
    2005 (a)PJM Revenue:Generation sold to PJM
    
    $
    550.5
    
    
    $
    792.4
    
    
    $
    1,601.2
    
    
    $
    1,807.2Power purchased from PJM
    
    
    (429.2
    )
    
    
    (672.3
    )
    
    
    (1,261.2
    )
    
    
    (1,626.4
    )Net
    
    
    121.3
    
    
    
    120.1
    
    
    
    340.0
    
    
    
    180.8Release of escrow proceeds
    
    
    
    
    
    
    2.7
    
    
    
    
    
    
    
    2.7Cash flow hedges and trading activities:Realized losses
    
    
    (14.1
    )
    
    
    (11.1
    )
    
    
    (18.7
    )
    
    
    (17.8
    )Unrealized gains
    
    
    8.5
    
    
    
    4.9
    
    
    
    26.8
    
    
    
    18.2Net
    
    
    (5.6
    )
    
    
    (6.2
    )
    
    
    8.1
    
    
    
    0.4Other revenues
    
    
    0.5
    
    
    
    0.2
    
    
    
    4.7
    
    
    
    3.3Total wholesale and other revenues
    
    $
    116.2
    
    
    $
    116.8
    
    
    $
    352.8
    
    
    $
    187.2
 
 (a)
    
    Certain prior period amounts were reclassified from other revenues to power purchased from PJM to conform to the presentation
for the current period.  
    
    a $2.7 million decrease related to the release of escrow proceeds during the
third quarter of 2005 due to the resolution of a guarantee,
    
    partially offset by a $0.6 million decrease in net losses on cash flow hedges
and trading revenues, primarily related to the settlement of cash flow hedges, losses on
mark-to-market purchase contracts and a reduction in contracts that were designated as
normal purchase and normal sale during 2006 and
    
    an increase in net PJM revenues of $1.2 million.
   
    
    an increase in net PJM revenues of $159.2 million and
    
    a $7.7 million increase in net gains on cash flow hedges and trading revenues,
primarily related to the settlement of cash flow hedges, partially offset by losses on
mark-to-market purchase contracts and a reduction in contracts that were designated as
normal purchase and normal sale during 2006,
    
    partially offset by a $2.7 million decrease related to the release of escrow
proceeds during the third quarter of 2005 due to the resolution of a guarantee.
 75




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##### Table of Contents



Fair Value of Contracts :
   Fair value of contracts at September 30, 2006Settlement by:Classification of contracts
    
    
    
    
    Settlementby source of fair
    
    
    
    
    In Excess ofvalue (In millions)
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Five Years
    
    
    TotalPrices actively quoted
    
    $
    (7.7
    )
    
    $
    (4.9
    )
    
    $
    (5.7
    )
    
    $
    (5.4
    )
    
    $
    (5.1
    )
    
    $
    (1.6
    )
    
    $
    (30.4
    )Prices provided by other external sources
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Prices based on models
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4Total
    
    $
    (7.0
    )
    
    $
    (4.9
    )
    
    $
    (5.7
    )
    
    $
    (5.4
    )
    
    $
    (5.1
    )
    
    $
    (1.6
    )
    
    $
    (29.7
    )
   76




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##### Table of Contents



Changes in Fair Value :
 Three Months Ended
    
    
    Nine Months Ended(In millions)
    
    September 30, 2006
    
    
    September 30, 2006Net fair value of contract liabilities at July 1 and January 1, respectively
    
    $
    (48.0
    )
    
    $
    (106.6
    )Changes in fair value of cash flow hedges
    
    
    9.8
    
    
    
    48.7Unrealized gains on contracts, net
    
    
    8.5
    
    
    
    26.8Net options paid (a)
    
    
    
    
    
    
    1.4Net fair value of contract liabilities at September 30
    
    $
    (29.7
    )
    
    $
    (29.7
    )
 
 (a)
    
    Amount reflects $1.0 million of option premium expirations for the nine months ended September 30, 2006.   Operating Expenses
 Fuel Consumed in Electric Generation:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Fuel consumed in electric generation
    
    $
    223.8
    
    
    $
    211.5
    
    
    $
    623.2
    
    
    $
    551.5
 X
  77




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##### Table of Contents



Purchased Power and Transmission:
 Three Months Ended
    
    Nine months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Purchased power and transmission expenses
    
    $
    8.2
    
    
    $
    18.5
    
    
    $
    26.6
    
    
    $
    61.5
   Gain on Sale of OVEC Power Agreement and Shares:
 Operations and Maintenance:
 Three Months Ended
    
    Nine months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Operations and maintenance
    
    $
    75.4
    
    
    $
    72.8
    
    
    $
    266.9
    
    
    $
    256.4
  
    
    a $12.5 million increase in contract work expense, primarily due to insurance
proceeds received during 2005 related to Hatfields Ferry Unit No. 2, which were recorded
as an offset to contract work expense,
    
    partially offset by an $8.1 million reduction in accrued site remediation
reserves associated with a previously terminated generation project and
    
    a $1.6 million decrease in materials and supplies expense, primarily due to
decreased maintenance expenditures.
  
    
    a $25.8 million increase in contract work expense, primarily due to insurance
proceeds received during 2005 related to Hatfields Ferry Unit No. 2, which were recorded
as an offset to contract work expense and
    
    a $6.6 million increase in outside service expense, primarily due to costs
associated with the implementation of Alleghenys information technology initiatives,
    
    partially offset by a $17.2 million decrease in other operation and
maintenance expense, primarily due to $6.4 million reversal of a guarantee liability
associated with the Hunlock Creek Energy Ventures (HCEV) partnership and an $8.1 million
reduction in accrued site remediation reserves associated with a previously terminated
generation project and
    
    a $1.6 million decrease in salaries and wages expense due to a decrease in the
number of information technology employees as a result of the outsourcing of this function
during 2005.
  78




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##### Table of Contents



Depreciation and Amortization:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Depreciation and amortization
    
    $
    30.6
    
    
    $
    38.5
    
    
    $
    91.0
    
    
    $
    115.2
  Other Income and Expenses, Net:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Other income and expenses, net
    
    $
    3.4
    
    
    $
    3.0
    
    
    $
    11.5
    
    
    $
    17.6
  Interest Expense and Preferred Dividends:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Interest expense and preferred dividends
    
    $
    47.0
    
    
    $
    88.5
    
    
    $
    150.6
    
    
    $
    268.3
   
    
    $32.6 million recorded during 2005 to reflect the premium and associated costs
to redeem AE Supplys outstanding 10.25% and 13% Senior Notes,
    
    $26.2 million in costs related to the April 2005 tender offer for AEs
outstanding Trust Preferred Securities,
    
    $38.5 million in interest expense recorded during the first quarter of 2005
related to a court decision in the litigation involving Merrill Lynch and
    
    a $16.1 million decrease in interest expense on long-term debt, primarily due
to lower average debt outstanding.
  Minority Interest:
 79




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##### Table of Contents



Discontinued Operations:
 Three Months Ended
    
    Nine months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Loss from discontinued operations
    
    $
    0.5
    
    
    $
    0.9
    
    
    $
    2.2
    
    
    $
    9.4
   80




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##### Table of Contents



MONONGAHELA POWER COMPANY AND SUBSIDIARIESCONSOLIDATED RESULTS OF OPERATIONS
 Income (Loss) Summary
 Three Months Ended
    
    
    Three Months EndedSeptember 30, 2006
    
    
    September 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    173.7
    
    
    $
    118.2
    
    
    $
    (78.0
    )
    
    $
    213.9
    
    
    $
    176.6
    
    
    $
    123.5
    
    
    $
    (79.6
    )
    
    $
    220.5Fuel consumed in electric generation
    
    
    
    
    
    
    45.3
    
    
    
    
    
    
    
    45.3
    
    
    
    
    
    
    
    41.8
    
    
    
    
    
    
    
    41.8Purchased power and transmission
    
    
    109.4
    
    
    
    39.8
    
    
    
    (78.0
    )
    
    
    71.2
    
    
    
    119.3
    
    
    
    36.4
    
    
    
    (79.6
    )
    
    
    76.1Impairment charge on Ohio T&D assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30.5
    
    
    
    
    
    
    
    
    
    
    
    30.5Deferred energy costs, net
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operations and maintenance
    
    
    23.7
    
    
    
    17.5
    
    
    
    
    
    
    
    41.2
    
    
    
    27.5
    
    
    
    17.8
    
    
    
    
    
    
    
    45.3Depreciation and amortization
    
    
    7.7
    
    
    
    8.7
    
    
    
    
    
    
    
    16.4
    
    
    
    7.9
    
    
    
    8.7
    
    
    
    
    
    
    
    16.6Taxes other than income taxes
    
    
    6.1
    
    
    
    5.2
    
    
    
    
    
    
    
    11.3
    
    
    
    6.1
    
    
    
    5.9
    
    
    
    
    
    
    
    12.0Total operating expenses
    
    
    146.3
    
    
    
    116.5
    
    
    
    (78.0
    )
    
    
    184.8
    
    
    
    191.3
    
    
    
    110.6
    
    
    
    (79.6
    )
    
    
    222.3Operating income (loss)
    
    
    27.4
    
    
    
    1.7
    
    
    
    
    
    
    
    29.1
    
    
    
    (14.7
    )
    
    
    12.9
    
    
    
    
    
    
    
    (1.8
    )Other income and expenses, net
    
    
    2.0
    
    
    
    2.6
    
    
    
    
    
    
    
    4.6
    
    
    
    0.9
    
    
    
    2.0
    
    
    
    
    
    
    
    2.9Interest expense
    
    
    6.4
    
    
    
    4.5
    
    
    
    
    
    
    
    10.9
    
    
    
    6.2
    
    
    
    4.6
    
    
    
    
    
    
    
    10.8Income (loss) from continuing operations
before income taxes
    
    
    23.0
    
    
    
    (0.2
    )
    
    
    
    
    
    
    22.8
    
    
    
    (20.0
    )
    
    
    10.3
    
    
    
    
    
    
    
    (9.7
    )Income tax expense (benefit)
    
    
    8.1
    
    
    
    1.0
    
    
    
    
    
    
    
    9.1
    
    
    
    (6.2
    )
    
    
    1.9
    
    
    
    
    
    
    
    (4.3
    )Income (loss) from continuing operations
    
    
    14.9
    
    
    
    (1.2
    )
    
    
    
    
    
    
    13.7
    
    
    
    (13.8
    )
    
    
    8.4
    
    
    
    
    
    
    
    (5.4
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.8
    )
    
    
    
    
    
    
    
    
    
    
    (6.8
    )Net income (loss)
    
    $
    14.9
    
    
    $
    (1.2
    )
    
    $
    
    
    
    $
    13.7
    
    
    $
    (20.6
    )
    
    $
    8.4
    
    
    $
    
    
    
    $
    (12.2
    )
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2005Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    504.5
    
    
    $
    309.6
    
    
    $
    (225.6
    )
    
    $
    588.5
    
    
    $
    515.6
    
    
    $
    306.2
    
    
    $
    (236.6
    )
    
    $
    585.2Fuel consumed in electric generation
    
    
    
    
    
    
    129.9
    
    
    
    
    
    
    
    129.9
    
    
    
    
    
    
    
    110.1
    
    
    
    
    
    
    
    110.1Purchased power and transmission
    
    
    306.5
    
    
    
    74.1
    
    
    
    (225.6
    )
    
    
    155.0
    
    
    
    340.6
    
    
    
    85.6
    
    
    
    (236.6
    )
    
    
    189.6Impairment charge on Ohio T&D assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30.5
    
    
    
    
    
    
    
    
    
    
    
    30.5Deferred energy costs, net
    
    
    (1.2
    )
    
    
    
    
    
    
    
    
    
    
    (1.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operations and maintenance
    
    
    73.9
    
    
    
    58.0
    
    
    
    
    
    
    
    131.9
    
    
    
    84.4
    
    
    
    57.0
    
    
    
    
    
    
    
    141.4Depreciation and amortization
    
    
    22.8
    
    
    
    26.3
    
    
    
    
    
    
    
    49.1
    
    
    
    24.0
    
    
    
    26.1
    
    
    
    
    
    
    
    50.1Taxes other than income taxes
    
    
    18.4
    
    
    
    17.0
    
    
    
    
    
    
    
    35.4
    
    
    
    19.7
    
    
    
    17.7
    
    
    
    
    
    
    
    37.4Total operating expenses
    
    
    420.4
    
    
    
    305.3
    
    
    
    (225.6
    )
    
    
    500.1
    
    
    
    499.2
    
    
    
    296.5
    
    
    
    (236.6
    )
    
    
    559.1Operating income
    
    
    84.1
    
    
    
    4.3
    
    
    
    
    
    
    
    88.4
    
    
    
    16.4
    
    
    
    9.7
    
    
    
    
    
    
    
    26.1Other income and expenses, net
    
    
    5.0
    
    
    
    7.4
    
    
    
    
    
    
    
    12.4
    
    
    
    2.5
    
    
    
    6.1
    
    
    
    
    
    
    
    8.6Interest expense
    
    
    18.6
    
    
    
    13.6
    
    
    
    
    
    
    
    32.2
    
    
    
    18.5
    
    
    
    13.7
    
    
    
    
    
    
    
    32.2Income (loss) from continuing operations
before income taxes
    
    
    70.5
    
    
    
    (1.9
    )
    
    
    
    
    
    
    68.6
    
    
    
    0.4
    
    
    
    2.1
    
    
    
    
    
    
    
    2.5Income tax expense (benefit)
    
    
    27.2
    
    
    
    (0.9
    )
    
    
    
    
    
    
    26.3
    
    
    
    (5.3
    )
    
    
    (7.2
    )
    
    
    
    
    
    
    (12.5
    )Income (loss) from continuing operations
    
    
    43.3
    
    
    
    (1.0
    )
    
    
    
    
    
    
    42.3
    
    
    
    5.7
    
    
    
    9.3
    
    
    
    
    
    
    
    15.0Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.4
    )
    
    
    
    
    
    
    
    
    
    
    (2.4
    )Net income (loss)
    
    $
    43.3
    
    
    $
    (1.0
    )
    
    $
    
    
    
    $
    42.3
    
    
    $
    3.3
    
    
    $
    9.3
    
    
    $
    
    
    
    $
    12.6
 81




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##### Table of Contents



MONONGAHELA POWER COMPANYCONSOLIDATED RESULTS
  Operating Revenues
  
    
    decreased revenues as a result of the Harrison transformer failure and
    
    decreased retail revenue resulting from milder weather,
    
    partially offset by increased revenues related to Monongahelas agreement to
provide power to Columbus Southern, a subsidiary of American Electric Power that serves
Monongahelas former Ohio service territory as of January 1, 2006, under a fixed price
power supply agreement at a higher rate per kWh, net of lost T&D revenues.
  
    
    increased generation revenue from sales as a result of additional MWhs
generated and
    
    increased revenues related to Monongahelas agreement to provide power to
Columbus Southern under a fixed price power supply agreement at a higher rate per kWh, net
of lost T&D revenues,
    
    partially offset by decreased retail revenue resulting from milder weather.
 Operating Income
  
    
    a $37.5 million decrease in operating expenses, primarily due to a $30.5
million impairment charge on Ohio T&D assets that was recorded in the third quarter of
2005,
    
    partially offset by a $6.6 million decrease in operating revenues discussed
above.
  
    
    a $59.0 million decrease in operating expenses and
    
    a $3.3 million increase in total operating revenues discussed above.
  Income (Loss) from Continuing Operations Before Income Taxes
   Income Tax Expense
  82




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##### Table of Contents



Discontinued Operations
   83




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##### Table of Contents



MONONGAHELA POWER COMPANYDISCUSSION OF SEGMENT RESULTS OF OPERATIONS:
 Delivery and Services
  Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    September 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeRetail electricity sales (million kWhs)
    
    
    2,663
    
    
    
    3,125
    
    
    
    (14.8
    )%
    
    
    7,717
    
    
    
    9,196
    
    
    
    (16.1
    )%HDD (a)
    
    
    107
    
    
    
    13
    
    
    
    723.1
    %
    
    
    2,706
    
    
    
    2,896
    
    
    
    (6.6
    )%CDD (a)
    
    
    598
    
    
    
    904
    
    
    
    (33.8
    )%
    
    
    776
    
    
    
    1,203
    
    
    
    (35.5
    )%
 
 (a)
    
    Normal (historical) HDD are 81 and 3,509 for the three and nine months ended September 30, respectively, and normal (historical) CDD are 540 and 733
for the three and nine months ended September 30, respectively, calculated on a weighted-average basis across the geographic areas served by
Monongahela. Operating Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail electric:Generation
    
    $
    90.8
    
    
    $
    103.9
    
    
    $
    264.6
    
    
    $
    307.7Transmission
    
    
    8.7
    
    
    
    10.2
    
    
    
    25.1
    
    
    
    29.9Distribution
    
    
    48.2
    
    
    
    54.3
    
    
    
    138.8
    
    
    
    154.9Total retail electric
    
    
    147.7
    
    
    
    168.4
    
    
    
    428.5
    
    
    
    492.5Transmission services and bulk power
    
    
    23.7
    
    
    
    6.1
    
    
    
    68.1
    
    
    
    17.7Other affiliated and non-affiliated energy services
    
    
    2.3
    
    
    
    2.1
    
    
    
    7.9
    
    
    
    5.4Total revenues
    
    $
    173.7
    
    
    $
    176.6
    
    
    $
    504.5
    
    
    $
    515.6
    84




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##### Table of Contents



Operating Expenses
 Purchased Power and Transmission:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Other purchased power and transmission
    
    $
    94.3
    
    
    $
    104.7
    
    
    $
    261.0
    
    
    $
    297.9From PURPA generation (a)
    
    
    15.1
    
    
    
    14.6
    
    
    
    45.5
    
    
    
    42.7Total purchased power and transmission
    
    $
    109.4
    
    
    $
    119.3
    
    
    $
    306.5
    
    
    $
    340.6(a) PURPA cost (cents per kWh sold)
    
    
    4.7
    
    
    
    4.8
    
    
    
    4.5
    
    
    
    4.5
     Impairment Charge on Ohio T&D Assets:
 Deferred Energy Costs, Net:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Deferred energy costs, net
    
    $
    (0.6
    )
    
    $
    
    
    
    $
    (1.2
    )
    
    $
    
 Grant Town PURPA Facility
  85




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##### Table of Contents



Operations and Maintenance:
 Three Months Ended
    
    Nine months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Operations and maintenance
    
    $
    23.7
    
    
    $
    27.5
    
    
    $
    73.9
    
    
    $
    84.4
  Depreciation and Amortization:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Depreciation and amortization
    
    $
    7.7
    
    
    $
    7.9
    
    
    $
    22.8
    
    
    $
    24.0
  Taxes Other Than Income Taxes:
 Three Months Ended
    
    Nine months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Taxes other than income taxes
    
    $
    6.1
    
    
    $
    6.1
    
    
    $
    18.4
    
    
    $
    19.7
  Other Income and Expenses, Net:
 Three Months Ended
    
    Nine months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Other income and expenses, net
    
    $
    2.0
    
    
    $
    0.9
    
    
    $
    5.0
    
    
    $
    2.5
  86




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##### Table of Contents



Generation and Marketing
  Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    September 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeGeneration (million kWhs)
    
    
    2,755
    
    
    
    2,888
    
    
    
    (4.6
    )%
    
    
    8,167
    
    
    
    7,873
    
    
    
    3.7
    %
 Operating Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue from affiliates
    
    $
    64.4
    
    
    $
    64.6
    
    
    $
    213.1
    
    
    $
    224.0Wholesale and other, net
    
    
    53.8
    
    
    
    58.9
    
    
    
    96.5
    
    
    
    82.2Total revenues
    
    $
    118.2
    
    
    $
    123.5
    
    
    $
    309.6
    
    
    $
    306.2
     Operating Expenses
 Fuel Consumed in Electric Generation:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Fuel consumed in electric generation
    
    $
    45.3
    
    
    $
    41.8
    
    
    $
    129.9
    
    
    $
    110.1
 X
  87




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##### Table of Contents



Purchased Power and Transmission:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Purchased power and transmission
    
    $
    39.8
    
    
    $
    36.4
    
    
    $
    74.1
    
    
    $
    85.6
   Operations and Maintenance:
 Three Months Ended
    
    Nine months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Operations and maintenance
    
    $
    17.5
    
    
    $
    17.8
    
    
    $
    58.0
    
    
    $
    57.0
  Other Income and Expenses, Net:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Other income and expenses, net
    
    $
    2.6
    
    
    $
    2.0
    
    
    $
    7.4
    
    
    $
    6.1
  88




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##### Table of Contents



ALLEGHENY GENERATING COMPANYRESULTS OF OPERATIONS
 Income Summary
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Operating revenues
    
    $
    16.9
    
    
    $
    17.4
    
    
    $
    48.1
    
    
    $
    50.9Operating income
    
    $
    10.4
    
    
    $
    11.1
    
    
    $
    28.9
    
    
    $
    32.5Income before income taxes
    
    $
    8.7
    
    
    $
    9.4
    
    
    $
    24.4
    
    
    $
    27.1Net income
    
    $
    5.9
    
    
    $
    7.4
    
    
    $
    18.8
    
    
    $
    22.5
 Operating Revenues and Expenses
   Operating Revenues:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2006
    
    2005
    
    2006
    
    2005Operating revenues
    
    $
    16.9
    
    
    $
    17.4
    
    
    $
    48.1
    
    
    $
    50.9
  Income Tax Expense
   89




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##### Table of Contents



FINANCIAL CONDITION, REQUIREMENTS AND RESOURCES
 Liquidity and Capital Requirements
    September 30, 2006
    
    
    December 31, 2005(In millions)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Debt
    
    $
    3,902.4
    
    
    
    65.8
    
    
    $
    4,101.7
    
    
    
    70.5Common equity
    
    
    2,005.0
    
    
    
    33.8
    
    
    
    1,695.3
    
    
    
    29.1Preferred equity
    
    
    24.0
    
    
    
    0.4
    
    
    
    24.0
    
    
    
    0.4Total
    
    $
    5,931.4
    
    
    
    100.0
    
    
    $
    5,821.0
    
    
    
    100.0
       90




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##### Table of Contents



Off-Balance Sheet Arrangements
  Long-Term Debt and Contractual Obligations
    Payments fromContractual Obligations and
    
    October 1, to
    
    
    Payments from
    
    
    Payments from
    
    
    Payments fromCommitments
    
    December 31,
    
    
    January 1, 2007 to
    
    
    January 1, 2009 to
    
    
    January 1, 2011(In millions)
    
    2006
    
    
    December 31, 2008
    
    
    December 31, 2010
    
    
    and beyond
    
    
    TotalLong-term debt (a)
    
    $
    418.6
    
    
    $
    260.6
    
    
    $
    198.7
    
    
    $
    3,033.2
    
    
    $
    3,911.1Interest on long-term debt (b)
    
    
    57.2
    
    
    
    440.7
    
    
    
    426.7
    
    
    
    541.6
    
    
    
    1,466.2Interest rate swap obligations
    
    
    
    
    
    
    12.2
    
    
    
    12.2
    
    
    
    2.1
    
    
    
    26.5Capital lease obligations
    
    
    2.5
    
    
    
    14.5
    
    
    
    9.3
    
    
    
    4.5
    
    
    
    30.8Operating lease obligations
    
    
    1.3
    
    
    
    7.4
    
    
    
    6.7
    
    
    
    19.5
    
    
    
    34.9PURPA purchased power
    
    
    57.2
    
    
    
    458.9
    
    
    
    467.8
    
    
    
    4,179.5
    
    
    
    5,163.4Fuel purchase and transportation commitments
    
    
    167.2
    
    
    
    1,145.5
    
    
    
    836.4
    
    
    
    2,389.7
    
    
    
    4,538.8Other purchase obligation (c)
    
    
    8.1
    
    
    
    53.3
    
    
    
    50.4
    
    
    
    44.9
    
    
    
    156.7Total
    
    $
    712.1
    
    
    $
    2,393.1
    
    
    $
    2,008.2
    
    
    $
    10,215.0
    
    
    $
    15,328.4
 
 (a)
    
    Does not include debt associated with unamortized debt expense, discounts, premiums,
payments made and debt issued subsequent to September 30, 2006.(b)
    
    Amounts are based on interest rates as of September 30, 2006 and do not reflect any payments
made or interest rate changes subsequent to September 30, 2006. Total interest on long-term
debt includes $11.0 million in interest that will accrue and be added to the principal amount
of West Penns $115.0 million of 4.46% Transaction Bonds, Series 2005-A.(c)
    
    Amounts represent Alleghenys expected cash payments for outsourcing of certain information
technology functions and assistance with the installation of an enterprise resource planning
system.  91




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##### Table of Contents



Contractual Obligations and
    
    Payments from
    
    
    Payments from
    
    
    Payments from
    
    
    Payments fromCommitments
    
    October 1, to
    
    
    January 1, 2007 to
    
    
    January 1, 2009 to
    
    
    January 1, 2011(In millions)
    
    December 31, 2006
    
    
    December 31, 2008
    
    
    December 31, 2010
    
    
    and beyond
    
    
    TotalLong-term debt (a)
    
    $
    300.0
    
    
    $
    15.5
    
    
    $
    110.0
    
    
    $
    410.3
    
    
    $
    835.8Interest on long-term debt (b)
    
    
    8.2
    
    
    
    64.7
    
    
    
    56.4
    
    
    
    129.5
    
    
    
    258.8Capital lease obligations
    
    
    0.8
    
    
    
    4.6
    
    
    
    2.9
    
    
    
    1.7
    
    
    
    10.0Operating lease obligations
    
    
    0.1
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.6PURPA purchased power
    
    
    0.5
    
    
    
    130.7
    
    
    
    132.7
    
    
    
    1,524.5
    
    
    
    1,788.4Fuel purchase and transportation commitments
    
    
    34.4
    
    
    
    244.6
    
    
    
    178.5
    
    
    
    510.0
    
    
    
    967.5Total
    
    $
    344.0
    
    
    $
    460.6
    
    
    $
    480.5
    
    
    $
    2,576.0
    
    
    $
    3,861.1
 
 (a)
    
    Does not include debt associated with unamortized debt expense, discounts, premiums and
payments made subsequent to September 30, 2006.(b)
    
    Amounts are based on interest rates as of September 30, 2006 and do not reflect any payments
made or interest rate changes subsequent to September 30, 2006 and any debt prepayments or
interest rate changes.   Financing
 Debt:
 Asset Sales
   Cash Flows
 Allegheny
  Operating Activities:
  92




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##### Table of Contents



Investing Activities:
   Financing Activities:
   Monongahela
   Operating Activities:
  93




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##### Table of Contents



Investing Activities:
 Financing Activities:
  AGC
   Operating Activities:
  Investing Activities:
 Financing Activities:
 94




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##### Table of Contents



Credit Ratings
  Moodys
    
    S & P
    
    FitchOutlook
    
    Stable (1)
    
    Positive
    
    Stable (2)AE:Corporate Credit Rating
    
    Ba2 (3)
    
    BB+
    
    NRSenior Unsecured Debt
    
    Ba2
    
    BB-
    
    BB+Short-term Rating
    
    SGL-2 (4)
    
    B2
    
    NRAE Supply:Senior Secured Debt
    
    Baa3
    
    BBB-
    
    BBB-Senior Unsecured Debt
    
    Ba3
    
    BB-
    
    BB+Pollution Control Bonds
    
    NR
    
    NR
    
    AAAMonongahela:First Mortgage Bonds
    
    Baa2
    
    BBB-
    
    BBB+Senior Unsecured Debt
    
    Baa3
    
    BB-
    
    BBB-Preferred Stock
    
    Ba3
    
    B+
    
    BB+Potomac Edison:First Mortgage Bonds
    
    Baa2
    
    BBB-
    
    BBB+Senior Unsecured Debt
    
    Baa3
    
    BB-
    
    BBB-West Penn:Transition Bonds
    
    Aaa
    
    AAA
    
    AAAFirst Mortgage Bonds
    
    Baa2
    
    BBB
    
    BBB+Senior Unsecured Debt
    
    Baa3
    
    BB+
    
    BBB-AGC:Senior Unsecured Debt
    
    Ba3
    
    BB-
    
    BB+
 
 (1)
    
    Moodys outlook for Potomac Edison is negative(2)
    
    Fitchs outlook for Monongahela is negative(3)
    
    Corporate family rating for AE only, which excludes all of its subsidiaries(4)
    
    Liquidity rating 95




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OTHER MATTERS
 Critical Accounting Policies
  Recent Accounting Pronouncements
  REGULATORY MATTERS
  Federal Legislation, Regulation and Rate Matters
 PJM and PJM Transmission Rate Design.
    96




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Transmission Expansion.
  97




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State Legislation, Regulation and Rate Matters
 West Virginia:
    Maryland:
 98




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Pennsylvania: en banc
   Virginia:
   99




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 ITEM 4. CONTROLS AND PROCEDURES
  Disclosure Controls and Procedures.
 Changes in Internal Control Over Financial Reporting
 100




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  Alleghenys leverage could adversely affect its ability to operate successfully and meet
contractual obligations.
   
    
    make it more difficult for Allegheny to satisfy its obligations under the
agreements governing its debt;
    
    require Allegheny to dedicate a substantial portion of its cash flow to payments on
its debt, thereby reducing the availability of its cash flow for working capital, capital
expenditures and other general corporate purposes;
    
    limit Alleghenys flexibility in planning for, or reacting to, changes in its
business, regulatory environment and the industry in which it operates;
    
    place Allegheny at a competitive disadvantage compared to its competitors that have less leverage;
    
    limit Alleghenys ability to borrow additional funds; and
    
    increase Alleghenys vulnerability to general adverse economic, regulatory and industry conditions.
 The supply and price of fuel and emissions credits may impact Alleghenys financial results.
  2 2
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Rate regulation in West Virginia may delay or deny Monongahelas and Potomac Edisons full recovery
of costs.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  102




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ITEM 6. EXHIBITS
 
 EXHIBIT INDEX
 Allegheny Energy, Inc.
 Documents31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under
Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under
Securities Exchange Act of 193432.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 135032.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
 103




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EXHIBIT INDEX
 Monongahela Power Company
 Documents31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 193432.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 135032.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
 104




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EXHIBIT INDEX
 Allegheny Generating Company
 Documents31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 193432.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 135032.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
 105




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SIGNATURE
  ALLEGHENY ENERGY, INC.Date: November 7, 2006
    
    By:
    
    /s/ Philip L. GouldingPhilip L. GouldingSenior Vice President andChief Financial OfficerMONONGAHELA POWER COMPANYDate: November 7, 2006
    
    By:
    
    /s/ Philip L. GouldingPhilip L. GouldingVice President andPrincipal Financial OfficerALLEGHENY GENERATING COMPANY.Date: November 7, 2006
    
    By:
    
    /s/ Philip L. GouldingPhilip L. GouldingVice President andPrincipal Financial Officer
 106