##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended March 31, 2009
 Commission File Number 1-267
 
 ALLEGHENY ENERGY, INC.
 Name of Registrant)
 
 Maryland
    
    13-5531602(State of Incorporation)
    
    (IRS Employer Identification Number)800 Cabin Hill Drive, Greensburg,Pennsylvania(Address of Principal Executive
    
    15601Offices)
    
    (Zip Code)
 (724) 837-3000
(Telephone Number)
 þ o
 o o
  Large accelerated filer þ

    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)
    
    
    39Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    79Item 4. Controls and Procedures
    
    
    80PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    81Item 1A. Risk Factors
    
    
    81Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    81Item 3. Defaults Upon Senior Securities
    
    
    81Item 4. Submission of Matters to a Vote of Security Holders
    
    
    81Item 5. Other Information
    
    
    81Item 6. Exhibits
    
    
    82Signatures
    
    
    83EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2
  2




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GLOSSARY
 The following abbreviations and terms are used in this report to identify Allegheny Energy,
Inc. and certain of its subsidiaries:
 AE
    
    Allegheny Energy, Inc., a diversified utility holding companyAE Supply
    
    Allegheny Energy Supply Company, LLC, an unregulated generation subsidiary of AEAGC
    
    Allegheny Generating Company, a generation subsidiary of AE Supply and
MonongahelaAllegheny
    
    Allegheny Energy, Inc., together with its consolidated subsidiariesDistribution Companies
    
    Monongahela, Potomac Edison and West Penn, which collectively do business as
Allegheny PowerMonongahela
    
    Monongahela Power Company, a regulated subsidiary of AEPATH, LLC
    
    Potomac-Appalachian Transmission Highline, LLC, a joint venture between
Allegheny and a subsidiary of American Electric Power Company, Inc.Potomac Edison
    
    The Potomac Edison Company, a regulated subsidiary of AETrAIL Company
    
    Trans-Allegheny Interstate Line Company, a regulated subsidiary of AEWest Penn
    
    West Penn Power Company, a regulated subsidiary of AE
 3




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 Three Months EndedMarch 31,(In thousands, except per share amounts)
    
    2009
    
    
    2008Operating revenues
    
    $
    957,173
    
    
    $
    875,026Operating expenses:Fuel
    
    
    258,961
    
    
    
    249,826Purchased power and transmission
    
    
    133,895
    
    
    
    97,380Deferred energy costs, net
    
    
    (17,007
    )
    
    
    (10,454
    )Operations and maintenance
    
    
    167,174
    
    
    
    168,700Depreciation and amortization
    
    
    68,511
    
    
    
    70,289Taxes other than income taxes
    
    
    55,814
    
    
    
    52,439Total operating expenses
    
    
    667,348
    
    
    
    628,180Operating income
    
    
    289,825
    
    
    
    246,846Other income (expense), net
    
    
    2,457
    
    
    
    6,209Interest expense
    
    
    57,279
    
    
    
    58,431Income before income taxes
    
    
    235,003
    
    
    
    194,624Income tax expense
    
    
    100,906
    
    
    
    58,293Net income
    
    
    134,097
    
    
    
    136,331Less net income attributable to noncontrolling interest
    
    
    (172
    )
    
    
    (206
    )Net income attributable to Allegheny Energy, Inc
    
    $
    133,925
    
    
    $
    136,125Earnings per common share attributable to Allegheny Energy, Inc.:Basic
    
    $
    0.79
    
    
    $
    0.81Diluted
    
    $
    0.79
    
    
    $
    0.80Average common shares outstanding:Basic
    
    
    169,443
    
    
    
    167,560Diluted
    
    
    169,873
    
    
    
    169,950Dividends per common share
    
    $
    0.15
    
    
    $
    0.15
  4




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Three Months EndedMarch 31,(In thousands)
    
    2009
    
    
    2008Cash Flows From Operating Activities:Net income
    
    $
    134,097
    
    
    $
    136,331Adjustments for non-cash items included in income:Depreciation and amortization
    
    
    68,511
    
    
    
    70,289Amortization of debt related costs
    
    
    2,756
    
    
    
    2,861Amortization of liability for adverse power purchase commitment
    
    
    (4,367
    )
    
    
    (4,284
    )Amortization of Pennsylvania stranded cost recovery asset
    
    
    
    
    
    
    5,427Gain on disposal or retirement of assets on disposal or retirement of assets
    
    
    (194
    )
    
    
    (358
    )Provision for uncollectible accounts
    
    
    1,852
    
    
    
    4,506Deferred income taxes and investment tax credit, net
    
    
    98,078
    
    
    
    41,435Deferred energy costs, net
    
    
    (17,007
    )
    
    
    (10,454
    )Stock-based compensation expense
    
    
    3,556
    
    
    
    2,735Unrealized gains on derivative contracts, net
    
    
    (33,163
    )
    
    
    (1,320
    )Pension and other postretirement employee benefit plan expense
    
    
    10,093
    
    
    
    7,995Pension and other postretirement employee benefit plan contributions
    
    
    (1,671
    )
    
    
    (39,055
    )Deferred revenue  Fort Martin scrubber project
    
    
    3,444
    
    
    
    5,437Deferred revenue recognized  Virginia
    
    
    (15,358
    )
    
    
    Other, net
    
    
    1,126
    
    
    
    482Share-based excess tax benefits included in cash flows from financing activities
    
    
    (19,965
    )
    
    
    Changes in certain assets and liabilities:Accounts receivable, net
    
    
    (61,760
    )
    
    
    (54,734
    )Materials, supplies and fuel
    
    
    (42,418
    )
    
    
    (1,952
    )Prepaid taxes
    
    
    (39,875
    )
    
    
    (34,809
    )Collateral deposits
    
    
    (73,281
    )
    
    
    12,489Accounts payable
    
    
    15,148
    
    
    
    (45,496
    )Accrued taxes
    
    
    (49,469
    )
    
    
    (10,201
    )Accrued interest
    
    
    10,527
    
    
    
    (2,244
    )Regulatory assets
    
    
    16,660
    
    
    
    (1,695
    )Deferred income taxes
    
    
    126
    
    
    
    (752
    )Regulatory liabilities
    
    
    (901
    )
    
    
    16,283Other operating assets and liabilities
    
    
    793
    
    
    
    7,144Net cash provided by operating activities
    
    
    7,338
    
    
    
    106,060
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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
 Three Months EndedMarch 31,(In thousands)
    
    2009
    
    
    2008Cash Flows From Investing Activities:Capital expenditures
    
    
    (254,057
    )
    
    
    (239,816
    )Proceeds from asset sales
    
    
    200
    
    
    
    400Purchase of Merrill Lynch interest in subsidiary
    
    
    
    
    
    
    (50,000
    )Decrease in restricted funds
    
    
    58,934
    
    
    
    64,777Other investments
    
    
    (1,551
    )
    
    
    (1,575
    )Net cash used in investing activities
    
    
    (196,474
    )
    
    
    (226,214
    )Cash Flows From Financing Activities:Issuance of long-term debt
    
    
    97,672
    
    
    
    124,347Repayment of long-term debt
    
    
    (57,169
    )
    
    
    (159,393
    )Equity contribution to PATH, LLC by the joint venture partner
    
    
    
    
    
    
    3,070Payments on capital lease obligations
    
    
    (2,238
    )
    
    
    Share-based excess tax benefits
    
    
    19,965
    
    
    
    Proceeds from exercise of employee stock options
    
    
    48
    
    
    
    8,256Cash dividends paid on common stock
    
    
    (25,409
    )
    
    
    (25,161
    )Net cash provided by (used in) financing activities
    
    
    32,869
    
    
    
    (48,881
    )Net decrease in cash and cash equivalents
    
    
    (156,267
    )
    
    
    (169,035
    )Cash and cash equivalents at beginning of period
    
    
    362,145
    
    
    
    258,750Cash and cash equivalents at end of period
    
    $
    205,878
    
    
    $
    89,715Supplemental Cash Flows Information:Cash paid during the period for interest (net of amounts capitalized)
    
    $
    43,848
    
    
    $
    57,763Capital additions, non-cash
    
    $
    3,932
    
    
    $
    (30,965
    )
  6




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 March 31,
    
    
    December 31,(In thousands)
    
    2009
    
    
    2008ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    205,878
    
    
    $
    362,145Accounts receivable:Customer
    
    
    263,899
    
    
    
    188,309Unbilled utility revenue
    
    
    93,861
    
    
    
    122,695Wholesale and other
    
    
    74,329
    
    
    
    61,445Allowance for uncollectible accounts
    
    
    (13,062
    )
    
    
    (13,280
    )Materials and supplies
    
    
    114,375
    
    
    
    115,107Fuel
    
    
    172,568
    
    
    
    128,238Deferred income taxes
    
    
    2,418
    
    
    
    69,617Prepaid taxes
    
    
    84,641
    
    
    
    44,766Collateral deposits
    
    
    113,773
    
    
    
    33,441Derivative assets
    
    
    143,735
    
    
    
    113,087Regulatory assets
    
    
    147,829
    
    
    
    158,835Other
    
    
    89,589
    
    
    
    111,317Total current assets
    
    
    1,493,833
    
    
    
    1,495,722Property, Plant and Equipment:Generation
    
    
    6,119,553
    
    
    
    6,107,344Transmission
    
    
    1,187,581
    
    
    
    1,171,716Distribution
    
    
    3,987,054
    
    
    
    3,944,068Other
    
    
    466,375
    
    
    
    463,377Accumulated depreciation
    
    
    (5,042,594
    )
    
    
    (4,994,099
    )Subtotal
    
    
    6,717,969
    
    
    
    6,692,406Construction work in progress
    
    
    1,486,957
    
    
    
    1,309,790Total property, plant and equipment, net
    
    
    8,204,926
    
    
    
    8,002,196Investments and Other Assets:Goodwill
    
    
    367,287
    
    
    
    367,287Restricted funds  Fort Martin scrubber project
    
    
    83,761
    
    
    
    133,346Investments in unconsolidated affiliates
    
    
    28,356
    
    
    
    27,955Other
    
    
    21,252
    
    
    
    19,695Total investments and other assets
    
    
    500,656
    
    
    
    548,283Deferred Charges:Regulatory assets
    
    
    677,596
    
    
    
    687,696Derivative assets
    
    
    12,744
    
    
    
    9,816Other
    
    
    64,334
    
    
    
    67,335Total deferred charges
    
    
    754,674
    
    
    
    764,847Total Assets
    
    $
    10,954,089
    
    
    $
    10,811,048
  7




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(unaudited)
 March 31,
    
    
    December 31,(In thousands, except share amounts)
    
    2009
    
    
    2008LIABILITIES AND EQUITYCurrent Liabilities:Long-term debt due within one year
    
    $
    198,441
    
    
    $
    93,848Accounts payable
    
    
    393,376
    
    
    
    374,229Accrued taxes
    
    
    66,558
    
    
    
    119,431Payable to PJM for FTRs
    
    
    65,964
    
    
    
    110,774Derivative liabilities
    
    
    20,329
    
    
    
    22,153Regulatory liabilities
    
    
    54,390
    
    
    
    69,208Accrued interest
    
    
    68,575
    
    
    
    58,048Other
    
    
    157,787
    
    
    
    155,809Total current liabilities
    
    
    1,025,420
    
    
    
    1,003,500Long-term Debt, excluding amounts due within one year
    
    
    4,054,544
    
    
    
    4,115,921Deferred Credits and Other Liabilities:Derivative liabilities
    
    
    10,303
    
    
    
    11,886Income taxes payable
    
    
    79,059
    
    
    
    75,669Investment tax credit
    
    
    64,955
    
    
    
    65,768Deferred income taxes
    
    
    1,301,343
    
    
    
    1,277,439Regulatory liabilities
    
    
    532,972
    
    
    
    528,937Pension and other postretirement employee benefit plan liabilities
    
    
    585,162
    
    
    
    578,440Adverse power purchase commitment
    
    
    127,856
    
    
    
    132,334Other
    
    
    162,671
    
    
    
    165,500Total deferred credits and other liabilities
    
    
    2,864,321
    
    
    
    2,835,973Commitments and Contingencies (Note 13)Equity:Common stock  $1.25 par value per share, 260 million shares
authorized and 169,448,538 and 169,413,887 shares issued at March
31, 2009 and December 31, 2008, respectively
    
    
    211,788
    
    
    
    211,767Other paid-in capital
    
    
    1,975,996
    
    
    
    1,952,440Retained earnings
    
    
    840,122
    
    
    
    731,615Treasury stock at cost - 49,493 shares
    
    
    (1,756
    )
    
    
    (1,756
    )Accumulated other comprehensive loss
    
    
    (21,424
    )
    
    
    (43,318
    )Total Allegheny Energy, Inc. common stockholders equity
    
    
    3,004,726
    
    
    
    2,850,748Noncontrolling interest
    
    
    5,078
    
    
    
    4,906Total equity
    
    
    3,009,804
    
    
    
    2,855,654Total Liabilities and Equity
    
    $
    10,954,089
    
    
    $
    10,811,048
  8




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Three Months Ended March 31, 2009 and 2008
(unaudited)
 TotalAlleghenyAccumulated
    
    
    Energy, Inc.Other
    
    
    
    
    
    
    
    
    
    
    other
    
    
    commonShares
    
    
    Common
    
    
    paid-in
    
    
    Retained
    
    
    Treasury
    
    
    comprehensive
    
    
    stockholders
    
    
    Noncontrolling
    
    
    Total(In thousands, except shares)
    
    outstanding
    
    
    stock
    
    
    capital
    
    
    earnings
    
    
    stock
    
    
    loss
    
    
    equity
    
    
    interest
    
    
    equityBalance at December 31, 2008
    
    
    169,364,394
    
    
    $
    211,767
    
    
    $
    1,952,440
    
    
    $
    731,615
    
    
    $
    (1,756
    )
    
    $
    (43,318
    )
    
    $
    2,850,748
    
    
    $
    4,906
    
    
    $
    2,855,654Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133,925
    
    
    
    
    
    
    
    
    
    
    
    133,925
    
    
    
    172
    
    
    
    134,097Defined benefit pension and
other benefit plan
amortization, net of tax of
$571
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    842
    
    
    
    842
    
    
    
    
    
    
    
    842Cash flow hedges, net of tax
of $13,330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,052
    
    
    
    21,052
    
    
    
    
    
    
    
    21,052Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,409
    )
    
    
    
    
    
    
    
    
    
    
    (25,409
    )
    
    
    
    
    
    
    (25,409
    )Stock-based compensation
expense:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock units
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Non-employee director
stock awards
    
    
    13,201
    
    
    
    17
    
    
    
    201
    
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    209
    
    
    
    
    
    
    
    209Stock options
    
    
    
    
    
    
    
    
    
    
    1,705
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,705
    
    
    
    
    
    
    
    1,705Performance shares
    
    
    
    
    
    
    
    
    
    
    1,624
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,624
    
    
    
    
    
    
    
    1,624Restricted shares
    
    
    17,850
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    12Exercise of stock options
    
    
    3,600
    
    
    
    4
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    48Dividends on stock units
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share-based excess tax benefits
    
    
    
    
    
    
    
    
    
    
    19,965
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,965
    
    
    
    
    
    
    
    19,965Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Balance at March 31, 2009
    
    
    169,399,045
    
    
    $
    211,788
    
    
    $
    1,975,996
    
    
    $
    840,122
    
    
    $
    (1,756
    )
    
    $
    (21,424
    )
    
    $
    3,004,726
    
    
    $
    5,078
    
    
    $
    3,009,804
 TotalAlleghenyAccumulated
    
    
    Energy, Inc.Other
    
    
    
    
    
    
    
    
    
    
    other
    
    
    commonShares
    
    
    Common
    
    
    paid-in
    
    
    Retained
    
    
    Treasury
    
    
    comprehensive
    
    
    stockholders
    
    
    Noncontrolling
    
    
    Total(In thousands, except shares)
    
    outstanding
    
    
    stock
    
    
    capital
    
    
    earnings
    
    
    stock
    
    
    loss
    
    
    equity
    
    
    interest
    
    
    equityBalance at December 31, 2007
    
    
    167,223,576
    
    
    $
    209,091
    
    
    $
    1,924,072
    
    
    $
    444,177
    
    
    $
    (1,756
    )
    
    $
    (40,232
    )
    
    $
    2,535,352
    
    
    $
    13,241
    
    
    $
    2,548,593Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136,125
    
    
    
    
    
    
    
    
    
    
    
    136,125
    
    
    
    206
    
    
    
    136,331Defined benefit pension and
other benefit plan
amortization, net of tax of
$334
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    327
    
    
    
    327
    
    
    
    
    
    
    
    327Cash flow hedges, net of tax
of $24,386
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,842
    )
    
    
    (38,842
    )
    
    
    
    
    
    
    (38,842
    )Purchase of minority
interest in AE Supply
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,238
    )
    
    
    (13,238
    )Equity contribution to PATH,
LLC by AEP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,070
    
    
    
    3,070Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,161
    )
    
    
    
    
    
    
    
    
    
    
    (25,161
    )
    
    
    
    
    
    
    (25,161
    )Stock-based compensation
expense:Stock units
    
    
    
    
    
    
    
    
    
    
    342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    342
    
    
    
    
    
    
    
    342Non-employee director
stock awards
    
    
    16,267
    
    
    
    20
    
    
    
    257
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    269
    
    
    
    
    
    
    
    269Stock options
    
    
    
    
    
    
    
    
    
    
    2,110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,110
    
    
    
    
    
    
    
    2,110Exercise of stock options
    
    
    606,902
    
    
    
    759
    
    
    
    7,497
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,256
    
    
    
    
    
    
    
    8,256Settlement of stock units
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends on stock units
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    (68
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Balance at March 31, 2008
    
    
    167,846,799
    
    
    $
    209,870
    
    
    $
    1,934,346
    
    
    $
    555,065
    
    
    $
    (1,756
    )
    
    
    (78,748
    )
    
    $
    2,618,777
    
    
    $
    3,279
    
    
    $
    2,622,056
  9




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 PageNote No.
    
    
    
    No.1
    
    Basis of Presentation
    
    112
    
    Recent Accounting Pronouncements
    
    123
    
    Regulatory Assets and Liabilities
    
    144
    
    Income Taxes
    
    155
    
    Common Stock and Debt
    
    156
    
    Business Segments
    
    187
    
    Fair Value Measurements, Derivative Instruments and Hedging Activities
    
    198
    
    Stock-Based Compensation
    
    259
    
    Pension Benefits and Postretirement Benefits Other Than Pensions
    
    2810
    
    Comprehensive Income and Accumulated Other Comprehensive Loss
    
    3011
    
    Earnings Per Common Share
    
    3112
    
    Other Income (Expense), Net
    
    3113
    
    Commitments and Contingencies
    
    3214
    
    Subsequent Event
    
    38
 10




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 
 NOTE 1: BASIS OF PRESENTATION
 Business Description
     Financial Statement Presentation
   11




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 
 NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
 FSP FAS No. 157-2
 Effective Date of FASB Statement 157
 SFAS 161
 Disclosures about Derivative Instruments and Hedging
Activities -an amendment of FASB Statement No. 133
 SFAS 160
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51 Business Combinations
 FSP FAS 157-4
 Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly,
 12




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 FSP FAS 107-1 and APB 28-1
 Interim Disclosures about Fair
Value of Financial Instruments, Disclosures about Fair Value of Financial Instruments Interim Financial Reporting,
 FSP FAS 132(R)-1
 Employers Disclosures about
Postretirement Benefit Plan Assets
 13




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 
 NOTE 3: REGULATORY ASSETS AND LIABILITIES
 Accounting for the Effects of Certain Types of Regulation
 March 31,
    
    
    December 31,(In millions)
    
    2009
    
    
    2008Regulatory assets, including current portion:Income taxes (a)(b)
    
    $
    228.5
    
    
    $
    231.3Pension benefits and postretirement benefits other than pensions (a)(c)
    
    
    386.1
    
    
    
    390.4Pennsylvania Competitive Transition Charge (CTC) reconciliation (d)
    
    
    53.9
    
    
    
    73.6Unamortized loss on reacquired debt (a)(e)
    
    
    30.0
    
    
    
    31.1Unrealized loss on decreased fair value of financial transmission rights (f)
    
    
    7.5
    
    
    
    17.8Deferred ENEC charges (f)
    
    
    65.9
    
    
    
    52.0Other (g)
    
    
    53.5
    
    
    
    50.3Subtotal
    
    
    825.4
    
    
    
    846.5Regulatory liabilities, including current portion:Net asset removal costs
    
    
    413.4
    
    
    
    407.4Income taxes
    
    
    34.2
    
    
    
    35.2SO2 allowances
    
    
    13.1
    
    
    
    13.3Virginia collections for costs not yet incurred
    
    
    13.0
    
    
    
    28.3Fort Martin Scrubber projectenvironmental control surcharge
    
    
    32.5
    
    
    
    29.1Maryland rate stabilization and transition plan surcharge
    
    
    57.9
    
    
    
    61.7Other
    
    
    23.3
    
    
    
    23.1Subtotal
    
    
    587.4
    
    
    
    598.1Net regulatory assets
    
    $
    238.0
    
    
    $
    248.4
 
 (a)
    
    Does not earn a return.(b)
    
    Amount is being recovered over various periods associated with the remaining useful life of
related regulated utility property, plant and equipment.(c)
    
    Amount is being recovered over a period up to 13 years.(d)
    
    Recorded amount includes an 11% return earned through 2005. No additional return will be
earned through the 2010 recovery period.(e)
    
    Amount is being recovered over various periods through 2025, based upon the maturities of
reacquired debt.(f)
    
    Includes amounts that do not earn a return with recovery periods up to two years.(g)
    
    Includes amounts that do not earn a return with various recovery periods through 2027. 14




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 
 NOTE 4: INCOME TAXES
    Three Months Ended March 31,2009
    
    
    2008(In millions, except percentages)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Income before income taxes
    
    $
    235.0
    
    
    
    
    
    
    $
    194.6Income tax expense calculated at the federal statutory rate of 35%
    
    
    82.3
    
    
    
    35.0
    
    
    
    68.1
    
    
    
    35.0Increases (reductions) resulting from:Rate-making effects of depreciation differences
    
    
    1.7
    
    
    
    0.7
    
    
    
    2.0
    
    
    
    1.0Plant removal costs
    
    
    (1.0
    )
    
    
    (0.4
    )
    
    
    (1.4
    )
    
    
    (0.7
    )State income tax, net of federal income tax benefit
    
    
    7.9
    
    
    
    3.4
    
    
    
    5.8
    
    
    
    3.0Amortization of deferred investment tax credits
    
    
    (0.9
    )
    
    
    (0.4
    )
    
    
    (0.8
    )
    
    
    (0.4
    )March 2008 West Virginia state income tax rate change
    
    
    
    
    
    
    
    
    
    
    (6.7
    )
    
    
    (3.4
    )Change in estimated Pennsylvania net operating loss benefits
    
    
    9.5
    
    
    
    4.0
    
    
    
    
    
    
    
    Changes in tax reserves related to uncertain tax positions
and audit settlements
    
    
    1.7
    
    
    
    0.7
    
    
    
    (7.6
    )
    
    
    (3.9
    )Other, net
    
    
    (0.3
    )
    
    
    (0.1
    )
    
    
    (1.1
    )
    
    
    (0.6
    )Income tax expense
    
    $
    100.9
    
    
    
    42.9
    
    
    $
    58.3
    
    
    
    30.0
  
 NOTE 5: COMMON STOCK AND DEBT
 Common Stock
  15




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 Debt
  (In millions)
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    Thereafter
    
    
    TotalAE Supply:Medium-Term Notes
    
    $
    
    
    
    $
    
    
    
    $
    400.0
    
    
    $
    650.0
    
    
    $
    
    
    
    $
    
    
    
    $
    1,050.0AE Supply Credit Facility:Term Loan
    
    
    
    
    
    
    
    
    
    
    447.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    447.0Pollution Control Bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    267.2
    
    
    
    268.5Debentures-AGC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0
    
    
    
    100.0Total AE Supply
    
    $
    
    
    
    $
    
    
    
    $
    847.0
    
    
    $
    651.3
    
    
    $
    
    
    
    $
    367.2
    
    
    $
    1,865.5Monongahela:Environmental Control Bonds (a)
    
    $
    5.4
    
    
    $
    11.1
    
    
    $
    11.6
    
    
    $
    12.2
    
    
    $
    12.8
    
    
    $
    271.2
    
    
    $
    324.3First Mortgage Bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300.0
    
    
    
    340.0
    
    
    
    640.0Medium-Term Notes
    
    
    
    
    
    
    110.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110.0Pollution Control Bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.0
    
    
    
    7.1
    
    
    
    57.2
    
    
    
    70.3Total Monongahela
    
    $
    5.4
    
    
    $
    121.1
    
    
    $
    11.6
    
    
    $
    18.2
    
    
    $
    319.9
    
    
    $
    668.4
    
    
    $
    1,144.6West Penn:First Mortgage Bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    420.0
    
    
    $
    420.0Transition Bonds (a)
    
    
    59.4
    
    
    
    16.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75.4Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80.0
    
    
    
    
    
    
    
    
    
    
    
    80.0Total West Penn
    
    $
    59.4
    
    
    $
    16.0
    
    
    $
    
    
    
    $
    80.0
    
    
    $
    
    
    
    $
    420.0
    
    
    $
    575.4Potomac Edison:First Mortgage Bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    420.0
    
    
    $
    420.0Environmental Control Bonds (a)
    
    
    1.9
    
    
    
    3.7
    
    
    
    3.9
    
    
    
    4.1
    
    
    
    4.3
    
    
    
    90.5
    
    
    
    108.4Total Potomac Edison
    
    $
    1.9
    
    
    $
    3.7
    
    
    $
    3.9
    
    
    $
    4.1
    
    
    $
    4.3
    
    
    $
    510.5
    
    
    $
    528.4TrAIL Company:Term Loan
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    140.0
    
    
    $
    140.0Revolving Loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20.0
    
    
    
    20.0Total TrAIL
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    160.0
    
    
    $
    160.0Unamortized debt discounts
    
    
    (1.2
    )
    
    
    (1.5
    )
    
    
    (1.2
    )
    
    
    (0.7
    )
    
    
    (0.6
    )
    
    
    (1.3
    )
    
    
    (6.5
    )Eliminations (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    (13.1
    )
    
    
    (14.4
    )Total consolidated debt
    
    $
    65.5
    
    
    $
    139.3
    
    
    $
    861.3
    
    
    $
    751.6
    
    
    $
    323.6
    
    
    $
    2,111.7
    
    
    $
    4,253.0
 
 (a)
    
    Amounts represent repayments based upon estimated surcharge collections from customers.(b)
    
    Amounts represent the elimination of certain pollution control bonds, for which Monongahela
and AE Supply are co-obligors.  16




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 2009 Debt Activity
  (In millions)
    
    Issuances
    
    
    RepaymentsAE Supply:AE Supply Credit Facility:Revolving Loan
    
    $
    30.0
    
    
    $
    30.0TrAIL Company:TrAIL Company Credit Facility:Term Loan
    
    
    70.0
    
    
    
    West Penn:Transition Bonds
    
    
    
    
    
    
    20.4Monongahela:Environmental Control Bonds
    
    
    
    
    
    
    5.1Potomac Edison:Environmental Control Bonds
    
    
    
    
    
    
    1.7Consolidated Total
    
    $
    100.0
    
    
    $
    57.2
 17




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 
 NOTE 6: BUSINESS SEGMENTS
   Three Months Ended March 31, 2009DeliveryGeneration and Marketing
    
    
    and(In millions)
    
    Unregulated
    
    
    Regulated
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    66.3
    
    
    $
    890.9
    
    
    $
    
    
    
    $
    957.2Internal operating revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    520.7
    
    
    
    1.8
    
    
    
    (522.5
    )
    
    
    Total operating revenues
    
    $
    455.6
    
    
    $
    139.8
    
    
    $
    (8.4
    )
    
    $
    587.0
    
    
    $
    892.7
    
    
    $
    (522.5
    )
    
    $
    957.2Fuel
    
    $
    185.4
    
    
    $
    73.6
    
    
    $
    
    
    
    $
    259.0
    
    
    $
    
    
    
    $
    
    
    
    $
    259.0Purchased power and transmission
    
    $
    9.4
    
    
    $
    28.2
    
    
    $
    (8.4
    )
    
    $
    29.2
    
    
    $
    625.4
    
    
    $
    (520.7
    )
    
    $
    133.9Deferred energy costs, net
    
    $
    
    
    
    $
    (13.0
    )
    
    $
    
    
    
    $
    (13.0
    )
    
    $
    (4.0
    )
    
    $
    
    
    
    $
    (17.0
    )Operations and maintenance
    
    $
    62.3
    
    
    $
    19.6
    
    
    $
    0.1
    
    
    $
    82.0
    
    
    $
    87.0
    
    
    $
    (1.8
    )
    
    $
    167.2Depreciation and amortization
    
    $
    23.8
    
    
    $
    5.2
    
    
    $
    (0.5
    )
    
    $
    28.5
    
    
    $
    40.0
    
    
    $
    
    
    
    $
    68.5Taxes other than income taxes
    
    $
    12.7
    
    
    $
    5.0
    
    
    $
    
    
    
    $
    17.7
    
    
    $
    38.1
    
    
    $
    
    
    
    $
    55.8Operating income
    
    $
    162.0
    
    
    $
    21.2
    
    
    
    0.4
    
    
    $
    183.6
    
    
    $
    106.2
    
    
    $
    
    
    
    $
    289.8Interest expense
    
    $
    18.0
    
    
    $
    12.8
    
    
    $
    
    
    
    $
    30.8
    
    
    $
    26.5
    
    
    $
    
    
    
    $
    57.3Income tax expense
    
    $
    53.1
    
    
    $
    13.1
    
    
    $
    (0.1
    )
    
    $
    66.1
    
    
    $
    34.8
    
    
    $
    
    
    
    $
    100.9Net income (loss)
    
    $
    91.6
    
    
    $
    (1.6
    )
    
    $
    (2.3
    )
    
    $
    87.7
    
    
    $
    46.4
    
    
    $
    
    
    
    $
    134.1Net income (loss) attributable
to Allegheny Energy, Inc.
    
    $
    89.3
    
    
    $
    (1.6
    )
    
    $
    
    
    
    $
    87.7
    
    
    $
    46.2
    
    
    $
    
    
    
    $
    133.9
 Three Months Ended March 31, 2008DeliveryGeneration and Marketing
    
    
    and(In millions)
    
    Unregulated
    
    
    Regulated
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    102.6
    
    
    $
    772.4
    
    
    $
    
    
    
    $
    875.0Internal operating revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    465.6
    
    
    
    2.1
    
    
    
    (467.7
    )
    
    
    Total operating revenues
    
    $
    442.5
    
    
    $
    137.0
    
    
    $
    (11.3
    )
    
    $
    568.2
    
    
    $
    774.5
    
    
    $
    (467.7
    )
    
    $
    875.0Fuel
    
    $
    180.9
    
    
    $
    68.9
    
    
    $
    
    
    
    $
    249.8
    
    
    $
    
    
    
    $
    
    
    
    $
    249.8Purchased power and transmission
    
    $
    9.4
    
    
    $
    29.4
    
    
    $
    (11.3
    )
    
    $
    27.5
    
    
    $
    535.5
    
    
    $
    (465.6
    )
    
    $
    97.4Deferred energy costs, net
    
    $
    
    
    
    $
    (13.6
    )
    
    $
    
    
    
    $
    (13.6
    )
    
    $
    3.1
    
    
    $
    
    
    
    $
    (10.5
    )Operations and maintenance
    
    $
    49.9
    
    
    $
    28.9
    
    
    $
    0.1
    
    
    $
    78.9
    
    
    $
    91.9
    
    
    $
    (2.1
    )
    
    $
    168.7Depreciation and amortization
    
    $
    23.3
    
    
    $
    4.8
    
    
    $
    (0.5
    )
    
    $
    27.6
    
    
    $
    42.7
    
    
    $
    
    
    
    $
    70.3Taxes other than income taxes
    
    $
    10.3
    
    
    $
    6.1
    
    
    $
    
    
    
    $
    16.4
    
    
    $
    36.1
    
    
    $
    
    
    
    $
    52.5Operating income
    
    $
    168.7
    
    
    $
    12.5
    
    
    $
    0.4
    
    
    $
    181.6
    
    
    $
    65.2
    
    
    $
    
    
    
    $
    246.8Interest expense
    
    $
    28.2
    
    
    $
    9.8
    
    
    $
    (0.1
    )
    
    $
    37.9
    
    
    $
    21.9
    
    
    $
    (1.4
    )
    
    $
    58.4Income tax expense
    
    $
    44.2
    
    
    $
    1.4
    
    
    $
    (0.1
    )
    
    $
    45.5
    
    
    $
    12.8
    
    
    $
    
    
    
    $
    58.3Net income
    
    $
    100.0
    
    
    $
    4.8
    
    
    $
    (2.4
    )
    
    $
    102.4
    
    
    $
    33.9
    
    
    $
    
    
    
    $
    136.3Net income attributable to
Allegheny Energy, Inc.
    
    $
    97.6
    
    
    $
    4.8
    
    
    $
    
    
    
    $
    102.4
    
    
    $
    33.7
    
    
    $
    
    
    
    $
    136.1
 18




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 
 NOTE 7: FAIR VALUE MEASUREMENTS, DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  (In millions)
    
    Assets
    
    
    LiabilitiesCash equivalents (a)
    
    $
    201.2
    
    
    $
    Derivative instruments (b):Current
    
    
    202.0
    
    
    
    (21.8
    )Non-current
    
    
    18.7
    
    
    
    (10.3
    )Total recurring fair value measurements
    
    $
    421.9
    
    
    $
    (32.1
    )
 
 (a)
    
    Cash equivalents represent amounts invested in money market mutual funds and are valued using
Level 1 inputs under the SFAS 157 hierarchy.(b)
    
    Before netting of cash collateral and financial transmission right (FTR) obligation.  March 31, 2009
    
    
    December 31, 2008Net Derivative
    
    
    
    
    
    
    
    
    
    
    Net DerivativeDerivative
    
    
    Derivative
    
    
    Assets
    
    
    Derivative
    
    
    Derivative
    
    
    Assets(In millions)
    
    Assets
    
    
    Liabilities
    
    
    (Liabilities)
    
    
    Assets
    
    
    Liabilities
    
    
    (Liabilities)Level 1
    
    $
    26.4
    
    
    $
    
    
    
    $
    26.4
    
    
    $
    10.5
    
    
    $
    
    
    
    $
    10.5Level 2
    
    
    138.8
    
    
    
    (32.1
    )
    
    
    106.7
    
    
    
    112.4
    
    
    
    (34.3
    )
    
    
    78.1Level 3
    
    
    55.5
    
    
    
    
    
    
    
    55.5
    
    
    
    189.8
    
    
    
    
    
    
    
    189.8Total
    
    $
    220.7
    
    
    $
    (32.1
    )
    
    $
    188.6
    
    
    $
    312.7
    
    
    $
    (34.3
    )
    
    $
    278.4
   (In millions)
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    TotalLevel 1
    
    $
    1.9
    
    
    $
    25.6
    
    
    $
    (1.1
    )
    
    $
    
    
    
    $
    26.4Level 2
    
    
    121.4
    
    
    
    (11.9
    )
    
    
    (2.8
    )
    
    
    
    
    
    
    106.7Level 3
    
    
    55.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55.5Net derivative assets (liabilities)
    
    $
    178.8
    
    
    $
    13.7
    
    
    $
    (3.9
    )
    
    $
    
    
    
    $
    188.6
 19




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
  Three Months Ended March 31,(In millions)
    
    2009
    
    
    2008Balance at January 1
    
    $
    189.8
    
    
    $
    150.0Total realized and unrealized gains (losses):Included in earnings, in operating revenues
    
    
    (38.0
    )
    
    
    38.3Included in regulatory assets or liabilities
    
    
    (18.3
    )
    
    
    18.3Purchases, issuances and settlements
    
    
    (78.0
    )
    
    
    (155.2
    )Transfers in / out of Level 3
    
    
    
    
    
    
    Balance at March 31
    
    $
    55.5
    
    
    $
    51.4Amount of total losses included in earnings
attributable to the change in unrealized gains
(losses) related to Level 3 assets held at
March 31
    
    $
    (9.5
    )
    
    $
    4.4
  (In millions)
    
    2009
    
    2010
    
    2011
    
    TotalForward sales of electricity (MWh):Designated as cash flow hedges
    
    
    3.4
    
    
    
    
    
    
    
    
    
    
    
    3.4Not designated as cash flow hedges
    
    
    3.0
    
    
    
    
    
    
    
    
    
    
    
    3.0Forward purchases of electricity (MWh):Designated as cash flow hedges
    
    
    1.2
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    1.5Not designated as cash flow hedges
    
    
    3.2
    
    
    
    0.1
    
    
    
    
    
    
    
    3.3FTRs (MWh)
    
    
    11.4
    
    
    
    
    
    
    
    
    
    
    
    11.4Coal purchase contracts  PRB (tons)
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    1.5Gas contracts  Kern River (decatherms):Forward sales of gas
    
    
    22.5
    
    
    
    16.4
    
    
    
    
    
    
    
    38.9Forward purchases of gas
    
    
    23.2
    
    
    
    17.3
    
    
    
    
    
    
    
    40.5Interest rate swaps (notional dollars):Interest rate swap agreements (fixed rate to floating rate)
    
    $
    
    
    
    $
    143.0
    
    
    $
    200.0
    
    
    $
    343.0Interest rate swap agreements (floating rate to fixed rate)
    
    $
    
    
    
    $
    143.0
    
    
    $
    200.0
    
    
    $
    343.0
  20




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
   21




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
  Gas
    
    
    CoalContracts
    
    
    Purchase
    
    
    Interest
    
    
    
    
    
    
    FTRPower Contracts
    
    
     Kern
    
    
    Contracts
    
    
    Rate
    
    
    
    
    
    
    Obligation
    
    
    Total
    
    
    
    
    
    
    Cash
    
    
    Net(In millions)
    
    Sales
    
    
    Purchases
    
    
    River
    
    
    - PRB
    
    
    Swaps
    
    
    FTRs
    
    
    (a)
    
    
    Derivatives
    
    
    Netting
    
    
    Collateral
    
    
    DerivativesDerivatives designated
as hedging 
instruments
under SFAS 133:Derivative assets:Current assets
    
    $
    109.5
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    109.5
    
    
    $
    5.0
    
    
    $
    
    
    
    $
    114.5Current liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15.9
    )
    
    
    
    
    
    
    (15.9
    )Long-term liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.1
    )Total
derivative
assets
    
    
    109.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109.5
    
    
    
    (12.0
    )
    
    
    
    
    
    
    97.5Derivative liabilities:Current
    
    
    
    
    
    
    (24.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24.4
    )
    
    
    16.7
    
    
    
    
    
    
    
    (7.7
    )Long-term
    
    
    
    
    
    
    (4.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.6
    )
    
    
    (0.6
    )
    
    
    
    
    
    
    (5.2
    )Total
derivative
liabilities
    
    
    
    
    
    
    (29.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29.0
    )
    
    
    16.1
    
    
    
    
    
    
    
    (12.9
    )Total
designated
    
    
    109.5
    
    
    
    (29.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80.5
    
    
    
    4.1
    
    
    
    
    
    
    
    84.6Derivatives not
designated as 
hedging
instruments under SFAS
133:Derivative assets:Current assets
    
    
    61.0
    
    
    
    0.2
    
    
    
    29.2
    
    
    
    11.5
    
    
    
    
    
    
    
    55.5
    
    
    
    (55.5
    )
    
    
    101.9
    
    
    
    (45.3
    )
    
    
    (2.7
    )
    
    
    53.9Current liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8.7
    )
    
    
    
    
    
    
    (8.7
    )Long-term
    
    
    
    
    
    
    
    
    
    
    19.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19.8
    
    
    
    
    
    
    
    (6.0
    )
    
    
    13.8Total
derivative
assets
    
    
    61.0
    
    
    
    0.2
    
    
    
    49.0
    
    
    
    11.5
    
    
    
    
    
    
    
    55.5
    
    
    
    (55.5
    )
    
    
    121.7
    
    
    
    (54.0
    )
    
    
    (8.7
    )
    
    
    59.0Derivative liabilities:Current assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    0.4Current liabilities
    
    
    (2.7
    )
    
    
    (53.5
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    (6.0
    )
    
    
    
    
    
    
    
    
    
    
    (62.3
    )
    
    
    47.8
    
    
    
    1.5
    
    
    
    (13.0
    )Long-term
    
    
    
    
    
    
    (1.7
    )
    
    
    
    
    
    
    
    
    
    
    (5.1
    )
    
    
    
    
    
    
    
    
    
    
    (6.8
    )
    
    
    1.7
    
    
    
    
    
    
    
    (5.1
    )Total
derivative
liabilities
    
    
    (2.7
    )
    
    
    (55.2
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    (11.1
    )
    
    
    
    
    
    
    
    
    
    
    (69.1
    )
    
    
    49.9
    
    
    
    1.5
    
    
    
    (17.7
    )Total not
designated
    
    
    58.3
    
    
    
    (55.0
    )
    
    
    48.9
    
    
    
    11.5
    
    
    
    (11.1
    )
    
    
    55.5
    
    
    
    (55.5
    )
    
    
    52.6
    
    
    
    (4.1
    )
    
    
    (7.2
    )
    
    
    41.3Total derivatives
    
    $
    167.8
    
    
    $
    (84.0
    )
    
    $
    48.9
    
    
    $
    11.5
    
    
    $
    (11.1
    )
    
    $
    55.5
    
    
    $
    (55.5
    )
    
    $
    133.1
    
    
    $
    
    
    
    $
    (7.2
    )
    
    $
    125.9
 
 (a)
    
    The FTR obligation at March 31, 2009 was $121.5 million and is payable to PJM in
approximately equal monthly amounts through the PJM planning year ending May 31, 2009. Of
this obligation, $55.5 million has been netted against the FTR derivative asset balance and
the remaining $66.0 million is included in non-derivative current liabilities on the
consolidated balance sheet. 22




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
  Three MonthsEnded March 31,(In millions)
    
    2009
    
    
    2008Accumulated OCI derivative gain (loss) at January 1
(before tax effect of $17.7 million and $2.8
million, respectively)
    
    $
    45.8
    
    
    $
    (7.0
    )Effective portion of changes in fair value (before
tax effect of $15.8 million and $21.9 million,
respectively)
    
    
    40.9
    
    
    
    (56.5
    )Reclassifications from accumulated OCI to earnings
(before tax effect of $2.6 million and $2.5
million, respectively)
    
    
    (6.5
    )
    
    
    (6.7
    )Accumulated OCI derivative gain (loss) at March 31
(before tax effect of $31.0 million and $27.2
million, respectively)
    
    $
    80.2
    
    
    $
    (70.2
    )
   Three MonthsEnded March 31,(In millions)
    
    2009
    
    
    2008Gain or loss recognized in OCI (effective portion)
    
    $
    40.9
    
    
    $
    (56.5
    )Gain or loss reclassified from accumulated OCI into operating revenues (effective portion)
    
    $
    (6.5
    )
    
    $
    (6.7
    )Gain or loss recognized in operating revenues (ineffective portion)
    
    $
    (3.1
    )
    
    $
    (3.0
    )
  Three MonthsEnded March 31,(In millions)
    
    2009
    
    
    2008Recorded in operating revenues:Interest Rate Swaps
    
    $
    3.0
    
    
    $
    2.5Mark-to-Market Power Contracts
    
    
    (6.1
    )
    
    
    (2.6
    )Gas Contracts  Kern River
    
    
    20.3
    
    
    
    FTRs
    
    
    21.2
    
    
    
    4.4Recorded in fuel expense:Coal Contracts  PRB
    
    
    (2.1
    )
    
    
    Recorded in regulatory liabilities (assets):FTRs
    
    
    10.3
    
    
    
    2.1Coal Purchase Contracts  PRB
    
    
    (1.9
    )
    
    
    Total
    
    $
    44.7
    
    
    $
    6.4
 23




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 Credit Related Contingent Features
  Credit Exposure
   24




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
  Net ExposureNumber of
    
    
    ofCounterparties
    
    
    CounterpartiesTotal Exposure
    
    
    
    
    
    
    
    
    
    
    With Greater
    
    
    With GreaterBefore
    
    
    
    
    
    
    Total
    
    
    than 10% of Net
    
    
    Than 10% of(Dollar amounts in millions)
    
    Collateral
    
    
    Collateral
    
    
    Exposure
    
    
    Exposure
    
    
    Net ExposureRating:Investment grade
    
    $
    185.3
    
    
    $
    99.3
    
    
    $
    284.6
    
    
    
    3
    
    
    
    58.4
    %Non-investment grade
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Not rated
    
    
    4.7
    
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    Total
    
    $
    190.0
    
    
    $
    99.3
    
    
    $
    289.3
    
    
    
    3
    
    
    
    58.4
    %
 
 NOTE 8: STOCK-BASED COMPENSATION
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    
    2008Stock options
    
    $
    1.7
    
    
    $
    2.1Performance shares
    
    
    1.6
    
    
    
    Stock units
    
    
    
    
    
    
    0.3Non-employee director shares
    
    
    0.2
    
    
    
    0.3Total stock-based compensation expense
    
    
    3.5
    
    
    
    2.7Income tax benefit
    
    
    1.4
    
    
    
    1.1Total stock-based compensation expense, net of tax
    
    $
    2.1
    
    
    $
    1.6
  Stock Options
  Three Months Ended March 31,2009
    
    2008Annual risk-free interest rate
    
    
    2.85
    %
    
    
    3.14
    %Expected term of the option
    
    6 years
    
    6 yearsExpected annual dividend yield
    
    
    2.54
    %
    
    
    1.11
    %Expected stock price volatility
    
    
    36.45
    %
    
    
    27.39
    %Grant date fair value per stock option
    
    $
    7.13
    
    
    $
    15.50
 25




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
   AggregateWeighted
    
    
    IntrinsicAverage
    
    
    Value (inStock Options
    
    
    Exercise Price
    
    
    millions)Outstanding at December 31, 2008
    
    
    1,870,509
    
    
    $
    29.08Granted (fair value at date of grant of $8.5 million)
    
    
    1,187,012
    
    
    $
    23.64Exercised (a)
    
    
    (3,600
    )
    
    $
    13.35Forfeited
    
    
    (14,596
    )
    
    $
    27.17Outstanding at March 31, 2009
    
    
    3,039,325
    
    
    $
    26.98
    
    
    $
    9.1
    (b)Exercisable at March 31, 2009
    
    
    1,295,743
    
    
    $
    22.87
    
    
    $
    8.4
    (b)
 
 (a)
    
    Proceeds from option exercises were less than $0.1 million. Allegheny issued new shares of
its common stock to satisfy these stock option exercises.(b)
    
    Represents the total pre-tax intrinsic value based on the difference between the exercise
price of stock options that have an exercise price lower than AEs closing stock price and
AEs closing stock price of $23.17, on March 31, 2009.   26




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 Performance Shares
   Number of SharesPerformance shares outstanding at December 31, 2008
    
    
    75,555Granted (grant date fair value of $4.5 million)
    
    
    169,720Forfeited
    
    
    (433
    )Performance shares outstanding at March 31, 2009
    
    
    244,842
   Number of SharesPerformance shares outstanding at December 31, 2008
    
    
    75,693Granted
    
    
    169,865Forfeited
    
    
    (434
    )Performance shares outstanding at March 31, 2009
    
    
    245,124
  27




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 Stock Units
  Weighted-Average
    
    AggregateNumber of
    
    Grant Date
    
    Intrinsic Value (a)Stock Units
    
    Fair Value
    
    (in millions)Outstanding at December 31, 2008
    
    
    5,087
    
    
    $
    15.19
    
    
    $
    0.2Dividend on unvested units
    
    
    31
    
    
    $
    24.89Outstanding at March 31, 2009
    
    
    5,118
    
    
    $
    15.25
    
    
    $
    0.1
 
 (a)
    
    Represents the total pre-tax intrinsic value based on stock units outstanding multiplied by
AEs closing stock price on each respective date.  Non-Employee Director Shares
  Number ofSharesShares earned but not issued at December 31, 2008
    
    
    71,221Granted
    
    
    9,000Issued
    
    
    (13,201
    )Dividends on earned but not issued shares
    
    
    376Shares earned but not issued at March 31, 2009
    
    
    67,396
 Restricted Shares
   
 NOTE 9: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
   28




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
   Postretirement Benefits OtherPension Benefits
    
    
    Than PensionsThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,(In millions)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Components of net periodic cost:Service cost
    
    $
    5.6
    
    
    $
    5.3
    
    
    $
    1.1
    
    
    $
    1.1Interest cost
    
    
    17.7
    
    
    
    17.1
    
    
    
    4.3
    
    
    
    4.3Expected return on plan assets
    
    
    (18.5
    )
    
    
    (19.2
    )
    
    
    (1.3
    )
    
    
    (1.8
    )Amortization of unrecognized transition obligation
    
    
    0.1
    
    
    
    0.1
    
    
    
    1.4
    
    
    
    1.4Amortization of prior service cost
    
    
    0.8
    
    
    
    0.8
    
    
    
    
    
    
    
    Recognized actuarial loss
    
    
    2.8
    
    
    
    1.8
    
    
    
    0.5
    
    
    
    0.2Net periodic cost
    
    $
    8.5
    
    
    $
    5.9
    
    
    $
    6.0
    
    
    $
    5.2
  Contributions
   29




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 
 NOTE 10: COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    
    2008Net income
    
    $
    134.1
    
    
    $
    136.3Other comprehensive income, net of tax:Defined benefit pension and other benefit plan amortization, net of tax of
$0.6 million and $0.3 million, respectively
    
    
    0.8
    
    
    
    0.3Cash flow hedges, net of tax of $13.2 million and $(24.4) million, respectively
    
    
    21.1
    
    
    
    (38.8
    )Total other comprehensive income, net of tax
    
    
    21.9
    
    
    
    (38.5
    )Comprehensive income
    
    
    156.0
    
    
    
    97.8Less comprehensive income attributable to noncontrolling interest
    
    
    (0.2
    )
    
    
    (0.2
    )Comprehensive income attributable to Allegheny Energy, Inc.
    
    $
    155.8
    
    
    $
    97.6
  March 31,
    
    
    December 31,(In millions)
    
    2009
    
    
    2008Cash flow hedges and other, net of tax of $31.0 million and $17.7 million, respectively
    
    $
    49.2
    
    
    $
    28.1Net unrecognized pension and other benefit plan costs, net of tax of $(48.1) million
and $(48.7) million, respectively
    
    
    (70.6
    )
    
    
    (71.4
    )Total
    
    $
    (21.4
    )
    
    $
    (43.3
    )
 30




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 
 NOTE 11: EARNINGS PER COMMON SHARE
  Three Months Ended March 31,(In millions, except share and per share amounts)
    
    2009
    
    
    2008Basic Earnings per Common Share:Numerator:Net income attributable to Allegheny Energy, Inc.
    
    $
    133.9
    
    
    $
    136.1Denominator:Weighted average common shares outstanding
    
    
    169,443,451
    
    
    
    167,560,075Basic earnings per common share attributable to Allegheny Energy, Inc.
    
    $
    0.79
    
    
    $
    0.81Diluted Earnings per Common Share:Numerator:Net income attributable to Allegheny Energy, Inc.
    
    $
    133.9
    
    
    $
    136.1Denominator:Weighted average common shares outstanding
    
    
    169,443,451
    
    
    
    167,560,075Effect of dilutive securities:Stock options (a)
    
    
    407,703
    
    
    
    1,895,355Stock units
    
    
    4,269
    
    
    
    442,194Non-employee stock awards
    
    
    
    
    
    
    51,894Performance shares
    
    
    17,197
    
    
    
    Total shares
    
    
    169,872,620
    
    
    
    169,949,518Diluted earnings per common share attributable to Allegheny Energy, Inc
    
    $
    0.79
    
    
    $
    0.80
 
 (a)
    
    The dilutive share calculations for the three months ended March 31, 2009 and 2008 exclude
1,244,506 shares and 265,442 shares, respectively, under outstanding stock options because the
inclusion of these stock options under the treasury stock method would have been antidilutive. 
 NOTE 12: OTHER INCOME (EXPENSE), NET
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    
    2008Interest and dividend income
    
    $
    0.9
    
    
    $
    2.7Cash received from a former trading executives forfeited assets
    
    
    
    
    
    
    1.6Equity component of AFUDC
    
    
    1.2
    
    
    
    0.7Other
    
    
    0.4
    
    
    
    1.2Total
    
    $
    2.5
    
    
    $
    6.2
 31




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 
 NOTE 13: COMMITMENTS AND CONTINGENCIES
  Environmental Matters and Litigation
  Global Climate Change 2
 2 2 2 2
 2
 2
 32




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
  
    
    maintaining an accurate CO2 emissions data base;
    
    improving the efficiency of its existing coal-burning generation facilities;
    
    following developing technologies for clean-coal energy and for
CO2 emission controls at coal-fired power plants, including
carbon sequestration;
    
    participating in CO2 sequestration efforts (e.g. reforestation projects) both domestically and abroad;
    
    analyzing options for future energy investment (e.g. renewables, clean-coal, etc.); and
    
    improving demand-side efficiency programs, as evidenced by customer conservation outreach plans and
Alleghenys Watt Watchers initiatives.
  2
 Clean Air Act Compliance
    33




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
  2 2 2 2 2
 2
 2
 Clean Air Act Litigation
   34




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
      Clean Water Act Compliance .
   35




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
  Monongahela River Water Quality
 Global Warming Class Action
 Claims Related to Alleged Asbestos Exposure ., .
  36




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 Other Litigation
 Nevada Power Contracts
  Claim by California Parties
  Ordinary Course of Business
 37




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 
 NOTE 14: SUBSEQUENT EVENT
  38




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward-Looking Statements
  
    
    regulatory matters, including but not limited to environmental regulation, state rate
regulation, and the status of retail generation service supply competition in states served
by the Distribution Companies;
    
    financing plans;
    
    market demand and prices for energy and capacity;
    
    the cost and availability of raw materials, including coal, and Alleghenys ability to
enter into and enforce long-term fuel purchase agreements;
    
    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;
    
    changes in technology and their effects on the competitiveness of Alleghenys
generation facilities;
    
    work stoppages by Alleghenys unionized employees; and
    
    capacity purchase commitments.
  
    
    the results of regulatory proceedings, including proceedings related to rates;
    
    plant performance and unplanned outages;
    
    volatility and changes in the price and demand for energy and capacity and changes in
the value of financial transmission rights (FTRs);
 39




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##### Table of Contents




    
    volatility and changes in the price of coal, natural gas and other energy-related
commodities and Alleghenys ability to enter into and enforce supplier performance under
long-term fuel purchase agreements;
    
    changes in the weather and other natural phenomena;
    
    changes in industry capacity, development and other activities by Alleghenys
competitors;
    
    changes in market rules, including changes to the participant rules and tariffs for PJM
Interconnection, L.L.C. (PJM);
    
    the loss of any significant customers or suppliers;
    
    changes in customer switching behavior and their resulting effects on existing and
future PLR load requirements;
    
    dependence on other electric transmission and gas transportation systems and their
constraints on availability;
    
    environmental regulations;
    
    changes in other laws and regulations applicable to Allegheny, its markets or its
activities;
    
    changes in the underlying inputs and assumptions, including market conditions, used to
estimate the fair values of commodity contracts;
    
    complications or other factors that make it difficult or impossible to obtain necessary
lender consents or regulatory authorizations on a timely basis;
    
    changes in access to capital markets, the availability of credit and actions of rating
agencies;
    
    inflationary and deflationary trends and interest rate trends;
    
    the effect of accounting pronouncements issued periodically by accounting
standard-setting bodies;
    
    any failure to consummate, or delay in the consummation of,
contemplated asset sales;
    
    general economic and business conditions; and
    
    other risks, including the effects of global instability, terrorism and war.
  40




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##### Table of Contents



Overview
  Key Indicators and Performance Factors
 The Delivery and Services Segment
  Revenue per megawatt-hour (MWh) sold
 Three Months EndedMarch 31,2009
    
    2008Revenue per MWh sold
    
    $
    73.12
    
    
    $
    61.83
 Operations and maintenance costs (O&M).
 Three Months EndedMarch 31,2009
    
    2008O&M per MWh sold
    
    $
    7.29
    
    
    $
    7.66
 Capital expenditures.
 41




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##### Table of Contents



Retail electricity sales.
 Three Months Ended March 31,Normal
    
    2009
    
    2008
    
    ChangeDelivery and Services:Retail electricity sales (million kWhs)
    
    
    N/A
    
    
    
    11,531
    
    
    
    11,796
    
    
    
    (2.2
    )%HDD (a)
    
    
    2,800
    
    
    
    2,760
    
    
    
    2,714
    
    
    
    1.7
    %
 
 (a)
    
    Heating degree-days (HDD).The operations of the Distribution Companies are weather
sensitive. Weather conditions directly influence the volume of electricity delivered by the
Distribution Companies, representing one of several factors that impact the volume of
electricity delivered. Accordingly, deviations in weather from normal levels can affect
Alleghenys financial performance. Degree-day data is used to estimate amounts of energy
required to maintain comfortable indoor temperature levels based on each days average
temperature. HDD is the measure of the variation in the weather based on the extent to which
the average daily temperature falls below 65° Fahrenheit. Each degree of temperature below 65°
Fahrenheit is counted as one heating degree-day. Changes in HDD are most likely to impact the
usage of Alleghenys residential and commercial customers. Industrial customers are less
weather sensitive. The Generation and Marketing Segment
  kWhs generated.
 Equivalent Availability Factor (EAF).
 Station operations and maintenance costs (Station O&M).
 42




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##### Table of Contents



Three Months Ended March 31,2009
    
    
    2008
    
    
    ChangeSupercritical Units:kWhs generated (in millions)
    
    
    8,922
    
    
    
    10,363
    
    
    
    (13.9
    )%EAF
    
    
    80.5
    %
    
    
    89.2
    %
    
    
    (8.7
    )%Station O&M (in millions):Base and operations
    
    $
    27.2
    
    
    $
    27.4
    
    
    
    (0.7
    )%Special maintenance
    
    
    17.1
    
    
    
    11.1
    
    
    
    54.1
    %Total Station O&M
    
    $
    44.3
    
    
    $
    38.5
    
    
    
    15.1
    %All Generation Units:kWhs generated (in millions)
    
    
    10,106
    
    
    
    12,541
    
    
    
    (19.4
    )%EAF
    
    
    82.4
    %
    
    
    88.6
    %
    
    
    (6.2
    )%Station O&M (in millions):Base and operations
    
    $
    41.5
    
    
    $
    41.6
    
    
    
    (0.2
    )%Special maintenance
    
    
    17.9
    
    
    
    14.1
    
    
    
    27.0
    %Total Station O&M
    
    $
    59.4
    
    
    $
    55.7
    
    
    
    6.6
    %
 43




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##### Table of Contents



RESULTS OF OPERATIONS
 Income Summary
 Three Months Ended
    
    
    Three Months EndedMarch 31, 2009
    
    
    March 31, 2008Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    892.7
    
    
    $
    587.0
    
    
    $
    (522.5
    )
    
    $
    957.2
    
    
    $
    774.5
    
    
    $
    568.2
    
    
    $
    (467.7
    )
    
    $
    875.0Fuel
    
    
    
    
    
    
    259.0
    
    
    
    
    
    
    
    259.0
    
    
    
    
    
    
    
    249.8
    
    
    
    
    
    
    
    249.8Purchased power and
transmission
    
    
    625.4
    
    
    
    29.2
    
    
    
    (520.7
    )
    
    
    133.9
    
    
    
    535.5
    
    
    
    27.5
    
    
    
    (465.6
    )
    
    
    97.4Deferred energy costs, net
    
    
    (4.0
    )
    
    
    (13.0
    )
    
    
    
    
    
    
    (17.0
    )
    
    
    3.1
    
    
    
    (13.6
    )
    
    
    
    
    
    
    (10.5
    )Operations and maintenance
    
    
    87.0
    
    
    
    82.0
    
    
    
    (1.8
    )
    
    
    167.2
    
    
    
    91.9
    
    
    
    78.9
    
    
    
    (2.1
    )
    
    
    168.7Depreciation and amortization
    
    
    40.0
    
    
    
    28.5
    
    
    
    
    
    
    
    68.5
    
    
    
    42.7
    
    
    
    27.6
    
    
    
    
    
    
    
    70.3Taxes other than income taxes
    
    
    38.1
    
    
    
    17.7
    
    
    
    
    
    
    
    55.8
    
    
    
    36.1
    
    
    
    16.4
    
    
    
    
    
    
    
    52.5Total operating expenses
    
    
    786.5
    
    
    
    403.4
    
    
    
    (522.5
    )
    
    
    667.4
    
    
    
    709.3
    
    
    
    386.6
    
    
    
    (467.7
    )
    
    
    628.2Operating income
    
    
    106.2
    
    
    
    183.6
    
    
    
    
    
    
    
    289.8
    
    
    
    65.2
    
    
    
    181.6
    
    
    
    
    
    
    
    246.8Other income (expense), net
    
    
    1.5
    
    
    
    1.0
    
    
    
    
    
    
    
    2.5
    
    
    
    3.4
    
    
    
    4.2
    
    
    
    (1.4
    )
    
    
    6.2Interest expense
    
    
    26.5
    
    
    
    30.8
    
    
    
    
    
    
    
    57.3
    
    
    
    21.9
    
    
    
    37.9
    
    
    
    (1.4
    )
    
    
    58.4Income before income taxes
    
    
    81.2
    
    
    
    153.8
    
    
    
    
    
    
    
    235.0
    
    
    
    46.7
    
    
    
    147.9
    
    
    
    
    
    
    
    194.6Income tax expense
    
    
    34.8
    
    
    
    66.1
    
    
    
    
    
    
    
    100.9
    
    
    
    12.8
    
    
    
    45.5
    
    
    
    
    
    
    
    58.3Net income
    
    
    46.4
    
    
    
    87.7
    
    
    
    
    
    
    
    134.1
    
    
    
    33.9
    
    
    
    102.4
    
    
    
    
    
    
    
    136.3Less net income attributable
to noncontrolling interest
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Net income attributable
to Allegheny Energy, Inc.
    
    $
    46.2
    
    
    $
    87.7
    
    
    $
    
    
    
    $
    133.9
    
    
    $
    33.7
    
    
    $
    102.4
    
    
    $
    
    
    
    $
    136.1
 44




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CONSOLIDATED RESULTS
   (In millions)Income before income taxes for the three months ended March 31, 2008
    
    
    
    
    
    $
    194.6Increase in operating revenues
    
    
    
    
    
    
    82.2Decreases (increases) in operating expenses:Purchased power and transmission
    
    
    (36.5
    )Fuel
    
    
    (9.2
    )Deferred energy costs, net
    
    
    6.5Operating expenses
    
    
    
    
    
    
    (39.2
    )Decrease in other income (expense), net
    
    
    
    
    
    
    (3.7
    )Decrease in interest expense
    
    
    
    
    
    
    1.1Income before income taxes for the three months ended March 31, 2009
    
    
    
    
    
    $
    235.0
 Operating Revenues
  
    
    a $44.9 million increase resulting from higher generation rates charged to Pennsylvania
customers,
    
    a $36.1 million increase primarily due to increased sales of power to third parties,
    
    a $31.9 million increase due to higher rates under a rate settlement agreement in
Virginia,
    
    a $23.2 million increase resulting from market-based generation pricing for Maryland
residential customers effective January 1, 2009,
    
    a $20.3 million increase in unrealized gains related to pipeline capacity economic
hedges that did not qualify for hedge accounting,
    
    a $16.8 million increase in unrealized gains relating to FTRs,
    
    an $18.2 million increase relating to higher prices for power, including marketing,
hedging and trading activities and
    
    a $4.9 million increase primarily due to increased recoverable expenses and return on
investment that are related to transmission expansion.
  
    
    a $92.6 million decrease due to a 19.4% decrease in total MWhs generated resulting from
lower plant availability and less demand and
    
    a $21.4 million decrease due to the expiration of an earnings benefit related to
stranded cost recovery in Pennsylvania.
 45




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##### Table of Contents



Operating Expenses
    Other Income (Expense), net
  Income Tax Expense
  46




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
DELIVERY AND SERVICES
  Three Months Ended March 31,Normal
    
    2009
    
    2008
    
    ChangeDelivery and Services:Retail electricity
sales (million kWhs)
    
    
    N/A
    
    
    
    11,531
    
    
    
    11,796
    
    
    
    (2.2
    )%HDD
    
    
    2,800
    
    
    
    2,760
    
    
    
    2,714
    
    
    
    1.7
    %
 Operating Revenues
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    
    2008Retail electric:Generation
    
    $
    615.1
    
    
    $
    501.0Transmission
    
    
    43.5
    
    
    
    44.4Distribution
    
    
    184.5
    
    
    
    184.0Total retail electric
    
    
    843.1
    
    
    
    729.4Transmission services and bulk power
    
    
    36.9
    
    
    
    34.8Other affiliated and nonaffiliated energy services
    
    
    12.7
    
    
    
    10.3Total operating revenues
    
    $
    892.7
    
    
    $
    774.5
  
    
    a $44.9 million increase resulting from higher generation rates charged to Pennsylvania
customers,
    
    a $38.3 million increase primarily due to an ENEC-related rate increase in West
Virginia that went into effect on January 1, 2009,
    
    a $33.0 million increase primarily resulting from market-based generation pricing for
Maryland residential customers effective January 1, 2009 and
    
    a $31.9 million increase due to higher rates under a rate settlement agreement in
Virginia.
  
    
    a $21.4 million decrease due to the expiration of an earnings benefit related to
stranded cost recovery in Pennsylvania and
    
    a decrease in generation revenue related to reduced industrial customer consumption.
  47




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
DELIVERY AND SERVICES
 Operating Expenses
 Purchased Power and Transmission:
 Three Months EndedMarch 31,(In millions)
    
    2009
    
    
    2008Purchased power and transmission, excluding PURPA
    
    $
    583.3
    
    
    $
    495.7From PURPA generation
    
    
    42.1
    
    
    
    39.8Purchased power and transmission
    
    $
    625.4
    
    
    $
    535.5
   
    
    a $38.3 million increase, primarily due to an ENEC-related rate increase in West
Virginia that went into effect on January 1, 2009,
    
    a $33.0 million increase, primarily due to higher rates under market-based generation
pricing for Maryland residential customers effective January 1, 2009,
    
    a $13.5 million increase due to higher generation rates charged to Pennsylvania
customers, which are passed on to AE Supply under the terms of a power supply agreement
between West Penn and AE Supply, partially offset by decreased MWhs purchased and the
elimination of an intercompany market rate adjustment and
    
    an $8.5 million increase due to higher rates for power purchased to serve customers in
Virginia.
  Deferred Energy Costs, net:
 AES Warrior Run PURPA Generation.
 48




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
DELIVERY AND SERVICES
 Market-based Generation Costs.
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    
    2008AES Warrior Run PURPA generation
    
    $
    (3.5
    )
    
    $
    5.2Market-based generation and other costs
    
    
    (0.5
    )
    
    
    (2.1
    )Deferred energy costs, net
    
    $
    (4.0
    )
    
    $
    3.1
  Operations and Maintenance:
 Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Operations and maintenance
    
    $
    87.0
    
    
    $
    91.9
  Depreciation and Amortization:
 Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Depreciation and amortization
    
    $
    40.0
    
    
    $
    42.7
  49




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
DELIVERY AND SERVICES
 Taxes Other Than Income Taxes
 Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Taxes other than income taxes
    
    $
    38.1
    
    
    $
    36.1
  Interest Expense
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Interest expense
    
    $
    26.5
    
    
    $
    21.9
  Income Tax Expense
   50




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
DELIVERY AND SERVICES
 Transmission Expansion
  Income Summary
 Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Operating revenues
    
    $
    13.4
    
    
    $
    8.3Operating income
    
    $
    9.2
    
    
    $
    5.7Income before income taxes
    
    $
    8.7
    
    
    $
    4.7Net income attributable to transmission expansion
    
    $
    5.0
    
    
    $
    2.6
   51




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
GENERATION AND MARKETING
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2009
    
    
    March 31, 2008(In millions)
    
    Unregulated
    
    
    Regulated
    
    
    Eliminations
    
    
    Total
    
    
    Unregulated
    
    
    Regulated
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    455.6
    
    
    $
    139.8
    
    
    $
    (8.4
    )
    
    $
    587.0
    
    
    $
    442.5
    
    
    $
    137.0
    
    
    $
    (11.3
    )
    
    $
    568.2Fuel
    
    
    185.4
    
    
    
    73.6
    
    
    
    
    
    
    
    259.0
    
    
    
    180.9
    
    
    
    68.9
    
    
    
    
    
    
    
    249.8Purchased power and
transmission
    
    
    9.4
    
    
    
    28.2
    
    
    
    (8.4
    )
    
    
    29.2
    
    
    
    9.4
    
    
    
    29.4
    
    
    
    (11.3
    )
    
    
    27.5Deferred energy costs, net
    
    
    
    
    
    
    (13.0
    )
    
    
    
    
    
    
    (13.0
    )
    
    
    
    
    
    
    (13.6
    )
    
    
    
    
    
    
    (13.6
    )Operations and maintenance
    
    
    62.3
    
    
    
    19.6
    
    
    
    0.1
    
    
    
    82.0
    
    
    
    49.9
    
    
    
    28.9
    
    
    
    0.1
    
    
    
    78.9Depreciation and amortization
    
    
    23.8
    
    
    
    5.2
    
    
    
    (0.5
    )
    
    
    28.5
    
    
    
    23.3
    
    
    
    4.8
    
    
    
    (0.5
    )
    
    
    27.6Taxes other than income taxes
    
    
    12.7
    
    
    
    5.0
    
    
    
    
    
    
    
    17.7
    
    
    
    10.3
    
    
    
    6.1
    
    
    
    
    
    
    
    16.4Total operating expenses
    
    
    293.6
    
    
    
    118.6
    
    
    
    (8.8
    )
    
    
    403.4
    
    
    
    273.8
    
    
    
    124.5
    
    
    
    (11.7
    )
    
    
    386.6Operating income
    
    
    162.0
    
    
    
    21.2
    
    
    
    0.4
    
    
    
    183.6
    
    
    
    168.7
    
    
    
    12.5
    
    
    
    0.4
    
    
    
    181.6Other income (expense), net
    
    
    0.7
    
    
    
    3.1
    
    
    
    (2.8
    )
    
    
    1.0
    
    
    
    3.7
    
    
    
    3.5
    
    
    
    (3.0
    )
    
    
    4.2Interest expense
    
    
    18.0
    
    
    
    12.8
    
    
    
    
    
    
    
    30.8
    
    
    
    28.2
    
    
    
    9.8
    
    
    
    (0.1
    )
    
    
    37.9Income before income taxes
    
    
    144.7
    
    
    
    11.5
    
    
    
    (2.4
    )
    
    
    153.8
    
    
    
    144.2
    
    
    
    6.2
    
    
    
    (2.5
    )
    
    
    147.9Income tax expense
    
    
    53.1
    
    
    
    13.1
    
    
    
    (0.1
    )
    
    
    66.1
    
    
    
    44.2
    
    
    
    1.4
    
    
    
    (0.1
    )
    
    
    45.5Net income (loss)
    
    
    91.6
    
    
    
    (1.6
    )
    
    
    (2.3
    )
    
    
    87.7
    
    
    
    100.0
    
    
    
    4.8
    
    
    
    (2.4
    )
    
    
    102.4Less net income attributable
to noncontrolling interest
    
    
    (2.3
    )
    
    
    
    
    
    
    2.3
    
    
    
    
    
    
    
    (2.4
    )
    
    
    
    
    
    
    2.4
    
    
    
    Net income (loss)
attributable to the
Generation and Marketing
segment
    
    $
    89.3
    
    
    $
    (1.6
    )
    
    $
    
    
    
    $
    87.7
    
    
    $
    97.6
    
    
    $
    4.8
    
    
    $
    
    
    
    $
    102.4
 52




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
GENERATION AND MARKETING
   Three Months EndedMarch 31,2009
    
    2008
    
    ChangeGeneration (million kWhs)
    
    
    10,106
    
    
    
    12,541
    
    
    
    (19.4
    )%
  (In millions)Income before income taxes for the three months ended March 31, 2008
    
    
    
    
    
    $
    147.9Increase in operating revenues
    
    
    
    
    
    
    18.8Decreases (increases) in operating expenses:Fuel
    
    
    (9.2
    )Operations and maintenance
    
    
    (3.1
    )Other operating expenses
    
    
    (4.5
    )Operating expenses
    
    
    
    
    
    
    (16.8
    )Decrease in other income (expense), net
    
    
    
    
    
    
    (3.2
    )Decrease in interest expense
    
    
    
    
    
    
    7.1Income before income taxes for the three months ended March 31, 2009
    
    
    
    
    
    $
    153.8
 53




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
GENERATION AND MARKETING
 Operating Revenues
  
    
    a $51.8 million increase in revenues due to rate increases under power sales contracts,
including a $44.9 million increase from higher generation rates charged to Pennsylvania
customers, which are passed on to AE Supply under the terms of a power supply agreement
between West Penn and AE Supply (see Regulatory Matters for additional information.),
    
    a $20.3 million increase in unrealized gains related to pipeline capacity economic
hedges that did not qualify for hedge accounting,
    
    an $18.2 million increase relating to higher prices for power, including marketing,
hedging and energy transacting activities and
    
    a $16.8 million increase in unrealized gains relating to FTRs,
    
    partially offset by a $92.6 million decrease due to a 19.4% decrease in total MWhs
generated resulting from lower plant availability and less demand.
 Operating Expenses
  
    
    a $5.2 million increase in fuel handling, emission allowance and other fuel expenses
and
    
    a $3.0 million increase in coal expense, primarily due to a 24.3% increase in the
average price of coal per ton consumed, partially offset by an 18.5% decrease in tons of
coal consumed resulting from decreased MWhs generated at Alleghenys coal-fired generation
facilities.
  54




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
GENERATION AND MARKETING
 Interest Expense
  Income Tax Expense
   55




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
GENERATION AND MARKETING
 Generation and Marketing Segment  Unregulated Results
  Three Months EndedMarch 31,2009
    
    2008
    
    ChangekWhs generated (in millions)
    
    
    7,388
    
    
    
    9,113
    
    
    
    (18.9
    )%
 Operating Revenues
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    
    2008Revenue from affiliates
    
    $
    353.2
    
    
    $
    333.0PJM revenue, net
    
    
    52.7
    
    
    
    114.3Other operating revenues, including risk management and trading activities, net
    
    
    49.7
    
    
    
    (4.8
    )Unregulated revenue
    
    $
    455.6
    
    
    $
    442.5
 Revenue from affiliates
   PJM revenue, net:
 Three Months EndedMarch 31,(In millions)
    
    2009
    
    
    2008Generation sold into PJM
    
    $
    389.6
    
    
    $
    546.8Power purchased from PJM
    
    
    (336.9
    )
    
    
    (432.5
    )PJM revenue, net
    
    $
    52.7
    
    
    $
    114.3
  56




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
GENERATION AND MARKETING
 Other Operating Revenues:
  Operating Expenses
 Fuel:
 Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Unregulated fuel
    
    $
    185.4
    
    
    $
    180.9
  Operations and Maintenance:
 Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Unregulated operations and maintenance
    
    $
    62.3
    
    
    $
    49.9
  Taxes Other than Income Taxes:
 Three Months EndedMarch 31(In millions)
    
    2009
    
    2008Unregulated taxes other than income taxes
    
    $
    12.7
    
    
    $
    10.3
  57




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
GENERATION AND MARKETING
 Other Income (Expense), net
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Unregulated other income (expense), net
    
    $
    0.7
    
    
    $
    3.7
  Interest Expense
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Unregulated interest expense
    
    $
    18.0
    
    
    $
    28.2
  58




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
GENERATION AND MARKETING
 Generation and Marketing Segment  Regulated Results
  Three Months EndedMarch 31,2009
    
    2008
    
    ChangekWhs generated (in millions)
    
    
    2,719
    
    
    
    3,428
    
    
    
    (20.7
    )%
 Operating Revenues
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    
    2008Revenue from affiliates
    
    $
    175.8
    
    
    $
    144.0PJM revenue, net
    
    
    (42.0
    )
    
    
    (14.9
    )Fort Martin Scrubber surcharge
    
    
    5.9
    
    
    
    5.9Other operating revenues
    
    
    0.1
    
    
    
    2.0Regulated revenue
    
    $
    139.8
    
    
    $
    137.0
 Revenue from affiliates
    PJM revenue, net:
 Three Months EndedMarch 31,(In millions)
    
    2009
    
    
    2008Generation sold into PJM
    
    $
    156.5
    
    
    $
    220.1Power purchased from PJM
    
    
    (198.5
    )
    
    
    (235.0
    )PJM revenue, net
    
    $
    (42.0
    )
    
    $
    (14.9
    )
  59




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
GENERATION AND MARKETING
  Other Operating Revenues:
  Operating Expenses
 Fuel:
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Regulated fuel
    
    $
    73.6
    
    
    $
    68.9
  Purchased Power and Transmission:
 Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Regulated purchased power and transmission
    
    $
    28.2
    
    
    $
    29.4
  Operations and Maintenance:
 Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Regulated operations and maintenance
    
    $
    19.6
    
    
    $
    28.9
  60




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
GENERATION AND MARKETING
 Taxes Other than Income Taxes:
 Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Regulated taxes other than income taxes
    
    $
    5.0
    
    
    $
    6.1
  Interest Expense
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    2008Regulated interest expense
    
    $
    12.8
    
    
    $
    9.8
  61




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##### Table of Contents



Liquidity and Capital Requirements
     Letters ofTotal
    
    
    
    
    
    
    Credit
    
    
    Available(In millions)
    
    Capacity
    
    
    Borrowed
    
    
    Issued
    
    
    CapacityAE Revolving Credit Facility
    
    $
    376.0
    
    
    $
    
    
    
    $
    3.3
    
    
    $
    372.7AE Supply Revolving Facility
    
    
    400.0
    
    
    
    
    
    
    
    
    
    
    
    400.0Total
    
    $
    776.0
    
    
    $
    
    
    
    $
    3.3
    
    
    $
    772.7
   March 31, 2009
    
    
    December 31, 2008(In millions)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Long-term debt
    
    $
    4,253.0
    
    
    
    58.6
    
    
    $
    4,209.8
    
    
    
    59.6Allegheny Energy, Inc. common stockholders equity
    
    
    3,004.7
    
    
    
    41.4
    
    
    
    2,850.7
    
    
    
    40.4Total
    
    $
    7,257.7
    
    
    
    100.0
    
    
    $
    7,060.5
    
    
    
    100.0
 62




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##### Table of Contents



2009 Debt Activity
  (In millions)
    
    Issuances
    
    
    RepaymentsAE Supply:AE Supply Credit Facility  Revolving Loan
    
    $
    30.0
    
    
    $
    30.0TrAIL Company:TrAIL Company Credit Facility  Term Loan
    
    
    70.0
    
    
    
    West Penn:Transition Bonds
    
    
    
    
    
    
    20.4Monongahela:Environmental Control Bonds
    
    
    
    
    
    
    5.2Potomac Edison:Environmental Control Bonds
    
    
    
    
    
    
    1.6Consolidated Total
    
    $
    100.0
    
    
    $
    57.2
   Dividends
  Capital Expenditures
  Off-Balance Sheet Arrangements
  63




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##### Table of Contents



Cash Flows
 Operating Activities
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    
    2008Net income
    
    $
    134.1
    
    
    $
    136.3Non-cash items included in income
    
    
    119.3
    
    
    
    124.8Pension and other postretirement employee benefit plan contributions
    
    
    (1.7
    )
    
    
    (39.1
    )Share-based excess tax benefits included in cash flows from financing activities
    
    
    (20.0
    )
    
    
    Changes in certain assets and liabilities
    
    
    (224.4
    )
    
    
    (115.9
    )Net cash provided by operating activities
    
    $
    7.3
    
    
    $
    106.1
   64




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##### Table of Contents



Investing Activities
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    
    2008Capital expenditures
    
    $
    (254.1
    )
    
    $
    (239.8
    )Proceeds from asset sales
    
    
    0.2
    
    
    
    0.4Purchase of Merrill Lynch interest in subsidiary
    
    
    
    
    
    
    (50.0
    )Decrease in restricted funds
    
    
    58.9
    
    
    
    64.8Other investments
    
    
    (1.5
    )
    
    
    (1.6
    )Net cash used in investing activities
    
    $
    (196.5
    )
    
    $
    (226.2
    )
   Financing Activities
  Three Months EndedMarch 31,(In millions)
    
    2009
    
    
    2008Issuance of long-term debt
    
    $
    97.7
    
    
    $
    124.3Repayment of long-term debt
    
    
    (57.2
    )
    
    
    (159.4
    )Equity contribution to PATH, LLC by a joint venture partner
    
    
    
    
    
    
    3.1Payments on capital lease obligations
    
    
    (2.2
    )
    
    
    Share-based excess tax benefits
    
    
    20.0
    
    
    
    Proceeds from exercise of employee stock options
    
    
    
    
    
    
    8.3Cash dividends paid on common stock
    
    
    (25.4
    )
    
    
    (25.2
    )Net cash provided by (used in) financing activities
    
    $
    32.9
    
    
    $
    (48.9
    )
   65




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##### Table of Contents



CREDIT RATINGS
  Moodys
    

Standard
& Poors
    
    FitchAE:Outlook
    
    Stable
    
    Stable
    
    StableCorporate Credit Rating
    
    Not Rated
    
    BBB-
    
    BBB-(a)Senior Unsecured Debt
    
    Ba1
    
    BB+
    
    BBB-AE Supply:Outlook
    
    Stable
    
    Stable
    
    StableSenior Secured Debt
    
    Baa2
    
    BBB
    
    BBBSenior Unsecured Debt
    
    Baa3
    
    BBB-
    
    BBB-Monongahela:Outlook
    
    Stable
    
    Stable
    
    StableFirst Mortgage Bonds
    
    Baa2
    
    BBB+
    
    BBB+Senior Unsecured Debt
    
    Baa3
    
    BBB-
    
    BBB-Environmental Control Bonds
    
    Aaa
    
    AAA
    
    AAAPotomac Edison:Outlook
    
    Stable
    
    Stable
    
    StableFirst Mortgage Bonds
    
    Baa2
    
    BBB+
    
    BBB+Environmental Control Bonds
    
    Aaa
    
    AAA
    
    AAAWest Penn:Outlook
    
    Stable
    
    Stable
    
    StableTransition Bonds
    
    Aaa
    
    AAA
    
    AAAFirst Mortgage Bonds
    
    Baa2
    
    BBB+
    
    BBB+Senior Unsecured Debt
    
    Baa3
    
    BBB-
    
    BBB-AGC:Outlook
    
    Stable
    
    Stable
    
    StableSenior Unsecured Debt
    
    Baa3
    
    BBB-
    
    BBB-
 
 (a)
    
    Issuer Default Rating 66




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##### Table of Contents



OTHER MATTERS
 Critical Accounting Policies
  Recent Accounting Pronouncements
  REGULATORY MATTERS
  Federal Regulation and Rate Matters
 FERC, Competition and RTOs
     67




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##### Table of Contents



Transmission Rate Design
     68




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##### Table of Contents



Wholesale Markets.
  
    
    updates the cost of new entry reference (CONE) used in setting the demand curve for the RPM
auctions to reflect substantial changes in construction costs since 2005;
    
    reduces the maximum penalties applicable to generation resources that have RPM commitments;
    
    creates a load forecast holdback in the base auctions equal to 2.5% of the total PJM load forecast in order
to artificially create additional demand in the incremental auctions for demand response and other short-term
resources that are unable to sell their product three years in advance;
    
    permits, as a new feature of RPM, proposed investments in energy efficiency to be offered into RPM auctions
like any other capacity resource; and
 69




---



##### Table of Contents




    
    introduces a process to determine, by objective criteria, whether significant planned transmission upgrades that
might impact the outcome of an RPM auction will be delivered on schedule (and thereby included in RPM
auction assumptions).
  Transmission Expansion
 PATH Project.
  National Interest Electric Transmission Corridor (NIETC).
  PURPA
   70




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##### Table of Contents



State Rate Regulation
 Pennsylvania
  Joint Petition and Extension of Generation Rate Caps
 Default Service Regulations
   71




---



##### Table of Contents




    
    directs the Pennsylvania PUC to adopt an energy conservation and efficiency program
to require EDCs to
develop and file, by July 1, 2009, plans to reduce energy demand and consumption; and
    
    requires EDCs to file a plan for smart meter procurement and installation in August 2009.
   Transmission Expansion
 Alternative Energy Portfolio Standard.
 Reliability Benchmarks.
 72




---



##### Table of Contents



West Virginia
  Transmission Expansion
 Rate Case
 Annual Adjustment of Fuel and Purchased Power Cost Rates
 Securitization and Scrubber Project.
 73




---



##### Table of Contents



Maryland
  Standard Offer Service
  74




---



##### Table of Contents



Rate Stabilization
  Advanced Metering and Demand Side Management Initiatives
  75




---



##### Table of Contents



Renewable Energy Portfolio Standard
 Moratorium on Service Terminations.
 Virginia
 Transmission Expansion
 Purchased Power Cost Recovery
 76




---



##### Table of Contents




    
    The $73 million rate increase approved on a temporary basis on May 15, 2008 will remain in effect
through June 30, 2009;
    
    For the period from July 1, 2009 through December 31, 2009, half of any further increase in purchased power
costs for service to large non-residential customers will be forgone, up to $15 million;
    
    For the period from July 1, 2009 through June 30, 2010, the total rate increase for all other customers will be
capped at 15%; and
    
    During the period from July 1, 2009 through June 30, 2011, 100 MW of the power procured by Potomac Edison
will be deemed for rate purposes to have been procured at the lesser of actual cost or $55 per MWh.
  77




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##### Table of Contents



78




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Market Risk
     Credit Risk
   79




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
  Disclosure Controls and Procedures.
  Changes in Internal Control over Financial Reporting:
 80




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  81




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##### Table of Contents



EXHIBIT INDEX
 Documents10.1
    
    Asset Purchase Agreement, dated as of May 4, 2009, by and among The
Potomac Edison Company and Rappahannock Electric Cooperative10.2
    
    Asset Purchase Agreement, dated as of May 4, 2009, by and among The
Potomac Edison Company and Shenandoah Valley Electric Cooperative31.1
    
    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
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SIGNATURE
  ALLEGHENY ENERGY, INC.Date: May 7, 2009
    By:
    /s/ Kirk R. OliverKirk R. OliverSenior Vice President and Chief Financial Officer 83