##### 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 September 30, 2008
 Commission File Number 1-267
 
 ALLEGHENY ENERGY, INC.
 Name of Registrant)
 
 Maryland
(State of Incorporation) 
800 Cabin Hill Drive, Greensburg,
    
    13-5531602
(IRS Employer Identification Number)Pennsylvania
    
    15601(Address of Principal Executive
    
    (Zip Code)Offices)
 (724) 837-3000
(Telephone Number)
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 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)
    

    47Item 3. Quantitative and Qualitative Disclosures About Market Risk
    

    93Item 4. Controls and Procedures
    

    94PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    

    95Item 1A. Risk Factors
    

    95Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    

    104Item 3. Defaults Upon Senior Securities
    

    104Item 4. Submission of Matters to a Vote of Security Holders
    

    104Item 5. Other Information
    

    104Item 6. Exhibits
    

    105Signatures
    

    106EX-3.1EX-10.1EX-10.2EX-10.3EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



GLOSSARY
 The following abbreviations and terms are used in this report to identify Allegheny Energy, Inc.
and its subsidiaries:
 AE
    
    Allegheny Energy, Inc., a diversified utility holding companyAE Supply
    
    Allegheny Energy Supply Company, LLC, an unregulated generation subsidiary of AEAGC
    
    Allegheny Generating Company, a regulated generation subsidiary of AE Supply
and MonongahelaAllegheny
    
    Allegheny Energy, Inc., together with its consolidated subsidiariesAllegheny Ventures
    
    Allegheny Ventures, Inc., a nonutility, unregulated subsidiary of AEDistribution 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 CompanyWest 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 Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Operating revenues
    
    $
    849,554
    
    
    $
    846,592
    
    
    $
    2,678,080
    
    
    $
    2,520,699Operating expenses:Fuel
    
    
    299,164
    
    
    
    245,503
    
    
    
    794,242
    
    
    
    709,057Purchased power and transmission
    
    
    108,149
    
    
    
    93,923
    
    
    
    302,735
    
    
    
    293,597Deferred energy costs, net
    
    
    (18,706
    )
    
    
    3,651
    
    
    
    (28,056
    )
    
    
    (6,049
    )Operations and maintenance
    
    
    152,261
    
    
    
    154,856
    
    
    
    510,893
    
    
    
    505,915Depreciation and amortization
    
    
    67,384
    
    
    
    66,748
    
    
    
    206,466
    
    
    
    209,455Taxes other than income taxes
    
    
    54,364
    
    
    
    53,497
    
    
    
    159,682
    
    
    
    158,254Total operating expenses
    
    
    662,616
    
    
    
    618,178
    
    
    
    1,945,962
    
    
    
    1,870,229Operating income
    
    
    186,938
    
    
    
    228,414
    
    
    
    732,118
    
    
    
    650,470Other income (expense), net
    
    
    4,474
    
    
    
    14,822
    
    
    
    15,343
    
    
    
    27,590Interest expense and preferred dividends of
subsidiary
    
    
    57,960
    
    
    
    59,582
    
    
    
    175,094
    
    
    
    182,323Income before income taxes and minority interest
    
    
    133,452
    
    
    
    183,654
    
    
    
    572,367
    
    
    
    495,737Income tax expense
    
    
    44,305
    
    
    
    67,223
    
    
    
    192,417
    
    
    
    191,481Minority interest in net income of subsidiaries
    
    
    158
    
    
    
    1,413
    
    
    
    710
    
    
    
    2,452Net income
    
    $
    88,989
    
    
    $
    115,018
    
    
    $
    379,240
    
    
    $
    301,804Common share data:Weighted average common shares outstanding:Basic
    
    
    168,894
    
    
    
    166,101
    
    
    
    168,233
    
    
    
    165,799Diluted
    
    
    170,006
    
    
    
    169,456
    
    
    
    170,023
    
    
    
    169,371Basic income per common share
    
    $
    0.53
    
    
    $
    0.69
    
    
    $
    2.25
    
    
    $
    1.81Diluted income per common share
    
    $
    0.52
    
    
    $
    0.67
    
    
    $
    2.23
    
    
    $
    1.78Dividends per common share
    
    $
    0.15
    
    
    $
    
    
    
    $
    0.45
    
    
    $
    
  4




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Nine Months EndedSeptember 30,(In thousands)
    
    2008
    
    
    2007Cash Flows From Operating Activities:Net income
    
    $
    379,240
    
    
    $
    301,804Adjustments for non-cash items included in income:Depreciation and amortization
    
    
    206,466
    
    
    
    209,455Amortization of debt related costs
    
    
    8,187
    
    
    
    7,602Amortization of power sale liability related to Ohio sale
    
    
    
    
    
    
    (10,500
    )Amortization of liability for adverse power purchase commitment
    
    
    (12,853
    )
    
    
    (12,965
    )Amortization of Pennsylvania stranded cost recovery asset
    
    
    8,555
    
    
    
    14,641Gain on asset sales and disposals
    
    
    (279
    )
    
    
    (15,439
    )Provision for uncollectible accounts
    
    
    13,304
    
    
    
    13,042Minority interest in net income of subsidiaries
    
    
    710
    
    
    
    2,452Deferred income taxes and investment tax credit, net
    
    
    177,033
    
    
    
    188,791Deferred energy costs, net
    
    
    (28,056
    )
    
    
    (6,049
    )Stock-based compensation expense
    
    
    9,850
    
    
    
    8,090Unrealized gains on derivatives, net
    
    
    (136,918
    )
    
    
    (4,348
    )Pension and other postretirement employee benefit plan expense
    
    
    23,496
    
    
    
    26,972Pension and other postretirement employee benefit plan contributions
    
    
    (45,409
    )
    
    
    (46,521
    )Deferred revenue  Fort Martin scrubber project
    
    
    9,292
    
    
    
    11,321Deferred revenue  Virginia July 1, 2008 rate increase
    
    
    13,999
    
    
    
    Other, net
    
    
    11,075
    
    
    
    8,053Changes in certain assets and liabilities:Accounts receivable, net
    
    
    (32,574
    )
    
    
    (37,079
    )Materials, supplies and fuel
    
    
    (43,343
    )
    
    
    (210
    )Taxes receivable / accrued
    
    
    (34,990
    )
    
    
    (14,746
    )Prepaid taxes
    
    
    21,506
    
    
    
    19,215Collateral deposits
    
    
    31,177
    
    
    
    16,459Prepaid assets
    
    
    (4,220
    )
    
    
    (8,869
    )Other current assets
    
    
    1,082
    
    
    
    11,740Accounts payable
    
    
    (62,146
    )
    
    
    33,673Accrued interest
    
    
    (2,459
    )
    
    
    21,462Other current liabilities
    
    
    12,967
    
    
    
    3,192Regulatory assets
    
    
    26,355
    
    
    
    (3,233
    )Other assets
    
    
    4,608
    
    
    
    (1,935
    )Deferred income taxes
    
    
    (2,498
    )
    
    
    (12,288
    )Regulatory liabilities
    
    
    41,066
    
    
    
    2,163Other liabilities
    
    
    (5,080
    )
    
    
    (3,745
    )Net cash provided by operating activities
    
    
    589,143
    
    
    
    722,200
  5




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
 Nine Months EndedSeptember 30,(In thousands)
    
    2008
    
    
    2007Cash Flows From Investing Activities:Capital expenditures
    
    
    (714,349
    )
    
    
    (590,305
    )Proceeds from asset sales
    
    
    400
    
    
    
    1,764Purchase of Merrill Lynch interest in subsidiary
    
    
    (50,000
    )
    
    
    Decrease (increase) in restricted funds
    
    
    177,639
    
    
    
    (388,541
    )Other investments
    
    
    (4,054
    )
    
    
    (3,951
    )Net cash used in investing activities
    
    
    (590,364
    )
    
    
    (981,033
    )Cash Flows From Financing Activities:Repayment of note payable
    
    
    (10,000
    )
    
    
    Issuance of long-term debt
    
    
    305,638
    
    
    
    450,577Repayment of long-term debt
    
    
    (384,589
    )
    
    
    (91,974
    )Redemption of preferred stock of subsidiary
    
    
    
    
    
    
    (25,148
    )Equity contribution to PATH, LLC by a joint venture partner
    
    
    4,460
    
    
    
    Payments on capital lease obligations
    
    
    (6,667
    )
    
    
    (6,032
    )Proceeds from exercise of employee stock options
    
    
    21,448
    
    
    
    10,335Cash dividends paid on common stock
    
    
    (75,748
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (145,458
    )
    
    
    337,758Net increase (decrease) in cash and cash equivalents
    
    
    (146,679
    )
    
    
    78,925Cash and cash equivalents at beginning of period
    
    
    258,750
    
    
    
    114,138Cash and cash equivalents at end of period
    
    $
    112,071
    
    
    $
    193,063Supplemental Cash Flow Information:Cash paid for interest (net of amount capitalized)
    
    $
    169,175
    
    
    $
    152,361
  6




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 September 30,
    
    
    December 31,(In thousands)
    
    2008
    
    
    2007ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    112,071
    
    
    $
    258,750Accounts receivable:Customer
    
    
    184,820
    
    
    
    195,545Unbilled utility revenue
    
    
    85,652
    
    
    
    110,569Wholesale and other
    
    
    80,171
    
    
    
    57,626Allowance for uncollectible accounts
    
    
    (14,346
    )
    
    
    (14,252
    )Materials and supplies
    
    
    112,639
    
    
    
    103,075Fuel
    
    
    111,888
    
    
    
    72,506Deferred income taxes
    
    
    119,137
    
    
    
    286,440Prepaid taxes
    
    
    54,217
    
    
    
    48,343Collateral deposits
    
    
    54,827
    
    
    
    59,527Derivative assets
    
    
    90,343
    
    
    
    29Restricted funds
    
    
    28,432
    
    
    
    47,501Regulatory assets
    
    
    117,213
    
    
    
    73,299Other
    
    
    120,397
    
    
    
    16,001Total current assets
    
    
    1,257,461
    
    
    
    1,314,959Property, Plant and Equipment, Net:Generation
    
    
    6,062,100
    
    
    
    5,992,919Transmission
    
    
    1,158,848
    
    
    
    1,126,657Distribution
    
    
    3,900,275
    
    
    
    3,761,438Other
    
    
    463,745
    
    
    
    452,525Accumulated depreciation
    
    
    (4,943,999
    )
    
    
    (4,795,925
    )Subtotal
    
    
    6,640,969
    
    
    
    6,537,614Construction work in progress
    
    
    1,114,862
    
    
    
    658,966Total property, plant and equipment, net
    
    
    7,755,831
    
    
    
    7,196,580Investments and Other Assets:Goodwill
    
    
    367,287
    
    
    
    367,287Restricted funds  Fort Martin scrubber project
    
    
    194,715
    
    
    
    347,023Investments in unconsolidated affiliates
    
    
    28,001
    
    
    
    27,875Other
    
    
    20,103
    
    
    
    15,974Total investments and other assets
    
    
    610,106
    
    
    
    758,159Deferred Charges:Regulatory assets
    
    
    491,987
    
    
    
    601,603Other
    
    
    73,702
    
    
    
    35,288Total deferred charges
    
    
    565,689
    
    
    
    636,891Total Assets
    
    $
    10,189,087
    
    
    $
    9,906,589
  7




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
 September 30,
    
    
    December 31,(In thousands, except share amounts)
    
    2008
    
    
    2007LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term debt
    
    $
    
    
    
    $
    10,000Long-term debt due within one year (Note 8)
    
    
    92,479
    
    
    
    95,367Accounts payable
    
    
    303,803
    
    
    
    380,688Accrued taxes
    
    
    65,308
    
    
    
    83,580Derivative liabilities
    
    
    11,498
    
    
    
    14,117Regulatory liabilities
    
    
    55,726
    
    
    
    4,029Accrued interest
    
    
    63,124
    
    
    
    65,583Security deposits
    
    
    44,162
    
    
    
    38,976Other
    
    
    124,109
    
    
    
    95,163Total current liabilities
    
    
    760,209
    
    
    
    787,503Long-term Debt (Note 8)
    
    
    3,881,085
    
    
    
    3,943,947Deferred Credits and Other Liabilities:Derivative liabilities
    
    
    8,501
    
    
    
    12,815Income taxes payable
    
    
    76,620
    
    
    
    68,050Investment tax credit
    
    
    66,913
    
    
    
    69,353Deferred income taxes
    
    
    1,357,163
    
    
    
    1,345,953Obligations under capital leases
    
    
    41,867
    
    
    
    38,765Regulatory liabilities
    
    
    543,737
    
    
    
    488,393Adverse power purchase commitment
    
    
    136,700
    
    
    
    149,799Other
    
    
    437,078
    
    
    
    453,418Total deferred credits and other liabilities
    
    
    2,668,579
    
    
    
    2,626,546Commitments and Contingencies (Note 17)Minority Interest
    
    
    5,173
    
    
    
    13,241Common Stockholders Equity:Common stock$1.25 par value per share, 260
million shares authorized and 169,103,200 and
167,273,069 shares issued at September 30,
2008 and December 31, 2007, respectively
    
    
    211,379
    
    
    
    209,091Other paid-in capital
    
    
    1,945,420
    
    
    
    1,924,072Retained earnings
    
    
    747,564
    
    
    
    444,177Treasury stock at cost49,493 shares
    
    
    (1,756
    )
    
    
    (1,756
    )Accumulated other comprehensive loss
    
    
    (28,566
    )
    
    
    (40,232
    )Total common stockholders equity
    
    
    2,874,041
    
    
    
    2,535,352Total Liabilities and Stockholders Equity
    
    $
    10,189,087
    
    
    $
    9,906,589
  8




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS EQUITY
For the Nine Months Ended September 30, 2008
(unaudited)
 Accumulated
    
    
    TotalOther
    
    
    
    
    
    
    
    
    
    
    other
    
    
    commonShares
    
    
    Common
    
    
    paid-in
    
    
    Retained
    
    
    Treasury
    
    
    comprehensive
    
    
    stockholders(In thousands, except shares)
    
    outstanding
    
    
    stock
    
    
    capital
    
    
    earnings
    
    
    stock
    
    
    loss
    
    
    equityBalance at December 31, 2007
    
    
    167,223,576
    
    
    $
    209,091
    
    
    $
    1,924,072
    
    
    $
    444,177
    
    
    $
    (1,756
    )
    
    $
    (40,232
    )
    
    $
    2,535,352Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    379,240
    
    
    
    
    
    
    
    
    
    
    
    379,240Defined benefit pension and
other benefit plan
amortization:Net actuarial loss,
net of tax of $112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    138Net transition
obligation, net of tax
of $524
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    644
    
    
    
    644Net prior service
cost, net of tax of
$255
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    312
    
    
    
    312Unrealized losses on
available-for-sale
securities, net of tax of $3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Cash flow hedges, net of tax
of $6,741
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,567
    
    
    
    10,567Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75,748
    )
    
    
    
    
    
    
    
    
    
    
    (75,748
    )Stock-based compensation
expense:Stock units
    
    
    
    
    
    
    
    
    
    
    638
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    638Non-employee director
stock awards
    
    
    19,097
    
    
    
    24
    
    
    
    811
    
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    809Stock options
    
    
    
    
    
    
    
    
    
    
    6,901
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,901Performance shares
    
    
    
    
    
    
    
    
    
    
    1,497
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,497Exercise of stock options
    
    
    1,558,452
    
    
    
    1,948
    
    
    
    19,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,448Settlement of stock units
    
    
    252,582
    
    
    
    316
    
    
    
    (8,078
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,762
    )Dividends on stock units
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    (79
    )
    
    
    
    
    
    
    
    
    
    
    Balance at September 30, 2008
    
    
    169,053,707
    
    
    $
    211,379
    
    
    $
    1,945,420
    
    
    $
    747,564
    
    
    $
    (1,756
    )
    
    $
    (28,566
    )
    
    $
    2,874,041
  9




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Note No.
    
    
    
    Page No.1
    
    Basis of Presentation
    
    112
    
    Recent Accounting Pronouncements
    
    123
    
    Transmission Expansion Projects
    
    134
    
    Acquisition of Minority Interest in AE Supply
    
    145
    
    Rates and Regulation
    
    146
    
    Regulatory Assets and Liabilities
    
    237
    
    Income Taxes
    
    248
    
    Common Stock and Debt
    
    259
    
    Business Segments
    
    2810
    
    Fair Value Measurements, Derivative Instruments and Hedging Activities
    
    2911
    
    Stock-Based Compensation
    
    3112
    
    Pension Benefits and Postretirement Benefits Other Than Pensions
    
    3513
    
    Comprehensive Income and Accumulated Other Comprehensive Loss
    
    3714
    
    Income Per Common Share
    
    3815
    
    Other Income (Expense), Net
    
    3916
    
    Guarantees and Letters of Credit
    
    4017
    
    Commitments and Contingencies
    
    41
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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 1: BASIS OF PRESENTATION
 Business Description
     Financial Statement Presentation
   11




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  
 NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
 SFAS 157
   FSP FAS 157-3
  SFAS 159
  FIN 39-1
  12




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 SFAS 161
  
 NOTE 3: TRANSMISSION EXPANSION PROJECTS
 Trans-Allegheny Interstate Line
  Potomac-Appalachian Transmission Highline
  
  
  13




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 4: ACQUISITION OF MINORITY INTEREST IN AE SUPPLY
   
 NOTE 5: RATES AND REGULATION
 FERC
 Transmission Rate Design
   14




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
    Wholesale Markets
  15




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  TrAIL Project.
 PATH Project.
 
    
    a return on equity of 14.3 percent;
    
    inclusion of 100 percent of construction work in progress in rate base;
    
    recovery of start-up business and administrative costs prudently incurred prior
to the time the rates go into effect; and
    
    recovery of prudently incurred development and construction costs if PATH is
abandoned as a result of factors beyond the control of PATH, LLC or its parent
companies.
  Pennsylvania
 Default Service Regulation.
  16




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
    
    
    directs the Pennsylvania PUC to adopt an energy conservation and efficiency program
to require EDCs to submit and implement plans to reduce energy demand and consumption;
    
    requires EDCs to file a plan for smart meter procurement and installation; and
    
    requires EDCs to obtain energy through a prudent mix of contracts, with an emphasis
on competitive procurement.
  Transmission Expansion
 17




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  West Virginia
 Rate Case.
 Annual Adjustment of Fuel and Purchased Power Cost Rates.
 Transmission Expansion.
 
    
    Monongahela, Potomac Edison and TrAIL Company will locate 100 to 150 managerial,
professional, technical and administrative jobs in north-central West Virginia no later
than the in-service date of the West Virginia segment of TrAIL, which will involve
construction of a new transmission operations facility in the state with an estimated cost
of approximately $50 million;
    
    Monongahela and Potomac Edison will not seek recovery in West Virginia of transmission
charges associated with TrAIL for the period from January 2007 through the latest of
December 31, 2013, the date which is two and one-half years following the in-service date
of TrAILs West Virginia segment or the month in which Alleghenys new West Virginia
facility is placed in service;
    
    TrAIL Company will contribute $5 million to fund energy conservation programs and
assistance plans for low-income customers in West Virginia over a five year period;
    
    Monongahela and Potomac Edison will provide rate relief in the form of credits totaling
approximately $5.7 million in the aggregate to industrial customers in West Virginia in
2010 and 2011;
 18




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
    
    The West Virginia segment of TrAIL should follow the route set forth in TrAIL Companys
application to the West Virginia PSC, except for certain modifications south of Morgantown,
West Virginia, which will more closely follow existing transmission corridors;
    
    The Consumer Advocate, the staff of the West Virginia PSC and the WVEUG will support
the need for the portion of TrAIL that is proposed to run from the 502 Junction Substation
through West Virginia to northern Virginia; and
    
    Each landowner on the right-of-way will be provided with transmission credits that can
be used for up to 12,000 kWh of power per year.
   Maryland
     19




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Standard Offer Service.
    Virginia
 Purchased Power Cost Recovery.
   20




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
      
    
    granted a rate adjustment effective immediately that would permit Potomac Edison to
collect an additional $9.5 million (pre-tax) on an annualized basis through June 30, 2008,
a substantially lower amount than the $42.3 million requested;
    
    directed Potomac Edison to implement deferred accounting effective immediately with
respect to the over- or under-recovery of the increased purchased power costs approved in
the order; and
    
    directed Potomac Edison to file an application with the Virginia SCC on or before July
1, 2008, for proposed recovery of purchased power costs for the 12-month period beginning
July 1, 2008, including for treatment of any over- or under-recovery incurred for service
rendered prior to July 1, 2008 and whether and how its proposed recovery of purchased power
costs for service rendered on and after January 1, 2009 would be consistent with the MOU
and certain amendments to the Restructuring Act.
    21




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
     Transmission Expansion.
 22




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 6: REGULATORY ASSETS AND LIABILITIES
  September 30,
    
    
    December 31,(In millions)
    
    2008
    
    
    2007Regulatory assets, including current portion:Income taxes (a)(b)
    
    $
    225.6
    
    
    $
    251.4Pension benefits and postretirement benefits other than pensions (a)(c)
    
    
    192.8
    
    
    
    202.7Pennsylvania stranded cost recovery
    
    
    
    
    
    
    13.7Pennsylvania Competitive Transition Charge (CTC) reconciliation
    
    
    93.2
    
    
    
    117.7Unamortized loss on reacquired debt (a)(d)
    
    
    32.1
    
    
    
    35.3Deferred ENEC charges (e)(f)
    
    
    25.1
    
    
    
    9.4Other (g)
    
    
    40.4
    
    
    
    44.7Subtotal
    
    
    609.2
    
    
    
    674.9Regulatory liabilities, including current portion:Net asset removal costs
    
    
    406.2
    
    
    
    396.4Unrealized gain on increased fair value of financial transmission rights
    
    
    46.1
    
    
    
    Income taxes
    
    
    35.3
    
    
    
    36.8SO2 allowances
    
    
    13.4
    
    
    
    13.8Fort Martin scrubber projectenvironmental control surcharge (e)
    
    
    27.6
    
    
    
    33.4Maryland rate stabilization and transition plan surcharge
    
    
    48.4
    
    
    
    6.9Other
    
    
    22.5
    
    
    
    5.1Subtotal
    
    
    599.5
    
    
    
    492.4Net regulatory assets
    
    $
    9.7
    
    
    $
    182.5
 
 (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)
    
    Amount is being recovered over various periods through 2025, based upon the maturities of reacquired debt.(e)
    
    Interest earnings on the Fort Martin scrubber project escrow fund represented an offset to regulatory
assets at September 30, 2008 and a regulatory liability at December 31, 2007. By order dated January 14,
2008, the West Virginia PSC approved a modification to the ENEC directing the interest earnings to be
applied to the ENEC.(f)
    
    Includes amounts that do not earn a return with recovery periods up to one year.(g)
    
    Includes amounts that do not earn a return with various recovery periods through 2027. 23




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 7: INCOME TAXES
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions, except percent)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Income before income taxes
and minority interest
    
    $
    133.5
    
    
    
    
    
    
    $
    183.7
    
    
    
    
    
    
    $
    572.4
    
    
    
    
    
    
    $
    495.7Preferred dividends of
subsidiary
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7Subtotal
    
    
    133.5
    
    
    
    
    
    
    
    183.8
    
    
    
    
    
    
    
    572.4
    
    
    
    
    
    
    
    496.4Income tax expense
calculated using the federal
statutory rate of 35%
    
    
    46.7
    
    
    
    35.0
    
    
    
    64.3
    
    
    
    35.0
    
    
    
    200.3
    
    
    
    35.0
    
    
    
    173.7
    
    
    
    35.0Increases (reductions)
resulting from:Rate-making effects of
depreciation differences
    
    
    2.0
    
    
    
    1.5
    
    
    
    1.9
    
    
    
    1.0
    
    
    
    5.9
    
    
    
    1.0
    
    
    
    5.8
    
    
    
    1.2Plant removal costs
    
    
    (1.3
    )
    
    
    (1.0
    )
    
    
    (0.6
    )
    
    
    (0.3
    )
    
    
    (3.9
    )
    
    
    (0.7
    )
    
    
    (1.8
    )
    
    
    (0.4
    )State income tax, net of
federal income tax
benefit
    
    
    2.3
    
    
    
    1.7
    
    
    
    6.4
    
    
    
    3.5
    
    
    
    13.5
    
    
    
    2.4
    
    
    
    15.7
    
    
    
    3.2Amortization of deferred
investment tax credit
    
    
    (1.0
    )
    
    
    (0.7
    )
    
    
    (0.9
    )
    
    
    (0.5
    )
    
    
    (2.7
    )
    
    
    (0.5
    )
    
    
    (2.7
    )
    
    
    (0.6
    )Estimated Pennsylvania net
operating loss benefits
    
    
    
    
    
    
    
    
    
    
    (4.2
    )
    
    
    (2.3
    )
    
    
    (3.0
    )
    
    
    (0.5
    )
    
    
    (4.2
    )
    
    
    (0.8
    )West Virginia state income
tax change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.7
    )
    
    
    (1.2
    )
    
    
    
    
    
    
    Changes in tax reserves
related to uncertain tax
positions
    
    
    (2.7
    )
    
    
    (2.0
    )
    
    
    (1.2
    )
    
    
    (0.6
    )
    
    
    (7.7
    )
    
    
    (1.3
    )
    
    
    3.5
    
    
    
    0.7Other, net
    
    
    (1.7
    )
    
    
    (1.3
    )
    
    
    1.5
    
    
    
    0.8
    
    
    
    (3.3
    )
    
    
    (0.6
    )
    
    
    1.5
    
    
    
    0.3Total income tax expense
    
    $
    44.3
    
    
    
    33.2
    
    
    $
    67.2
    
    
    
    36.6
    
    
    $
    192.4
    
    
    
    33.6
    
    
    $
    191.5
    
    
    
    38.6
  24




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
     
 NOTE 8: COMMON STOCK AND DEBT
 Common Stock
  25




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Debt
  (In millions)
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    Thereafter
    
    
    TotalAE Supply:Medium-Term Notes
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    400.0
    
    
    $
    650.0
    
    
    $
    
    
    
    $
    1,050.0AE Supply Credit Facility:Term Loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    447.0
    
    
    
    
    
    
    
    
    
    
    
    447.0Revolving Loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90.0
    
    
    
    
    
    
    
    
    
    
    
    90.0Pollution Control Bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    267.2
    
    
    
    268.5Debentures-AGC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0
    
    
    
    100.0Total AE Supply
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    937.0
    
    
    $
    651.3
    
    
    $
    367.2
    
    
    $
    1,955.5Monongahela:Environmental Control Bonds (a)
    
    $
    
    
    
    $
    10.6
    
    
    $
    11.1
    
    
    $
    11.6
    
    
    $
    12.2
    
    
    $
    284.0
    
    
    $
    329.5First Mortgage Bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    340.0
    
    
    
    340.0Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    110.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110.0Pollution Control Bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.0
    
    
    
    64.3
    
    
    
    70.3Total Monongahela
    
    $
    
    
    
    $
    10.6
    
    
    $
    121.1
    
    
    $
    11.6
    
    
    $
    18.2
    
    
    $
    688.3
    
    
    $
    849.8West Penn:First Mortgage Bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    420.0
    
    
    $
    420.0Transition Bonds (a)
    
    
    18.6
    
    
    
    79.8
    
    
    
    16.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114.4Medium-Term Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80.0
    
    
    
    
    
    
    
    80.0Total West Penn
    
    $
    18.6
    
    
    $
    79.8
    
    
    $
    16.0
    
    
    $
    
    
    
    $
    80.0
    
    
    $
    420.0
    
    
    $
    614.4Potomac Edison:First Mortgage Bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    420.0
    
    
    $
    420.0Environmental Control Bonds (a)
    
    
    
    
    
    
    3.5
    
    
    
    3.7
    
    
    
    3.9
    
    
    
    4.1
    
    
    
    94.8
    
    
    
    110.0Total Potomac Edison
    
    $
    
    
    
    $
    3.5
    
    
    $
    3.7
    
    
    $
    3.9
    
    
    $
    4.1
    
    
    $
    514.8
    
    
    $
    530.0TrAIL Company:Term Loan
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    45.0
    
    
    $
    45.0Total TrAIL
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    45.0
    
    
    $
    45.0Unamortized debt discounts
    
    
    (0.4
    )
    
    
    (1.5
    )
    
    
    (1.3
    )
    
    
    (1.1
    )
    
    
    (0.6
    )
    
    
    (1.8
    )
    
    
    (6.7
    )Eliminations (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    (13.1
    )
    
    
    (14.4
    )Total consolidated debt
    
    $
    18.2
    
    
    $
    92.4
    
    
    $
    139.5
    
    
    $
    951.4
    
    
    $
    751.7
    
    
    $
    2,020.4
    
    
    $
    3,973.6
 
 (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.  26




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 2008 Debt Activity
  (In millions)
    
    Issuances
    
    
    RepaymentsAE Supply:AE Supply Credit Facility:Term Loan
    
    $
    
    
    
    $
    125.0Revolving Loan
    
    
    250.0
    
    
    
    160.0TrAIL Company:Short-Term Promissory Note
    
    
    
    
    
    
    10.0TrAIL Company Credit Facility:Term Loan
    
    
    45.0
    
    
    
    Revolving Loan
    
    
    20.0
    
    
    
    20.0West Penn:Transition Bonds
    
    
    2.8
    
    
    
    59.8Monongahela:Environmental Control Bonds
    
    
    
    
    
    
    14.9Potomac Edison:Environmental Control Bonds
    
    
    
    
    
    
    4.9Consolidated Total
    
    $
    317.8
    
    
    $
    394.6
  27




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 9: BUSINESS SEGMENTS
  Three Months Ended September 30, 2008
    
    
    Three Months Ended September 30, 2007Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    690.8
    
    
    $
    158.8
    
    
    $
    
    
    
    $
    849.6
    
    
    $
    690.2
    
    
    $
    156.4
    
    
    $
    
    
    
    $
    846.6Internal operating revenues
    
    
    1.9
    
    
    
    430.5
    
    
    
    (432.4
    )
    
    
    
    
    
    
    2.2
    
    
    
    424.7
    
    
    
    (426.9
    )
    
    
    Total operating revenues
    
    $
    692.7
    
    
    $
    589.3
    
    
    $
    (432.4
    )
    
    $
    849.6
    
    
    $
    692.4
    
    
    $
    581.1
    
    
    $
    (426.9
    )
    
    $
    846.6Depreciation
    
    $
    38.2
    
    
    $
    28.1
    
    
    $
    
    
    
    $
    66.3
    
    
    $
    35.7
    
    
    $
    26.3
    
    
    $
    
    
    
    $
    62.0Amortization
    
    $
    1.0
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    1.1
    
    
    $
    4.7
    
    
    $
    
    
    
    $
    
    
    
    $
    4.7Operating income
    
    $
    20.5
    
    
    $
    166.4
    
    
    $
    
    
    
    $
    186.9
    
    
    $
    37.1
    
    
    $
    191.4
    
    
    $
    
    
    
    $
    228.5Interest expense
    
    $
    24.8
    
    
    $
    33.3
    
    
    $
    (0.2
    )
    
    $
    57.9
    
    
    $
    18.1
    
    
    $
    43.1
    
    
    $
    (1.8
    )
    
    $
    59.4Income tax expense (benefit)
    
    $
    (5.7
    )
    
    $
    50.0
    
    
    $
    
    
    
    $
    44.3
    
    
    $
    9.1
    
    
    $
    58.1
    
    
    $
    
    
    
    $
    67.2Net income
    
    $
    4.3
    
    
    $
    84.7
    
    
    $
    
    
    
    $
    89.0
    
    
    $
    12.8
    
    
    $
    102.2
    
    
    $
    
    
    
    $
    115.0
 Nine Months Ended September 30, 2008
    
    
    Nine Months Ended September 30, 2007Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalExternal operating revenues
    
    $
    2,133.6
    
    
    $
    544.5
    
    
    $
    
    
    
    $
    2,678.1
    
    
    $
    2,121.3
    
    
    $
    399.4
    
    
    $
    
    
    
    $
    2,520.7Internal operating revenues
    
    
    6.0
    
    
    
    1,297.5
    
    
    
    (1,303.5
    )
    
    
    
    
    
    
    7.5
    
    
    
    1,231.5
    
    
    
    (1,239.0
    )
    
    
    Total operating revenues
    
    $
    2,139.6
    
    
    $
    1,842.0
    
    
    $
    (1,303.5
    )
    
    $
    2,678.1
    
    
    $
    2,128.8
    
    
    $
    1,630.9
    
    
    $
    (1,239.0
    )
    
    $
    2,520.7Depreciation
    
    $
    113.4
    
    
    $
    83.7
    
    
    $
    
    
    
    $
    197.1
    
    
    $
    107.7
    
    
    $
    87.7
    
    
    $
    
    
    
    $
    195.4Amortization
    
    $
    9.2
    
    
    $
    0.2
    
    
    $
    
    
    
    $
    9.4
    
    
    $
    14.0
    
    
    $
    
    
    
    $
    
    
    
    $
    14.0Operating income
    
    $
    113.8
    
    
    $
    618.3
    
    
    $
    
    
    
    $
    732.1
    
    
    $
    203.6
    
    
    $
    446.9
    
    
    $
    
    
    
    $
    650.5Interest expense
    
    $
    70.7
    
    
    $
    106.7
    
    
    $
    (2.4
    )
    
    $
    175.0
    
    
    $
    55.0
    
    
    $
    131.2
    
    
    $
    (4.6
    )
    
    $
    181.6Income tax expense
    
    $
    10.0
    
    
    $
    182.5
    
    
    $
    
    
    
    $
    192.5
    
    
    $
    66.9
    
    
    $
    124.6
    
    
    $
    
    
    
    $
    191.5Net income
    
    $
    42.5
    
    
    $
    336.7
    
    
    $
    
    
    
    $
    379.2
    
    
    $
    91.7
    
    
    $
    210.1
    
    
    $
    
    
    
    $
    301.8
 28




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 10: FAIR VALUE MEASUREMENTS, DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  Level 1 

    Quoted prices for identical instruments in active markets.
 Level 2 

    Quoted prices for similar instruments in active markets; quoted prices for identical or
similar instruments in markets that are not active; and model-derived valuations for which all
significant inputs are observable market data.
 Level 3 
    Unobservable inputs significant to the fair value measurement supported by little or no
market activity.
      29




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
    Three Months Ended
    
    
    Nine Months Ended(Pre-tax amounts, in millions)
    
    September 30, 2008
    
    
    September 30, 2008Accumulated OCI derivative loss at July 1, 2008 and January 1,
2008, respectively
    
    $
    (121.1
    )
    
    $
    (7.0
    )Effective portion of changes in fair value
    
    
    150.9
    
    
    
    57.6Reclassifications from accumulated OCI derivative loss to earnings
    
    
    (19.4
    )
    
    
    (40.2
    )Accumulated OCI derivative gain at September 30, 2008
    
    $
    10.4
    
    
    $
    10.4
    Mark-to-Cash flow
    
    
    market
    
    
    Interest
    
    
    Total
    
    
    FTR
    
    
    Cash
    
    
    Net(In millions)
    
    FTRs
    
    
    hedges
    
    
    contracts (a)
    
    
    rate swaps
    
    
    derivatives
    
    
    obligation
    
    
    collateral
    
    
    derivativesDerivative assets:Current
    
    $
    524.6
    
    
    $
    18.7
    
    
    $
    36.4
    
    
    $
    
    
    
    $
    579.7
    
    
    $
    (483.9
    )
    
    $
    (5.5
    )
    
    $
    90.3Long-term
    
    
    
    
    
    
    7.5
    
    
    
    7.1
    
    
    
    
    
    
    
    14.6
    
    
    
    
    
    
    
    0.3
    
    
    
    14.9Derivative liabilities:Current
    
    
    
    
    
    
    (10.6
    )
    
    
    (3.4
    )
    
    
    (5.9
    )
    
    
    (19.9
    )
    
    
    
    
    
    
    8.4
    
    
    
    (11.5
    )Long-term
    
    
    
    
    
    
    (0.5
    )
    
    
    (0.7
    )
    
    
    (7.8
    )
    
    
    (9.0
    )
    
    
    
    
    
    
    0.5
    
    
    
    (8.5
    )Total derivatives
    
    $
    524.6
    
    
    $
    15.1
    
    
    $
    39.4
    
    
    $
    (13.7
    )
    
    $
    565.4
    
    
    $
    (483.9
    )
    
    $
    3.7
    
    
    $
    85.2
 
 (a)
    
    Includes economic gas hedges and unrealized changes in value
for power contracts previously not designated in cash flow hedge accounting relationships.   (In millions)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalDerivative assets
    
    $
    5.2
    
    
    $
    64.5
    
    
    $
    524.6
    
    
    $
    594.3Derivative liabilities
    
    
    (6.7
    )
    
    
    (22.2
    )
    
    
    
    
    
    
    (28.9
    )Net derivative assets (liabilities)
    
    $
    (1.5
    )
    
    $
    42.3
    
    
    $
    524.6
    
    
    $
    565.4
 30




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  (In millions)
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    TotalLevel 1
    
    $
    (0.1
    )
    
    $
    (2.4
    )
    
    $
    1.3
    
    
    $
    (0.3
    )
    
    $
    
    
    
    $
    (1.5
    )Level 2
    
    
    13.8
    
    
    
    37.3
    
    
    
    (6.6
    )
    
    
    (2.2
    )
    
    
    
    
    
    
    42.3Level 3
    
    
    182.4
    
    
    
    342.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    524.6Net derivative assets (liabilities)
    
    $
    196.1
    
    
    $
    377.1
    
    
    $
    (5.3
    )
    
    $
    (2.5
    )
    
    $
    
    
    
    $
    565.4
  Three Months Ended
    
    
    Nine Months Ended(In millions)
    
    September 30, 2008
    
    
    September 30, 2008Balance at July 1, 2008 and January 1, 2008, respectively
    
    $
    958.4
    
    
    $
    150.0Total realized and unrealized gains (losses):Included in earnings, in operating revenues
    
    
    (154.2
    )
    
    
    161.0Included in regulatory assets or liabilities
    
    
    (74.8
    )
    
    
    77.8Purchases, issuances and settlements
    
    
    (204.8
    )
    
    
    135.8Transfers in / out of Level 3
    
    
    
    
    
    
    Balance at September 30, 2008
    
    $
    524.6
    
    
    $
    524.6Amount of total gains (losses) included in earnings
attributable to the change in unrealized gains related to
Level 3 assets held at September 30, 2008
    
    $
    (63.2
    )
    
    $
    94.4
 
 NOTE 11: STOCK-BASED COMPENSATION
   31




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Stock options
    
    $
    2.1
    
    
    $
    1.9
    
    
    $
    6.9
    
    
    $
    5.3Performance shares
    
    
    1.1
    
    
    
    
    
    
    
    1.5
    
    
    
    Stock units
    
    
    
    
    
    
    0.5
    
    
    
    0.6
    
    
    
    2.0Other
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.8
    
    
    
    0.8Total stock-based compensation expense
    
    
    3.5
    
    
    
    2.5
    
    
    
    9.8
    
    
    
    8.1Income tax benefit
    
    
    1.4
    
    
    
    1.0
    
    
    
    3.9
    
    
    
    3.3Total stock-based compensation expense, net of tax
    
    $
    2.1
    
    
    $
    1.5
    
    
    $
    5.9
    
    
    $
    4.8
  Stock Options
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Annual risk-free interest rate
    
    
    3.58
    %
    
    
    4.58
    %
    
    
    3.18
    %
    
    
    4.66
    %Expected term of the option (in years)
    
    
    6.36
    
    
    
    5.63
    
    
    
    6.04
    
    
    
    5.62Expected annual dividend yield
    
    
    1.31
    %
    
    
    1.09
    %
    
    
    1.12
    %
    
    
    0.16
    %Expected stock price volatility
    
    
    27.0
    %
    
    
    26.2
    %
    
    
    27.3
    %
    
    
    24.7
    %Grant date fair value per stock option
    
    $
    13.50
    
    
    $
    15.83
    
    
    $
    15.27
    
    
    $
    17.18
 32




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Weighted-
    
    AggregateAverage
    
    IntrinsicNumber of
    
    Exercise
    
    Value (a)Stock Options
    
    Price
    
    (in millions)Outstanding at June 30, 2008
    
    
    2,511,867
    
    
    $
    25.38Granted
    
    
    69,127
    
    
    $
    45.82Exercised
    
    
    (339,322
    )
    
    $
    13.85Forfeited/expired
    
    
    (25,267
    )
    
    $
    47.89Outstanding at September 30, 2008
    
    
    2,216,405
    
    
    $
    27.53
    
    
    $
    31.0Exercisable at September 30, 2008
    
    
    996,838
    
    
    $
    18.54
    
    
    $
    18.9
 
 (a)
    
    Represents the total pre-tax intrinsic value based on stock options with an exercise
price less than AEs closing stock price of $36.77 on September 30, 2008.    Weighted-
    
    AggregateAverage
    
    IntrinsicNumber of
    
    Exercise
    
    Value (a)Stock Options
    
    Price
    
    (in millions)Outstanding at December 31, 2007
    
    
    3,191,409
    
    
    $
    16.10Granted
    
    
    620,473
    
    
    $
    52.69Exercised
    
    
    (1,558,452
    )
    
    $
    13.76Forfeited/expired
    
    
    (37,025
    )
    
    $
    44.05Outstanding at September 30, 2008
    
    
    2,216,405
    
    
    $
    27.53
    
    
    $
    31.0Exercisable at September 30, 2008
    
    
    996,838
    
    
    $
    18.54
    
    
    $
    18.9
 
 (a)
    
    Represents the total pre-tax intrinsic value based on stock options with an exercise
price less than AEs closing stock price of $36.77 on September 30, 2008.    33




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Stock Units
  Weighted-
    
    AggregateAverage
    
    IntrinsicNumber of
    
    Grant Date
    
    Value (a)Stock Units
    
    Fair Value
    
    (in millions)Outstanding at June 30, 2008
    
    
    40,336
    
    
    $
    15.47Units settled (3,500 common shares issued)
    
    
    (5,042
    )
    
    $
    15.02Dividend on unvested units
    
    
    149
    
    
    $
    35.50Outstanding at September 30, 2008
    
    
    35,443
    
    
    $
    15.62
    
    
    $
    1.3
 
 (a)
    
    Represents the total pre-tax intrinsic value based on stock units outstanding multiplied by
AEs closing stock price of $36.77 on September 30, 2008.  Weighted-
    
    AggregateAverage
    
    IntrinsicNumber of
    
    Grant Date
    
    Value (a)Stock Units
    
    Fair Value
    
    (in millions)Outstanding at December 31, 2007
    
    
    451,055
    
    
    $
    15.40Units settled (252,582 common shares issued)
    
    
    (417,260
    )
    
    $
    15.51Dividend on unvested units
    
    
    1,648
    
    
    $
    47.91Outstanding at September 30, 2008
    
    
    35,443
    
    
    $
    15.62
    
    
    $
    1.3
 
 (a)
    
    Represents the total pre-tax intrinsic value based on stock units outstanding multiplied by
AEs closing stock price of $36.77 on September 30, 2008.   Performance Share Awards
  34




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Non-Employee Director Stock Plan
  Number ofSharesShares earned but not issued at June 30, 2008
    
    
    58,757Granted
    
    
    7,344Issued
    
    
    (1,632
    )Dividends on earned but not issued shares
    
    
    245Shares earned but not issued at September 30, 2008
    
    
    64,714
  Number ofSharesShares earned but not issued at December 31, 2007
    
    
    65,177Granted
    
    
    18,081Issued
    
    
    (19,097
    )Dividends on earned but not issued shares
    
    
    553Shares earned but not issued at September 30, 2008
    
    
    64,714
 
 NOTE 12: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
    Pension BenefitsThree Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Components of net periodic cost:Service cost
    
    $
    5.3
    
    
    $
    5.3
    
    
    $
    15.9
    
    
    $
    16.1Interest cost
    
    
    17.1
    
    
    
    16.2
    
    
    
    51.4
    
    
    
    48.5Expected return on plan assets
    
    
    (19.2
    )
    
    
    (18.3
    )
    
    
    (57.6
    )
    
    
    (54.8
    )Amortization of unrecognized transition obligation
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.3Amortization of prior service cost
    
    
    0.8
    
    
    
    0.8
    
    
    
    2.4
    
    
    
    2.4Recognized actuarial loss
    
    
    1.8
    
    
    
    2.7
    
    
    
    5.4
    
    
    
    8.0Net periodic cost
    
    $
    5.9
    
    
    $
    6.8
    
    
    $
    17.8
    
    
    $
    20.5
 35




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Postretirement Benefits Other than PensionsThree Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Components of net periodic cost:Service cost
    
    $
    1.1
    
    
    $
    1.1
    
    
    $
    3.3
    
    
    $
    3.4Interest cost
    
    
    4.3
    
    
    
    4.3
    
    
    
    12.8
    
    
    
    12.7Expected return on plan assets
    
    
    (1.8
    )
    
    
    (1.7
    )
    
    
    (5.4
    )
    
    
    (5.0
    )Amortization of unrecognized transition obligation
    
    
    1.4
    
    
    
    1.4
    
    
    
    4.3
    
    
    
    4.2Recognized actuarial loss
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.5
    
    
    
    1.8Net periodic cost
    
    $
    5.2
    
    
    $
    5.7
    
    
    $
    15.5
    
    
    $
    17.1
    36




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 13: COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    89.0
    
    
    $
    115.0
    
    
    $
    379.2
    
    
    $
    301.8Cash flow hedges and
other, net of tax of
$51.0, $(1.6), $6.7
and $0.4, respectively
    
    
    80.5
    
    
    
    (2.5
    )
    
    
    10.6
    
    
    
    0.7Defined benefit
pension and other
benefit plan
amortization, net of
tax of $0.3, $0.6,
$0.9 and $1.7,
respectively
    
    
    0.4
    
    
    
    0.9
    
    
    
    1.0
    
    
    
    2.7West Virginia Rate
Order  establishment
of regulatory asset
related to pension
obligation, net of tax
of $35.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52.3Comprehensive income
    
    $
    169.9
    
    
    $
    113.4
    
    
    $
    390.8
    
    
    $
    357.5
  September 30,
    
    
    December 31,(In millions)
    
    2008
    
    
    2007Cash flow hedges and other, net of tax of $4.1 and $(2.7), respectively
    
    $
    6.3
    
    
    $
    (4.3
    )Net unrecognized pension and other benefit plan costs, net of tax of
$(23.6) and $(24.5), respectively
    
    
    (34.9
    )
    
    
    (35.9
    )Total
    
    $
    (28.6
    )
    
    $
    (40.2
    )
 37




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 14: INCOME PER COMMON SHARE
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions, except share and per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Basic Income per Common Share:Numerator:Net income
    
    $
    89.0
    
    
    $
    115.0
    
    
    $
    379.2
    
    
    $
    301.8Redemption of preferred stock (a)
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.1
    )Net income available for common shareholders
    
    $
    89.0
    
    
    $
    113.9
    
    
    $
    379.2
    
    
    $
    300.7Denominator:Weighted average common shares outstanding
    
    
    168,894,148
    
    
    
    166,101,169
    
    
    
    168,232,547
    
    
    
    165,798,727Basic income per common share
    
    $
    0.53
    
    
    $
    0.69
    
    
    $
    2.25
    
    
    $
    1.81Diluted Income per Common Share:Numerator:Net income
    
    $
    89.0
    
    
    $
    115.0
    
    
    $
    379.2
    
    
    $
    301.8Redemption of preferred stock (a)
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.1
    )Net income available for common shareholders
    
    $
    89.0
    
    
    $
    113.9
    
    
    $
    379.2
    
    
    $
    300.7Denominator:Weighted average common shares outstanding
    
    
    168,894,148
    
    
    
    166,101,169
    
    
    
    168,232,547
    
    
    
    165,798,727Effect of dilutive securities:Stock options (b)
    
    
    1,003,600
    
    
    
    2,770,502
    
    
    
    1,450,503
    
    
    
    2,758,665Stock units
    
    
    36,766
    
    
    
    493,652
    
    
    
    276,238
    
    
    
    728,057Non-employee stock awards
    
    
    58,887
    
    
    
    64,715
    
    
    
    55,084
    
    
    
    59,938Performance shares
    
    
    12,448
    
    
    
    25,497
    
    
    
    8,573
    
    
    
    25,497Total shares
    
    
    170,005,849
    
    
    
    169,455,535
    
    
    
    170,022,945
    
    
    
    169,370,884Diluted income per common share
    
    $
    0.52
    
    
    $
    0.67
    
    
    $
    2.23
    
    
    $
    1.78
 
 (a)
    
    On September 4, 2007, Monongahela redeemed its 4.40% Cumulative Preferred Stock, $100 par value, its 4.80%
Cumulative Preferred Stock, Series B, $100 par value, its 4.50% Cumulative Preferred Stock, Series C, $100 par value
and its $6.28 Cumulative Preferred Stock, Series D, $100 par value with an aggregate carrying value of $24.0 million.
In connection with the cash redemption, Monongahela paid accrued dividends at the redemption date plus a redemption
premium of approximately $1.1 million that was charged against other paid-in capital.(b)
    
    The dilutive share calculations exclude 637,846 shares and 35,696 shares for the three months ended September
30, 2008 and 2007, respectively, and 491,388 shares and 56,981 shares for the nine months ended September 30, 2008 and
2007, respectively, relating to stock options, because the inclusion of these amounts would have been antidilutive
under the treasury stock method. 38




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 15: OTHER INCOME (EXPENSE), NET
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Interest and dividend income
    
    $
    1.4
    
    
    $
    3.5
    
    
    $
    5.4
    
    
    $
    10.9Gain on equity investment
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    Tax reimbursement on contributions in aid of construction
    
    
    1.0
    
    
    
    1.7
    
    
    
    3.0
    
    
    
    4.5Gain on the sale or exchange of real estate
    
    
    
    
    
    
    8.9
    
    
    
    0.4
    
    
    
    8.9Cash received from a former trading executives forfeited assets
    
    
    
    
    
    
    
    
    
    
    1.6
    
    
    
    Equity component of AFUDC
    
    
    1.0
    
    
    
    0.7
    
    
    
    2.4
    
    
    
    1.9Premium services
    
    
    0.8
    
    
    
    (0.4
    )
    
    
    1.4
    
    
    
    0.7Other
    
    
    0.3
    
    
    
    0.4
    
    
    
    (0.2
    )
    
    
    0.7Total
    
    $
    4.5
    
    
    $
    14.8
    
    
    $
    15.3
    
    
    $
    27.6
 39




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 16:  GUARANTEES AND LETTERS OF CREDIT
  September 30, 2008
    
    
    December 31, 2007Amounts
    
    
    Total
    
    
    Amounts
    
    
    TotalRecorded on
    
    
    Guarantees
    
    
    Recorded on
    
    
    Guaranteesthe Consolidated
    
    
    and Letters
    
    
    the Consolidated
    
    
    and Letters(In millions)
    
    Balance Sheet
    
    
    of Credit
    
    
    Balance Sheet
    
    
    of CreditGuarantees:Purchase, sale, exchange or transportation of
wholesale natural gas, electric power and
related services
    
    $
    
    
    
    $
    62.0
    
    
    $
    
    
    
    $
    41.0Loans and other financing-related matters
    
    
    
    
    
    
    6.9
    
    
    
    
    
    
    
    10.2Lease agreement
    
    
    
    
    
    
    5.0
    
    
    
    
    
    
    
    4.9Other
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Total Guarantees
    
    $
    0.2
    
    
    $
    74.1
    
    
    $
    0.2
    
    
    $
    56.3Letters of Credit:Under AEs Revolving Facility (a)
    
    $
    
    
    
    $
    3.3
    
    
    $
    
    
    
    $
    6.7Other (b)
    
    
    
    
    
    
    3.0
    
    
    
    
    
    
    
    2.5Total Letters of Credit
    
    $
    
    
    
    $
    6.3
    
    
    $
    
    
    
    $
    9.2Total Guarantees and Letters of Credit
    
    $
    0.2
    
    
    $
    80.4
    
    
    $
    0.2
    
    
    $
    65.5
 
 (a)
    
    These amounts were comprised of a letter of credit issued in connection with a contractual obligation of
  Allegheny Ventures that will expire in July 2009.(b)
    
    These amounts were not issued under either AEs credit facility or AE Supplys credit facility. 40




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 NOTE 17: COMMITMENTS AND CONTINGENCIES
 Environmental Matters and Litigation
  Global Climate Change . 2.
 2 2 2 2
 2
 2
  
    
    maintaining an accurate CO2 emissions data base;
    
    improving the efficiency of its existing coal-burning generation fleet;
    
    following developing technologies for clean-coal energy and for CO2
emission controls at coal-fired power plants;
    
    following developing technologies for carbon sequestration;
 41




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
    
    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. 2
 2 x en banc
 2 2 2 2
  42




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 2
    2 2 2 2 2
 Clean Air Act Litigation .
  43




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ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
       Global Warming Class Action:
 44




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Claims Related to Alleged Asbestos Exposure: ., .
   Other Litigation
 Nevada Power Contracts .
 45




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##### Table of Contents



ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Claim by California Parties .
  Ordinary Course of Business .
 46




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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 FTRs;
 47




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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 PJMs participant rules and tariffs;
    
    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 interest rate trends;
    
    the effect of accounting pronouncements issued periodically by accounting
standard-setting bodies and accounting issues facing Allegheny;
    
    general economic and business conditions; and
    
    other risks, including the effects of global instability, terrorism and war.
  Overview
  48




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##### Table of Contents



Key Indicators and Performance Factors
 The Delivery and Services Segment
  Revenue per megawatt-hour (MWh) sold
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Revenue per MWh sold
    
    $
    60.09
    
    
    $
    59.56
    
    
    $
    60.60
    
    
    $
    59.80
 Operations and maintenance costs (O&M).
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007O&M per MWh sold
    
    $
    7.78
    
    
    $
    7.68
    
    
    $
    8.10
    
    
    $
    7.65
 Capital expenditures.
 Retail electricity sales.
 Three Months Ended September 30,
    
    
    
    
    
    Nine Months Ended September 30,Normal
    
    2008
    
    2007
    
    Change
    
    Normal
    
    2008
    
    2007
    
    ChangeDelivery and
Services:Retail
electricity
sales
(million
kWhs)
    
    
    N/A
    
    
    
    10,749
    
    
    
    11,164
    
    
    
    (3.7
    )%
    
    
    N/A
    
    
    
    33,023
    
    
    
    33,540
    
    
    
    (1.5
    )%HDD (a)
    
    
    95
    
    
    
    37
    
    
    
    60
    
    
    
    (38.3
    )%
    
    
    3,570
    
    
    
    3,292
    
    
    
    3,397
    
    
    
    (3.1
    )%CDD (a)
    
    
    585
    
    
    
    537
    
    
    
    686
    
    
    
    (21.7
    )%
    
    
    798
    
    
    
    767
    
    
    
    968
    
    
    
    (20.8
    )%
 
 (a)
    
    Heating degree-days (HDD) and cooling degree-days (CDD).The operations of the Distribution Companies are weather sensitive. Weather
conditions directly influence the volume of electricity delivered by the Distribution Companies, representing one of several factors that impact
the volume of electricity delivered. Accordingly, deviations in weather from normal levels can affect Alleghenys financial performance. Degree-day
data is used to estimate amounts of energy required to maintain comfortable indoor temperature levels based on each days average temperature. HDD
is the measure of the variation in the weather based on the extent to which the average daily temperature falls below 65° Fahrenheit, and CDD is
the measure of the variation in the weather based on the extent to which the average daily temperature rises above 65° Fahrenheit. Each degree of
temperature above 65° Fahrenheit is counted as one cooling degree-day, and each degree of temperature below 65° Fahrenheit is counted as one
heating degree-day. HDD and CDD are most likely to impact the usage of Alleghenys residential and commercial customers. Industrial customers are
less weather sensitive. 49




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##### Table of Contents



The Generation and Marketing Segment
  kWhs generated.
 Equivalent Availability Factor (EAF).
 Station operations and maintenance costs (Station O&M).
 kWhs generated and Station O&M.
 Three Months Ended
    
    
    
    
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    
    
    
    
    September 30, 20082008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    ChangeSupercritical Units:kWhs generated (in millions)
    
    
    10,115
    
    
    
    10,226
    
    
    
    (1.1
    )%
    
    
    29,303
    
    
    
    30,285
    
    
    
    (3.2
    )%EAF
    
    
    90.2
    %
    
    
    87.5
    %
    
    
    2.7
    %
    
    
    86.1
    %
    
    
    85.5
    %
    
    
    0.6
    %Station O&M (in millions):Base and operations
    
    $
    26.3
    
    
    $
    23.5
    
    
    
    11.9
    %
    
    $
    81.0
    
    
    $
    78.1
    
    
    
    3.7
    %Special maintenance
    
    
    8.4
    
    
    
    14.9
    
    
    
    (43.6
    )%
    
    
    43.6
    
    
    
    57.0
    
    
    
    (23.5
    )%Total Station O&M
    
    $
    34.7
    
    
    $
    38.4
    
    
    
    (9.6
    )%
    
    $
    124.6
    
    
    $
    135.1
    
    
    
    (7.8
    )%All Generation Units:kWhs generated (in millions)
    
    
    11,904
    
    
    
    12,640
    
    
    
    (5.8
    )%
    
    
    35,049
    
    
    
    37,491
    
    
    
    (6.5
    )%EAF
    
    
    90.7
    %
    
    
    86.5
    %
    
    
    4.2
    %
    
    
    86.5
    %
    
    
    85.9
    %
    
    
    0.6
    %Station O&M (in millions):Base and operations
    
    $
    40.2
    
    
    $
    36.7
    
    
    
    9.5
    %
    
    $
    123.8
    
    
    $
    120.1
    
    
    
    3.1
    %Special maintenance
    
    
    9.8
    
    
    
    16.5
    
    
    
    (40.6
    )%
    
    
    57.1
    
    
    
    65.8
    
    
    
    (13.2
    )%Total Station O&M
    
    $
    50.0
    
    
    $
    53.2
    
    
    
    (6.0
    )%
    
    $
    180.9
    
    
    $
    185.9
    
    
    
    (2.7
    )%
 50




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##### Table of Contents



RESULTS OF OPERATIONS
 Income Summary
 Three Months Ended
    
    
    Three Months EndedSeptember 30, 2008
    
    
    September 30, 2007Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    692.7
    
    
    $
    589.3
    
    
    $
    (432.4
    )
    
    $
    849.6
    
    
    $
    692.4
    
    
    $
    581.1
    
    
    $
    (426.9
    )
    
    $
    846.6Fuel
    
    
    
    
    
    
    299.2
    
    
    
    
    
    
    
    299.2
    
    
    
    
    
    
    
    245.5
    
    
    
    
    
    
    
    245.5Purchased power and
transmission
    
    
    512.9
    
    
    
    25.7
    
    
    
    (430.5
    )
    
    
    108.1
    
    
    
    493.0
    
    
    
    25.6
    
    
    
    (424.7
    )
    
    
    93.9Deferred energy costs, net
    
    
    1.5
    
    
    
    (20.2
    )
    
    
    
    
    
    
    (18.7
    )
    
    
    2.3
    
    
    
    1.3
    
    
    
    
    
    
    
    3.6Operations and maintenance
    
    
    83.6
    
    
    
    70.6
    
    
    
    (1.9
    )
    
    
    152.3
    
    
    
    85.7
    
    
    
    71.3
    
    
    
    (2.2
    )
    
    
    154.8Depreciation and amortization
    
    
    39.2
    
    
    
    28.2
    
    
    
    
    
    
    
    67.4
    
    
    
    40.4
    
    
    
    26.3
    
    
    
    
    
    
    
    66.7Taxes other than income taxes
    
    
    35.0
    
    
    
    19.4
    
    
    
    
    
    
    
    54.4
    
    
    
    33.9
    
    
    
    19.7
    
    
    
    
    
    
    
    53.6Total operating expenses
    
    
    672.2
    
    
    
    422.9
    
    
    
    (432.4
    )
    
    
    662.7
    
    
    
    655.3
    
    
    
    389.7
    
    
    
    (426.9
    )
    
    
    618.1Operating income
    
    
    20.5
    
    
    
    166.4
    
    
    
    
    
    
    
    186.9
    
    
    
    37.1
    
    
    
    191.4
    
    
    
    
    
    
    
    228.5Other income (expense), net
    
    
    3.1
    
    
    
    1.6
    
    
    
    (0.2
    )
    
    
    4.5
    
    
    
    3.0
    
    
    
    13.6
    
    
    
    (1.8
    )
    
    
    14.8Interest expense and
preferred dividends of
subsidiary
    
    
    24.8
    
    
    
    33.3
    
    
    
    (0.2
    )
    
    
    57.9
    
    
    
    18.2
    
    
    
    43.3
    
    
    
    (1.8
    )
    
    
    59.7Income (loss) before income
taxes and minority interest
    
    
    (1.2
    )
    
    
    134.7
    
    
    
    
    
    
    
    133.5
    
    
    
    21.9
    
    
    
    161.7
    
    
    
    
    
    
    
    183.6Income tax expense (benefit)
    
    
    (5.7
    )
    
    
    50.0
    
    
    
    
    
    
    
    44.3
    
    
    
    9.1
    
    
    
    58.1
    
    
    
    
    
    
    
    67.2Minority interest
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    1.4Net income
    
    $
    4.3
    
    
    $
    84.7
    
    
    $
    
    
    
    $
    89.0
    
    
    $
    12.8
    
    
    $
    102.2
    
    
    $
    
    
    
    $
    115.0
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2007Delivery
    
    
    Generation
    
    
    
    
    
    
    
    
    
    
    Delivery
    
    
    Generationand
    
    
    and
    
    
    
    
    
    
    
    
    
    
    and
    
    
    and(In millions)
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    Total
    
    
    Services
    
    
    Marketing
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    2,139.6
    
    
    $
    1,842.0
    
    
    $
    (1,303.5
    )
    
    $
    2,678.1
    
    
    $
    2,128.8
    
    
    $
    1,630.9
    
    
    $
    (1,239.0
    )
    
    $
    2,520.7Fuel
    
    
    
    
    
    
    794.2
    
    
    
    
    
    
    
    794.2
    
    
    
    
    
    
    
    709.1
    
    
    
    
    
    
    
    709.1Purchased power and
transmission
    
    
    1,522.5
    
    
    
    77.7
    
    
    
    (1,297.5
    )
    
    
    302.7
    
    
    
    1,447.9
    
    
    
    77.2
    
    
    
    (1,231.5
    )
    
    
    293.6Deferred energy costs, net
    
    
    7.8
    
    
    
    (35.9
    )
    
    
    
    
    
    
    (28.1
    )
    
    
    (0.5
    )
    
    
    (5.6
    )
    
    
    
    
    
    
    (6.1
    )Operations and maintenance
    
    
    267.4
    
    
    
    249.6
    
    
    
    (6.0
    )
    
    
    511.0
    
    
    
    256.6
    
    
    
    256.8
    
    
    
    (7.5
    )
    
    
    505.9Depreciation and amortization
    
    
    122.6
    
    
    
    83.9
    
    
    
    
    
    
    
    206.5
    
    
    
    121.7
    
    
    
    87.7
    
    
    
    
    
    
    
    209.4Taxes other than income taxes
    
    
    105.5
    
    
    
    54.2
    
    
    
    
    
    
    
    159.7
    
    
    
    99.5
    
    
    
    58.8
    
    
    
    
    
    
    
    158.3Total operating expenses
    
    
    2,025.8
    
    
    
    1,223.7
    
    
    
    (1,303.5
    )
    
    
    1,946.0
    
    
    
    1,925.2
    
    
    
    1,184.0
    
    
    
    (1,239.0
    )
    
    
    1,870.2Operating income
    
    
    113.8
    
    
    
    618.3
    
    
    
    
    
    
    
    732.1
    
    
    
    203.6
    
    
    
    446.9
    
    
    
    
    
    
    
    650.5Other income (expense), net
    
    
    10.1
    
    
    
    7.6
    
    
    
    (2.4
    )
    
    
    15.3
    
    
    
    10.4
    
    
    
    21.8
    
    
    
    (4.6
    )
    
    
    27.6Interest expense and
preferred dividends of
subsidiary
    
    
    70.7
    
    
    
    106.7
    
    
    
    (2.4
    )
    
    
    175.0
    
    
    
    55.4
    
    
    
    131.6
    
    
    
    (4.6
    )
    
    
    182.4Income before income taxes
and minority interest
    
    
    53.2
    
    
    
    519.2
    
    
    
    
    
    
    
    572.4
    
    
    
    158.6
    
    
    
    337.1
    
    
    
    
    
    
    
    495.7Income tax expense
    
    
    10.0
    
    
    
    182.5
    
    
    
    
    
    
    
    192.5
    
    
    
    66.9
    
    
    
    124.6
    
    
    
    
    
    
    
    191.5Minority interest
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    2.4Net income
    
    $
    42.5
    
    
    $
    336.7
    
    
    $
    
    
    
    $
    379.2
    
    
    $
    91.7
    
    
    $
    210.1
    
    
    $
    
    
    
    $
    301.8
 51




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CONSOLIDATED RESULTS
   (In millions)Income before income taxes and minority interest for the three
months ended September 30, 2007
    
    
    
    
    
    $
    183.6Increase in operating revenues
    
    
    
    
    
    
    3.0Decreases (increases) in operating expenses:Fuel
    
    
    (53.7
    )Purchased power and transmission
    
    
    (14.2
    )Deferred energy costs, net
    
    
    22.3Other operating expenses
    
    
    1.0Operating expenses
    
    
    
    
    
    
    (44.6
    )Decrease in other income (expense), net
    
    
    
    
    
    
    (10.3
    )Decrease in interest expense and preferred dividends of subsidiary
    
    
    
    
    
    
    1.8Income before income taxes and minority interest for the three
months ended September 30, 2008
    
    
    
    
    
    $
    133.5
 (In millions)Income before income taxes and minority interest for the nine
months ended September 30, 2007
    
    
    
    
    
    $
    495.7Increase in operating revenues
    
    
    
    
    
    
    157.4Decreases (increases) in operating expenses:Fuel
    
    
    (85.1
    )Purchased power and transmission
    
    
    (9.1
    )Deferred energy costs, net
    
    
    22.0Operations and maintenance
    
    
    (5.1
    )Other operating expenses
    
    
    1.5Operating expenses
    
    
    
    
    
    
    (75.8
    )Decrease in other income (expense), net
    
    
    
    
    
    
    (12.3
    )Decrease in interest expense and preferred dividends of subsidiary
    
    
    
    
    
    
    7.4Income before income taxes and minority interest for the nine
months ended September 30, 2008
    
    
    
    
    
    $
    572.4
 Operating Revenues
  
    
    an $81.1 million increase resulting primarily from increased unrealized gains on
economic power sale hedges that did not qualify for hedge accounting,
    
    a $21.5 million increase resulting from unrealized gains related to pipeline capacity
economic hedges that did not qualify for hedge accounting,
    
    a $15.8 million increase due to higher generation rates charged to Pennsylvania
customers,
    
    an $18.6 million increase, relating to higher market prices, including marketing,
hedging and trading activities,
 52




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##### Table of Contents




    
    an $11.0 million increase due to increased sales of power to third parties and
    
    a $6.2 million increase due to increased recoverable expenses and return on investment
that are related to transmission expansion.
  
    
    $106.6 million in unrealized losses relating to financial transmission rights (FTRs),
    
    a $19.4 million decrease due to a 5.8% decrease in total MWhs generated and
    
    an $18.1 million decrease due to the expiration of an earnings benefit related to
stranded cost recovery.
   
    
    a $94.4 million increase in unrealized gains relating to FTRs,
    
    a $70.8 million increase, relating to higher market prices, including marketing,
hedging and trading activities,
    
    a $48.1 million increase due to higher generation rates charged to Pennsylvania
customers,
    
    a $21.5 million increase due to increased recoverable expenses and return on investment
that are related to transmission expansion,
    
    an $18.0 million increase resulting primarily from increased unrealized gains on
economic power sale hedges that did not qualify for hedge accounting and
    
    an $8.4 million increase resulting from unrealized gains related to pipeline capacity
economic hedges that did not qualify for hedge accounting.
  
    
    a $92.6 million decrease due to a 6.5% decrease in total MWhs generated and
    
    a $26.1 million decrease due to the expiration of an earnings benefit related to
stranded cost recovery.
   Operating Expenses
  53




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##### Table of Contents



Other Income (Expense), net
  Interest Expense and Preferred Dividends of Subsidiary
  Income Tax Expense
  54




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##### Table of Contents



DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
 Delivery and Services Segment Results
  Three Months Ended September 30,
    
    
    
    
    
    Nine Months Ended September 30,Normal
    
    2008
    
    2007
    
    Change
    
    Normal
    
    2008
    
    2007
    
    ChangeDelivery and
Services:Retail electricity
sales (million
kWhs)
    
    
    N/A
    
    
    
    10,749
    
    
    
    11,164
    
    
    
    (3.7
    )%
    
    
    N/A
    
    
    
    33,023
    
    
    
    33,540
    
    
    
    (1.5
    )%HDD
    
    
    95
    
    
    
    37
    
    
    
    60
    
    
    
    (38.3
    )%
    
    
    3,570
    
    
    
    3,292
    
    
    
    3,397
    
    
    
    (3.1
    )%CDD
    
    
    585
    
    
    
    537
    
    
    
    686
    
    
    
    (21.7
    )%
    
    
    798
    
    
    
    767
    
    
    
    968
    
    
    
    (20.8
    )%
 Operating Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Retail electric:Generation
    
    $
    444.1
    
    
    $
    454.5
    
    
    $
    1,377.2
    
    
    $
    1,354.9Transmission
    
    
    39.5
    
    
    
    41.0
    
    
    
    122.2
    
    
    
    123.9Distribution
    
    
    162.3
    
    
    
    169.4
    
    
    
    501.9
    
    
    
    527.0Total retail electric
    
    
    645.9
    
    
    
    664.9
    
    
    
    2,001.3
    
    
    
    2,005.8Transmission services and bulk power
    
    
    37.0
    
    
    
    17.5
    
    
    
    107.1
    
    
    
    91.8Other affiliated and nonaffiliated energy services
    
    
    9.8
    
    
    
    10.0
    
    
    
    31.2
    
    
    
    31.2Total operating revenues
    
    $
    692.7
    
    
    $
    692.4
    
    
    $
    2,139.6
    
    
    $
    2,128.8
  
    
    a $10.4 million decrease in generation revenues due to an $18.1 million decrease
resulting from the expiration of an earnings benefit related to stranded cost recovery, as
well as milder weather and reduced customer consumption, partially offset by a $15.8 million
increase due to higher generation rates charged to Pennsylvania customers and
    
    an $8.6 million decrease in transmission and distribution (T&D) revenues due to milder
weather and reduced customer consumption.
  
    
    a $26.8 million decrease in T&D revenues,
    
    partially offset by a $22.3 million increase in generation revenues.
  55




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##### Table of Contents



Operating Expenses
 Purchased Power and Transmission:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Other purchased power and transmission
    
    $
    473.0
    
    
    $
    457.4
    
    
    $
    1,403.7
    
    
    $
    1,330.0From PURPA generation
    
    
    39.9
    
    
    
    35.6
    
    
    
    118.8
    
    
    
    117.9Purchased power and transmission
    
    $
    512.9
    
    
    $
    493.0
    
    
    $
    1,522.5
    
    
    $
    1,447.9
   56




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##### Table of Contents




    
    a $57.3 million increase due to a new power sales agreement in Virginia between AE Supply
and Potomac Edison at market-based rates (see Regulatory Matters and Risk Factors below
and Note 5, Rates and Regulation, for additional information regarding market-based rates
in Virginia) and
    
    a $48.1 million increase due to higher generation rates charged to Pennsylvania
customers, which is passed on to AE Supply under the terms of a power supply agreement
between West Penn and AE Supply,
    
    partially offset by a $21.7 million decrease due to the expiration in May 2007 of a fixed
price supply agreement to serve Monongahelas former Ohio service territory.
  Deferred Energy Costs, net:
 AES Warrior Run PURPA Generation.
 Market-based Generation Costs.
 57




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007AES Warrior Run PURPA generation
    
    $
    3.0
    
    
    $
    1.6
    
    
    $
    9.7
    
    
    $
    (1.1
    )Market-based generation and other costs
    
    
    (1.5
    )
    
    
    0.7
    
    
    
    (1.9
    )
    
    
    0.6Deferred energy costs, net
    
    $
    1.5
    
    
    $
    2.3
    
    
    $
    7.8
    
    
    $
    (0.5
    )
  Operations and Maintenance:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Operations and maintenance
    
    $
    83.6
    
    
    $
    85.7
    
    
    $
    267.4
    
    
    $
    256.6
   
    
    a $4.3 million increase in contract work due to service outages as a result of storm
activity and
    
    a $4.5 million increase in right-of-way vegetation expense resulting from increased
maintenance activities and storm activity.
 58




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##### Table of Contents



Depreciation and Amortization:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Depreciation and amortization
    
    $
    39.2
    
    
    $
    40.4
    
    
    $
    122.6
    
    
    $
    121.7
  Taxes Other Than Income Taxes
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Taxes other than income taxes
    
    $
    35.0
    
    
    $
    33.9
    
    
    $
    105.5
    
    
    $
    99.5
   Interest Expense and Preferred Dividends of Subsidiary
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Interest expense
    
    $
    24.8
    
    
    $
    18.1
    
    
    $
    70.7
    
    
    $
    55.0Preferred dividends of subsidiary
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.4Interest expense and preferred dividends of subsidiary
    
    $
    24.8
    
    
    $
    18.2
    
    
    $
    70.7
    
    
    $
    55.4
  59




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Income Tax Expense
     60




---



##### Table of Contents



Transmission Expansion
  Income Summary
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Operating revenues
    
    $
    8.0
    
    
    $
    1.6
    
    
    $
    26.5
    
    
    $
    4.7Operating income
    
    $
    4.7
    
    
    $
    1.0
    
    
    $
    16.5
    
    
    $
    1.2Income before income taxes and minority interest
    
    $
    4.7
    
    
    $
    1.3
    
    
    $
    15.2
    
    
    $
    2.2Net income
    
    $
    2.7
    
    
    $
    0.7
    
    
    $
    8.4
    
    
    $
    1.3
    61




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##### Table of Contents



The Generation and Marketing Segment
   Three Months Ended
    
    
    Three Months EndedSeptember 30, 2008
    
    
    September 30, 2007(In millions)
    
    Unregulated
    
    
    Regulated
    
    
    Eliminations
    
    
    Total
    
    
    Unregulated
    
    
    Regulated
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    468.2
    
    
    $
    133.1
    
    
    $
    (12.0
    )
    
    $
    589.3
    
    
    $
    447.9
    
    
    $
    144.7
    
    
    $
    (11.5
    )
    
    $
    581.1Fuel
    
    
    223.4
    
    
    
    75.8
    
    
    
    
    
    
    
    299.2
    
    
    
    174.8
    
    
    
    70.7
    
    
    
    
    
    
    
    245.5Purchased power and
transmission
    
    
    7.9
    
    
    
    29.8
    
    
    
    (12.0
    )
    
    
    25.7
    
    
    
    8.6
    
    
    
    28.5
    
    
    
    (11.5
    )
    
    
    25.6Deferred energy costs, net
    
    
    
    
    
    
    (20.2
    )
    
    
    
    
    
    
    (20.2
    )
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    1.3Operations and maintenance
    
    
    49.0
    
    
    
    21.5
    
    
    
    0.1
    
    
    
    70.6
    
    
    
    49.2
    
    
    
    22.0
    
    
    
    0.1
    
    
    
    71.3Depreciation and amortization
    
    
    23.7
    
    
    
    5.0
    
    
    
    (0.5
    )
    
    
    28.2
    
    
    
    22.2
    
    
    
    4.7
    
    
    
    (0.6
    )
    
    
    26.3Taxes other than income taxes
    
    
    12.8
    
    
    
    6.6
    
    
    
    
    
    
    
    19.4
    
    
    
    12.7
    
    
    
    7.0
    
    
    
    
    
    
    
    19.7Total operating expenses
    
    
    316.8
    
    
    
    118.5
    
    
    
    (12.4
    )
    
    
    422.9
    
    
    
    267.5
    
    
    
    134.2
    
    
    
    (12.0
    )
    
    
    389.7Operating income
    
    
    151.4
    
    
    
    14.6
    
    
    
    0.4
    
    
    
    166.4
    
    
    
    180.4
    
    
    
    10.5
    
    
    
    0.5
    
    
    
    191.4Other income (expense), net
    
    
    1.2
    
    
    
    3.4
    
    
    
    (3.0
    )
    
    
    1.6
    
    
    
    13.0
    
    
    
    3.6
    
    
    
    (3.0
    )
    
    
    13.6Interest expense and
preferred dividends
    
    
    23.8
    
    
    
    9.6
    
    
    
    (0.1
    )
    
    
    33.3
    
    
    
    33.2
    
    
    
    10.2
    
    
    
    (0.1
    )
    
    
    43.3Income (loss) before income
taxes and minority interest
    
    
    128.8
    
    
    
    8.4
    
    
    
    (2.5
    )
    
    
    134.7
    
    
    
    160.2
    
    
    
    3.9
    
    
    
    (2.4
    )
    
    
    161.7Income tax expense (benefit)
    
    
    47.6
    
    
    
    2.5
    
    
    
    (0.1
    )
    
    
    50.0
    
    
    
    56.9
    
    
    
    1.3
    
    
    
    (0.1
    )
    
    
    58.1Minority interest
    
    
    2.4
    
    
    
    
    
    
    
    (2.4
    )
    
    
    
    
    
    
    3.7
    
    
    
    
    
    
    
    (2.3
    )
    
    
    1.4Net income
    
    $
    78.8
    
    
    $
    5.9
    
    
    $
    
    
    
    $
    84.7
    
    
    $
    99.6
    
    
    $
    2.6
    
    
    $
    
    
    
    $
    102.2
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2007(In millions)
    
    Unregulated
    
    
    Regulated
    
    
    Eliminations
    
    
    Total
    
    
    Unregulated
    
    
    Regulated
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    1,460.3
    
    
    $
    416.1
    
    
    $
    (34.4
    )
    
    $
    1,842.0
    
    
    $
    1,261.0
    
    
    $
    403.2
    
    
    $
    (33.3
    )
    
    $
    1,630.9Fuel
    
    
    578.3
    
    
    
    215.9
    
    
    
    
    
    
    
    794.2
    
    
    
    515.4
    
    
    
    193.7
    
    
    
    
    
    
    
    709.1Purchased power and
transmission
    
    
    22.3
    
    
    
    89.8
    
    
    
    (34.4
    )
    
    
    77.7
    
    
    
    22.5
    
    
    
    87.9
    
    
    
    (33.2
    )
    
    
    77.2Deferred energy costs, net
    
    
    
    
    
    
    (35.9
    )
    
    
    
    
    
    
    (35.9
    )
    
    
    
    
    
    
    (5.6
    )
    
    
    
    
    
    
    (5.6
    )Operations and maintenance
    
    
    168.6
    
    
    
    80.6
    
    
    
    0.4
    
    
    
    249.6
    
    
    
    170.5
    
    
    
    86.1
    
    
    
    0.2
    
    
    
    256.8Depreciation and amortization
    
    
    70.8
    
    
    
    14.6
    
    
    
    (1.5
    )
    
    
    83.9
    
    
    
    67.2
    
    
    
    22.3
    
    
    
    (1.8
    )
    
    
    87.7Taxes other than income taxes
    
    
    35.1
    
    
    
    19.1
    
    
    
    
    
    
    
    54.2
    
    
    
    37.8
    
    
    
    21.0
    
    
    
    
    
    
    
    58.8Total operating expenses
    
    
    875.1
    
    
    
    384.1
    
    
    
    (35.5
    )
    
    
    1,223.7
    
    
    
    813.4
    
    
    
    405.4
    
    
    
    (34.8
    )
    
    
    1,184.0Operating income (loss)
    
    
    585.2
    
    
    
    32.0
    
    
    
    1.1
    
    
    
    618.3
    
    
    
    447.6
    
    
    
    (2.2
    )
    
    
    1.5
    
    
    
    446.9Other income (expense), net
    
    
    6.3
    
    
    
    10.2
    
    
    
    (8.9
    )
    
    
    7.6
    
    
    
    20.0
    
    
    
    11.1
    
    
    
    (9.3
    )
    
    
    21.8Interest expense and
preferred dividends
    
    
    78.0
    
    
    
    28.9
    
    
    
    (0.2
    )
    
    
    106.7
    
    
    
    108.4
    
    
    
    23.3
    
    
    
    (0.1
    )
    
    
    131.6Income (loss) before income
taxes and minority interest
    
    
    513.5
    
    
    
    13.3
    
    
    
    (7.6
    )
    
    
    519.2
    
    
    
    359.2
    
    
    
    (14.4
    )
    
    
    (7.7
    )
    
    
    337.1Income tax expense (benefit)
    
    
    179.7
    
    
    
    3.2
    
    
    
    (0.4
    )
    
    
    182.5
    
    
    
    131.5
    
    
    
    (6.6
    )
    
    
    (0.3
    )
    
    
    124.6Minority interest
    
    
    7.2
    
    
    
    
    
    
    
    (7.2
    )
    
    
    
    
    
    
    9.8
    
    
    
    
    
    
    
    (7.4
    )
    
    
    2.4Net income (loss)
    
    $
    326.6
    
    
    $
    10.1
    
    
    $
    
    
    
    $
    336.7
    
    
    $
    217.9
    
    
    $
    (7.8
    )
    
    $
    
    
    
    $
    210.1
 62




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##### Table of Contents



Generation and Marketing Segment Results
   Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    September 30,2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeGeneration (million kWhs)
    
    
    11,904
    
    
    
    12,640
    
    
    
    (5.8
    )%
    
    
    35,049
    
    
    
    37,491
    
    
    
    (6.5
    )%
  (In millions)Income before income taxes and minority interest for
the three months ended September 30, 2007
    
    
    
    
    
    $
    161.7Increase in operating revenues
    
    
    
    
    
    
    8.2Decreases (increases) in operating expenses:Fuel
    
    
    (53.7
    )Deferred energy costs, net
    
    
    21.5Other operating expenses
    
    
    (1.0
    )Operating expenses
    
    
    
    
    
    
    (33.2
    )Decrease in other income (expense), net
    
    
    
    
    
    
    (12.0
    )Decrease in interest expense
    
    
    
    
    
    
    10.0Income before income taxes and minority interest for
the three months ended September 30, 2008
    
    
    
    
    
    $
    134.7
 (In millions)Income before income taxes and minority interest for
the nine months ended September 30, 2007
    
    
    
    
    
    $
    337.1Increase in operating revenues
    
    
    
    
    
    
    211.1Decreases (increases) in operating expenses:Fuel
    
    
    (85.1
    )Deferred energy costs, net
    
    
    30.3Operations and maintenance
    
    
    7.2Depreciation and amortization
    
    
    3.8Taxes other than income taxes
    
    
    4.6Other operating expenses
    
    
    (0.5
    )Operating expenses
    
    
    
    
    
    
    (39.7
    )Decrease in other income (expense), net
    
    
    
    
    
    
    (14.2
    )Decrease in interest expense
    
    
    
    
    
    
    24.9Income before income taxes and minority interest for
the nine months ended September 30, 2008
    
    
    
    
    
    $
    519.2
 63




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##### Table of Contents



Operating Revenues
  
    
    an $81.1 million increase resulting primarily from increased unrealized gains on
economic power sale hedges that did not qualify for hedge accounting,
    
    a $21.5 million increase resulting from unrealized gains related to pipeline capacity
economic hedges that did not qualify for hedge accounting,
    
    a $26.6 million increase relating to higher market prices, including marketing, hedging
and trading activities and
    
    a $15.8 million increase in revenues 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.
  
    
    $106.6 million in unrealized losses relating to FTRs and
    
    a $19.4 million decrease due to a 5.8% decrease in total MWhs generated.
   
    
    a $94.4 million increase in unrealized gains relating to FTRs,
    
    a $91.4 million increase, relating to higher market prices, including marketing,
hedging and trading activities,
    
    a $57.3 million increase in revenues from affiliates due to a new power sales agreement
in Virginia between AE Supply and Potomac Edison at market-based rates, effective July 1,
2007,
    
    a $48.1 million increase, primarily 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,
    
    an $18.0 million increase resulting primarily from increased unrealized gains on
economic power sale hedges that did not qualify for hedge accounting and
    
    an $8.4 million increase resulting from unrealized gains related to pipeline capacity
economic hedges that did not qualify for hedge accounting.
  64




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##### Table of Contents



Operating Expenses
       Other Income (Expense), net
  Interest Expense and Preferred Dividends
   65




---



##### Table of Contents



Income Tax Expense
     66




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##### Table of Contents



Generation and Marketing Segment  Unregulated Results
  Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    September 30,2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangekWhs generated (in millions)
    
    
    8,834
    
    
    
    9,154
    
    
    
    (3.5
    )%
    
    
    25,683
    
    
    
    27,561
    
    
    
    (6.8
    )%
 Operating Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue from affiliates
    
    $
    312.6
    
    
    $
    300.1
    
    
    $
    930.7
    
    
    $
    855.6PJM revenue, net
    
    
    184.2
    
    
    
    133.4
    
    
    
    442.4
    
    
    
    383.6Other operating
revenues, including risk
management and trading
activities, net
    
    
    (28.6
    )
    
    
    14.4
    
    
    
    87.2
    
    
    
    21.8Unregulated revenue
    
    $
    468.2
    
    
    $
    447.9
    
    
    $
    1,460.3
    
    
    $
    1,261.0
 Revenue from affiliates
   
    
    a $10.8 million increase due to an increase in market rates under a power sales agreement
in Virginia between AE Supply and Potomac Edison and
    
    a $15.8 million increase resulting 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,
    
    partially offset by an $8.1 million decrease related to lower sales volumes for certain
of Potomac Edisons customers in Maryland.
  
    
    a $57.3 million increase due to a new power sales agreement in Virginia between AE Supply
and Potomac Edison at market-based rates, effective July 1, 2007 and
    
    a $48.1 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 a $23.4 million decrease related to lower sales volumes for certain
of Potomac Edisons customers in Maryland.
 67




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##### Table of Contents



PJM revenue, net:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Generation sold into PJM
    
    $
    614.1
    
    
    $
    446.5
    
    
    $
    1,653.4
    
    
    $
    1,346.0Power purchased from PJM
    
    
    (429.9
    )
    
    
    (313.1
    )
    
    
    (1,211.0
    )
    
    
    (962.4
    )PJM revenue, net
    
    $
    184.2
    
    
    $
    133.4
    
    
    $
    442.4
    
    
    $
    383.6
  Other Operating Revenues:
   Operating Expenses
 Fuel:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Unregulated fuel
    
    $
    223.4
    
    
    $
    174.8
    
    
    $
    578.3
    
    
    $
    515.4
   68




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##### Table of Contents



Operations and Maintenance:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Unregulated operations and maintenance
    
    $
    49.0
    
    
    $
    49.2
    
    
    $
    168.6
    
    
    $
    170.5
  Depreciation and Amortization:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Unregulated depreciation and amortization
    
    $
    23.7
    
    
    $
    22.2
    
    
    $
    70.8
    
    
    $
    67.2
  Taxes Other than Income Taxes:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Unregulated taxes other than income taxes
    
    $
    12.8
    
    
    $
    12.7
    
    
    $
    35.1
    
    
    $
    37.8
  69




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##### Table of Contents



Other Income (Expense), net
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Unregulated other income (expense), net
    
    $
    1.2
    
    
    $
    13.0
    
    
    $
    6.3
    
    
    $
    20.0
  Interest Expense
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Unregulated interest expense
    
    $
    23.8
    
    
    $
    33.2
    
    
    $
    78.0
    
    
    $
    108.4
  70




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##### Table of Contents



Generation and Marketing Segment  Regulated Results
  Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    September 30,2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangekWhs generated (in millions)
    
    
    3,071
    
    
    
    3,485
    
    
    
    (11.9
    )%
    
    
    9,366
    
    
    
    9,930
    
    
    
    (5.7
    )%
 Operating Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue from affiliates
    
    $
    129.9
    
    
    $
    136.1
    
    
    $
    401.1
    
    
    $
    409.1PJM revenue, net
    
    
    (3.0
    )
    
    
    2.5
    
    
    
    (5.4
    )
    
    
    (17.4
    )Fort Martin Scrubber surcharge
    
    
    6.1
    
    
    
    6.1
    
    
    
    18.1
    
    
    
    11.5Other operating revenues
    
    
    0.1
    
    
    
    
    
    
    
    2.3
    
    
    
    Regulated revenue
    
    $
    133.1
    
    
    $
    144.7
    
    
    $
    416.1
    
    
    $
    403.2
 Revenue from affiliates
    71




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##### Table of Contents



PJM revenue, net:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Generation sold into PJM
    
    $
    229.7
    
    
    $
    176.9
    
    
    $
    654.9
    
    
    $
    516.1Power purchased from PJM
    
    
    (232.7
    )
    
    
    (174.4
    )
    
    
    (660.3
    )
    
    
    (533.5
    )PJM revenue, net
    
    $
    (3.0
    )
    
    $
    2.5
    
    
    $
    (5.4
    )
    
    $
    (17.4
    )
   Fort Martin Scrubber surcharge:
  Other Operating Revenues:
  Operating Expenses
 Fuel:
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Regulated fuel
    
    $
    75.8
    
    
    $
    70.7
    
    
    $
    215.9
    
    
    $
    193.7
  72




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##### Table of Contents



Purchased Power and Transmission:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Regulated purchased power and transmission
    
    $
    29.8
    
    
    $
    28.5
    
    
    $
    89.8
    
    
    $
    87.9
  Deferred Energy Costs, Net:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Regulated deferred energy costs, net
    
    $
    (20.2
    )
    
    $
    1.3
    
    
    $
    (35.9
    )
    
    $
    (5.6
    )
  73




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Operations and Maintenance:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Regulated operations and maintenance
    
    $
    21.5
    
    
    $
    22.0
    
    
    $
    80.6
    
    
    $
    86.1
  Depreciation and Amortization:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Regulated depreciation and amortization
    
    $
    5.0
    
    
    $
    4.7
    
    
    $
    14.6
    
    
    $
    22.3
  Taxes Other than Income Taxes:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Regulated taxes other than income taxes
    
    $
    6.6
    
    
    $
    7.0
    
    
    $
    19.1
    
    
    $
    21.0
  Interest Expense and Preferred Dividends
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2008
    
    2007
    
    2008
    
    2007Regulated interest expense and preferred dividends
    
    $
    9.6
    
    
    $
    10.2
    
    
    $
    28.9
    
    
    $
    23.3
  74




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##### Table of Contents



Liquidity and Capital Requirements
      Letters ofTotal
    
    
    
    
    
    
    Credit
    
    
    Available(In millions)
    
    Capacity
    
    
    Borrowed
    
    
    Issued
    
    
    CapacityAE Revolving Credit Facility
    
    $
    400.0
    
    
    $
    
    
    
    $
    3.3
    
    
    $
    396.7AE Supply Revolving Facility
    
    
    400.0
    
    
    
    90.0
    
    
    
    
    
    
    
    310.0Total
    
    $
    800.0
    
    
    $
    90.0
    
    
    $
    3.3
    
    
    $
    706.7
    75




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##### Table of Contents



September 30, 2008
    
    
    December 31, 2007(In millions)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Long-term debt
    
    $
    3,973.6
    
    
    
    58.0
    
    
    $
    4,039.3
    
    
    
    61.4Stockholders equity
    
    
    2,874.0
    
    
    
    42.0
    
    
    
    2,535.4
    
    
    
    38.6Total
    
    $
    6,847.6
    
    
    
    100.0
    
    
    $
    6,574.7
    
    
    
    100.0
 2008 Debt Activity
  (In millions)
    
    Issuances
    
    
    RepaymentsAE Supply:AE Supply Credit Facility:Term Loan
    
    $
    
    
    
    $
    125.0Revolving Loan
    
    
    250.0
    
    
    
    160.0TrAIL Company:Short-Term Promissory Note
    
    
    
    
    
    
    10.0TrAIL Company Credit Facility:Term Loan
    
    
    45.0
    
    
    
    Revolving Loan
    
    
    20.0
    
    
    
    20.0West Penn:Transition Bonds
    
    
    2.8
    
    
    
    59.8Monongahela:Environmental Control Bonds
    
    
    
    
    
    
    14.9Potomac Edison:Environmental Control Bonds
    
    
    
    
    
    
    4.9Consolidated Total
    
    $
    317.8
    
    
    $
    394.6
   76




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##### Table of Contents



Dividends
  Capital Expenditures
   Other Matters Concerning Liquidity and Capital Requirements
  Payments
    
    Paymentsfrom
    
    fromJanuary 1,
    
    January 1,
    
    Payments fromPayments by
    
    2009 to
    
    2011 to
    
    January 1,December 31,
    
    December 31,
    
    December 31,
    
    2013 and(In millions)
    
    2008
    
    2010
    
    2012
    
    beyond
    
    TotalFuel purchase and transportation commitments
    
    $
    240.1
    
    
    $
    1,326.1
    
    
    $
    1,314.4
    
    
    $
    3,685.4
    
    
    $
    6,566.0
 Coal Agreement
  77




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Off-Balance Sheet Arrangements
  Cash Flows
 Operating Activities
  Nine Months EndedSeptember 30,(In millions)
    
    2008
    
    
    2007Net income
    
    $
    379.2
    
    
    $
    301.8Non-cash items included in income
    
    
    303.9
    
    
    
    441.1Pension and other postretirement employee benefit plan contributions
    
    
    (45.4
    )
    
    
    (46.5
    )Changes in certain assets and liabilities
    
    
    (48.6
    )
    
    
    25.8Net cash provided by operating activities
    
    $
    589.1
    
    
    $
    722.2
   78




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##### Table of Contents



Investing Activities
  Nine Months EndedSeptember 30,(In millions)
    
    2008
    
    
    2007Capital expenditures
    
    $
    (714.3
    )
    
    $
    (590.3
    )Proceeds from asset sales
    
    
    0.4
    
    
    
    1.8Purchase of Merrill Lynch interest in subsidiary
    
    
    (50.0
    )
    
    
    Decrease (increase) in restricted funds
    
    
    177.6
    
    
    
    (388.5
    )Other investments
    
    
    (4.1
    )
    
    
    (4.0
    )Net cash used in investing activities
    
    $
    (590.4
    )
    
    $
    (981.0
    )
   Financing Activities
  Nine Months EndedSeptember 30,(In millions)
    
    2008
    
    
    2007Issuance of long-term debt
    
    $
    305.6
    
    
    $
    450.6Repayment of long-term debt
    
    
    (384.6
    )
    
    
    (92.0
    )Repayment of note payable
    
    
    (10.0
    )
    
    
    Redemption of preferred stock of subsidiary
    
    
    
    
    
    
    (25.1
    )Equity contribution to PATH, LLC by AEP
    
    
    4.5
    
    
    
    Payments on capital lease obligations
    
    
    (6.7
    )
    
    
    (6.0
    )Proceeds from exercise of employee stock options
    
    
    21.4
    
    
    
    10.3Cash dividends paid on common stock
    
    
    (75.7
    )
    
    
    Net cash provided by (used in) financing activities
    
    $
    (145.5
    )
    
    $
    337.8
  79




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80




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##### Table of Contents



CREDIT RATINGS
 
  
 Moodys
    
    
    S & P
    
    
    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
    
    Ba1
    
    BBB-
    
    BBB-Monongahela:Outlook
    
    Stable
    
    Stable
    
    StableFirst Mortgage Bonds
    
    Baa2
    
    BBB+
    
    BBB+Senior Unsecured Debt
    
    Baa3
    
    BB+
    
    BBB-Environmental Control Bonds
    
    Aaa
    
    AAA
    
    AAAPotomac Edison:Outlook
    
    Negative
    
    Stable
    
    NegativeFirst Mortgage Bonds
    
    Baa2
    
    BBB+
    
    BBBEnvironmental Control Bonds
    
    Aaa
    
    AAA
    
    AAAWest Penn:Outlook
    
    Stable
    
    Stable
    
    StableTransition Bonds
    
    Aaa
    
    AAA
    
    AAAFirst Mortgage Bonds
    
    Baa2
    
    BBB+
    
    BBB+Senior Unsecured Debt
    
    Baa3
    
    BBB-
    
    BBB-AGC:Outlook
    
    Stable
    
    Stable
    
    StableSenior Unsecured Debt
    
    Baa3
    
    BBB-
    
    BBB-
 
 (a)
    
    Issuer Default Rating 81




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##### Table of Contents



OTHER MATTERS
 Critical Accounting Policies
  Recent Accounting Pronouncements
  REGULATORY MATTERS
  Federal Regulation and Rate Matters
 Transmission Rate Design
    82




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##### Table of Contents



Wholesale Markets
  83




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##### Table of Contents



Transmission Expansion
 TrAIL Project.
   PATH Project.
  84




---



##### Table of Contents




    
    a return on equity of 14.3 percent;
    
    inclusion of 100 percent of construction work in progress in rate base;
    
    recovery of start-up business and administrative costs prudently incurred prior
to the time the rates go into effect; and
    
    recovery of prudently incurred development and construction costs if PATH is
abandoned as a result of factors beyond the control of PATH, LLC or its parent
companies.
  National Interest Electric Transmission Corridor.
  85




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##### Table of Contents



State Rate Regulation
 Pennsylvania
 Default Service Regulations.
    
    
    directs the Pennsylvania PUC to adopt an energy conservation and efficiency program
to require EDCs to submit and implement plans to reduce energy demand and consumption;
    
    requires EDCs to file a plan for smart meter procurement and installation; and
    
    requires EDCs to obtain energy through a prudent mix of contracts, with an emphasis
on competitive procurement.
  Transmission Expansion.
 86




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##### Table of Contents



West Virginia
 Transmission Expansion.
 
    
    Monongahela, Potomac Edison and TrAIL Company will locate 100 to 150
managerial, professional, technical and administrative jobs in north-central West
Virginia no later than the in-service date of the West Virginia segment of TrAIL, which
will involve construction of a new facility in the state with an estimated cost of
approximately $50 million;
    
    Monongahela and Potomac Edison will not seek recovery in West Virginia of
transmission charges associated with TrAIL for the period from January 2007 through the
latest of December 31, 2013, the date which is two and one-half years following the
in-service date of TrAILs West Virginia segment or the month in which Alleghenys new
West Virginia facility is placed in service;
    
    TrAIL Company will contribute $5 million to fund energy conservation programs
and assistance plans for low-income customers in West Virginia over a five year period;
    
    Monongahela and Potomac Edison will provide rate relief in the form of credits
totaling approximately $5.7 million in the aggregate to industrial customers in West
Virginia in 2010 and 2011;
    
    The West Virginia segment of TrAIL should follow the route set forth in TrAIL
Companys application to the West Virginia PSC, except for certain modifications south
of Morgantown, West Virginia, which will more closely follow existing transmission
corridors;
    
    The Consumer Advocate, the Staff of the West Virginia PSC and the WVEUG will
support the need for the portion of TrAIL that is proposed to run from the 502 Junction
Substation through West Virginia to northern Virginia; and
    
    Landowners on the right-of-way will be provided with transmission credits that
can be used for up to 12,000 kWh of power per year.
 87




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##### Table of Contents



Rate Case.
 Annual Adjustment of Fuel and Purchased Power Cost Rates.
 Maryland
 Standard Offer Service.
 88




---



##### Table of Contents



Advanced Metering and Demand Side Management Initiatives.
   89




---



##### Table of Contents



Virginia
 Transmission Expansion.
 Purchased Power Cost Recovery.
      90




---



##### Table of Contents




    
    granted a rate adjustment effective immediately that would permit Potomac
Edison to collect an additional $9.5 million (pre-tax) on an annualized basis through
June 30, 2008, a substantially lower amount than the $42.3 million requested;
    
    directed Potomac Edison to implement deferred accounting effective immediately
with respect to the over- or under-recovery of the increased purchased power costs
approved in the order; and
    
    directed Potomac Edison to file an application with the Virginia SCC on or
before July 1, 2008, for proposed recovery of purchased power costs for the 12-month
period beginning July 1, 2008, including treatment of any over- or under-recovery
incurred for service rendered prior to July 1, 2008 and whether and how its proposed
recovery of purchased power costs for service rendered on and after January 1, 2009
would be consistent with the MOU and certain amendments to the Restructuring Act.
      91




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92




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       93




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ITEM 4. CONTROLS AND PROCEDURES
  Disclosure Controls and Procedures.
    Changes in Internal Control over Financial Reporting.
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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 United Coals .
  
 ITEM 1A. RISK FACTORS
  Alleghenys costs to comply with environmental laws are significant. New environmental laws and
regulations, or new interpretations of existing laws and regulations, could impose more stringent
limitations on Alleghenys generation operations or require it to incur significant additional
costs. The cost of compliance with present and future environmental laws could have an adverse
effect on Alleghenys business.
  Potential Climate Change Legislation. 2 2 2 2 2
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2
 2
 Clean Air Act Compliance.
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Other Environmental Compliance Matters.
 Shifting state and federal regulatory policies impose risks on Alleghenys operations. Delays,
discontinuations or reversals of electricity market restructurings in the markets in which
Allegheny operates could have an adverse effect on its business.
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State rate regulation may delay or deny full recovery of costs and impose risks on Alleghenys
operations. Any denial of, or delay in, cost recovery could have an adverse effect on Alleghenys
business.
  Virginia
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
    
    granted a rate adjustment effective immediately that would permit Potomac
Edison to collect an additional $9.5 million (pre-tax) on an annualized basis through
June 30, 2008, a substantially lower amount than the $42.3 million requested;
    
    directed Potomac Edison to implement deferred accounting effective immediately
with respect to the over- or under-recovery of the increased purchased power costs
approved in the order; and
    
    directed Potomac Edison to file an application with the Virginia SCC on or
before July 1, 2008, for proposed recovery of purchased power costs for the 12-month
period beginning July 1, 2008, including for treatment of any over- or under-recovery
incurred for service rendered prior to July 1, 2008 and whether and how its proposed
recovery of purchased power costs for service rendered on and after January 1, 2009
would be consistent with the MOU and certain amendments to the Restructuring Act.
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West Virginia
    The TrAIL project and the PATH project are subject to permitting and state regulatory approvals,
and the failure to obtain any of these permits or approvals could have an adverse effect on
Alleghenys business.
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The supply and price of fuel may impact Alleghenys financial results.
  Allegheny is currently involved in capital intensive projects that may involve various
implementation and financial risks.
   Adverse investment returns and other factors may increase Alleghenys pension liability and pension
funding requirements.
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Allegheny is dependent on its ability to successfully access capital markets. Any inability to
access capital may adversely affect Alleghenys business.
  
    
    a recession or an economic slowdown;
    
    the bankruptcy of one or more energy companies or highly-leveraged companies;
    
    significant increases in the prices for oil or other fuel;
    
    a terrorist attack or threatened attacks;
    
    a significant transmission failure; or
    
    changes in technology.
    Changes in prevailing market conditions or in Alleghenys access to commodities markets may make it
difficult for Allegheny to hedge its physical power supply commitments and resource requirements.
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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
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EXHIBIT INDEX
 Documents3.1
    
    Allegheny Energy, Inc. Articles of Restatement

10.1
    
    Amended and Restated Credit Agreement, dated as of August 15, 2008, among
Trans-Allegheny Interstate Line Company and the Lenders party thereto.10.2
    
    Equity Commitment Agreement, dated as of August 15, 2007, between
Allegheny Energy, Inc. and Union Bank of California, N.A., as Collateral
Agent10.3
    
    Pledge Agreement, dated as of August 15, 2008, between Allegheny Energy
Transmission, LLC and Union Bank of California, N.A., as Collateral Agent31.1
    
    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: November 5, 2008
    By:
    /s/ Kirk R. OliverKirk R. OliverSenior Vice President and Chief Financial Officer 106