_________________

# UNITED STATES SECURITIES AND
EXCHANGE COMMISSION WASHINGTON, D.C. 20549

_________________

FORM 10-Q

_________________

# QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (d)OF THE SECURITIES
EXCHANGE ACT OF 1934

# For the quarterly period
ended June 30, 2004

|Commission
File Number | Name of Registrant
State of Incorporation
Address of Principal Executive
Offices and Telephone Number                                                                    | IRS Employer
Identification Number
|---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------
|1-267                  | ALLEGHENY ENERGY, INC.           
(A Maryland Corporation)
800 Cabin Hill Drive
Greensburg, Pennsylvania 15601
Telephone (724) 837-3000                                  | 13-5531602                        
|333-72498              | ALLEGHENY ENERGY SUPPLY COMPANY, LLC            
(A Delaware Limited Liability Company) 4350 Northern Pike
Monroeville, Pennsylvania 15146-2841 Telephone (412) 858-1600 | 23-3020481                        
|1-5164                 | MONONGAHELA POWER COMPANY      
(An Ohio Corporation)
1310 Fairmont Avenue
Fairmont, West Virginia 26554
Telephone (304) 366-3000                                        | 13-5229392                        
|1-3376-2               | THE POTOMAC EDISON COMPANY             
(A Maryland and Virginia Corporation)
800 Cabin Hill Drive
Greensburg, Pennsylvania 15601
Telephone (724) 837-3000               | 13-5323955                        
|1-255-2                | WEST PENN POWER COMPANY          
(A Pennsylvania Corporation)
800 Cabin Hill Drive
Greensburg, Pennsylvania 15601
Telephone (724) 837-3000                              | 13-5480882                        
|0-14688                | ALLEGHENY GENERATING COMPANY    
(A Virginia Corporation)
800 Cabin Hill Drive
Greensburg, Pennsylvania 15601
Telephone (724) 837-3000                                   | 13-3079675                        



---

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

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

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

|                                                                                                                                                                                                                      |                              |   |                        |             
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | - | ---------------------- | ------------
|Allegheny Energy, Inc.              
Allegheny Energy Supply Company, LLC
Monongahela Power Company           
The Potomac Edison Company          
West Penn Power Company             
Allegheny Generating Company | Yes
 Yes
 Yes
 Yes
 Yes
 Yes | X | No 
No 
No 
No 
No 
No | X 
X 
X 
X
X

Number
of shares outstanding of each class of common stock as of July 30, 2004:

---

|                                     |             |                    
|------------------------------------ | ----------- | -------------------
|Allegheny Energy, Inc.               | 127,112,883 | ( $1.25 par value) 
|Allegheny Energy Supply Company, LLC | (a)         |                    
|Monongahela Power Company            | 5,891,000   | ($50.00 par value) 
|The Potomac Edison Company           | 22,385,000  | ( $0.01 par value) 
|West Penn Power Company              | 24,361,586  | (    no par value) 
|Allegheny Generating Company         | 1,000       | (  $1.00 par value)

---

(a)    
          The registrant is a limited liability company, the interests in which are not
          represented by shares.

2



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# TABLE OF CONTENTS

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Page                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------
|PART I.      FINANCIAL INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                   
|Item 1.      Financial Statements (Unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                   
|Allegheny Energy, Inc.:                                            
Consolidated Statements of Operations for the Three and Six Months 
  Ended June 30, 2004 and 2003 ................................................................................................   
Consolidated Statements of Cash Flows for the Six Months 
  Ended June 30, 2004 and 2003 ................................................................................................                                        
Consolidated Balance Sheets as of June 30, 2004 and                
  December 31, 2003 ..................................................................................................................                                      | 7
       
      8
       
   9-10 
|Allegheny Energy Supply Company, LLC:                              
Consolidated Statements of Operations for the Three and Six Months 
  Ended June 30, 2004 and 2003 ................................................................................................                                        
Consolidated Statements of Cash Flows for the Six Months 
  Ended June 30, 2004 and 2003 ................................................................................................                                        
Consolidated Balance Sheets as of June 30, 2004 and                
  December 31, 2003 .................................................................................................................. | 11
      
    12
      
 13-14    
|Monongahela Power Company:                                         
Consolidated Statements of Operations for the Three and Six Months 
  Ended June 30, 2004 and 2003 ................................................................................................                                        
Consolidated Statements of Cash Flows for the Six Months 
  Ended June 30, 2004 and 2003 ................................................................................................                                        
Consolidated Balance Sheets as of June 30, 2004 and                
  December 31, 2003 .................................................................................................................. | 15
      
    16
      
 17-18    
|The Potomac Edison Company:                                       
Consolidated Statements of Operations for the Three and Six Months
  Ended June 30, 2004 and 2003 ................................................................................................                                        
Consolidated Statements of Cash Flows for the Six Months
  Ended June 30, 2004 and 2003 ................................................................................................                                        
Consolidated Balance Sheets as of June 30, 2004 and               
  December 31, 2003 ..................................................................................................................     | 19
       
     20
       
  21-22
|West Penn Power Company:                                           
Consolidated Statements of Operations for the Three and Six Months 
  Ended June 30, 2004 and 2003 ................................................................................................                                        
Consolidated Statements of Cash Flows for the Six Months 
  Ended June 30, 2004 and 2003 ................................................................................................                                        
Consolidated Balance Sheets as of June 30, 2004 and                
  December 31, 2003 .................................................................................................................. | 23
      
    24
      
 25-26    
|Allegheny Generating Company:                               
Statements of Operations for the Three and Six Months Ended 
  June 30, 2004 and 2003 ..........................................................................................................                                        
Statements of Cash Flows for the Six Months Ended 
  June 30, 2004 and 2003 ..........................................................................................................                                        
Balance Sheets as of June 30, 2004 and December 31, 2003 ...................................................                                                                                                            | 27
     
   28
 29-30             
|Combined Notes to Financial Statements ............................................................................                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 31-53                             
|Item 2.      Management's Discussion and Analysis of Financial Condition and Results of
                  Operations     (MD&A) ...........................................................................................                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 53-89                             
|Item 3.      Quantitative and Qualitative Disclosures About Market Risk  ...........................                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 90                                
|Item 4.      Controls and Procedures ......................................................................................                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 90                                
|PART II.      OTHER INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                   
|Item 1.      Legal Proceedings .................................................................................................                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 92                                
|Item 2.      Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
                  Securities ................................................................................................................                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 9286                              
|Item 3.      Defaults Upon Senior Securities ............................................................................                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 92                                
|Item 4.      Submission of Matters to Vote of Security Holders  ............................................                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 92                                
|Item 5.      Other Information ..................................................................................................                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 93                                
|Item 6.      Exhibits and Reports on Form 8-K .......................................................................                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 94                                
|Signatures ................................................................................................................................                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 100                               

4



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# GLOSSARY

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

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

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

|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2003 Annual Report on Form 10-K | Annual Report on the combined Form 10-K of Allegheny Energy, Inc.,
Allegheny Energy Supply Company, LLC, Monongahela Power Company, The Potomac Edison Company, West Penn Power Company and Allegheny Generating Company for the
year ended December 31, 2003.                                                                                                                                                                                                                                                     
|Borrowing Facilities            | Agreements entered into on February 25, 2003 and March 13, 2003 by AE, AE Supply,
Monongahela and West Penn with various credit providers to refinance and restructure the
majority of AE and AE Supply's short-term debt                                                                                                                                                                                                                                                                                          
|CDWR                            | California Department of Water Resources                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|CDWR contract                   | 2001 power sale contract between AE Supply and the CDWR to hedge certain long-term power purchase commitments.
AE Supply sold the CDWR contract and associated hedge transactions in September 2003                                                                                                                                                                                                                                                                                                                
|Clean Air Act                   | Clean Air Act of 1970                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|EITF                            | Emerging Issues Task Force                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|EPA                             | United States Environmental Protection Agency                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|FASB                            | Financial Accounting Standards Board                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|FERC                            | Federal Energy Regulatory Commission, an independent commission within the Department of
Energy                                                                                                                                                                                                                                                                                                                                                                                                                    
|FIN                             | FASB Interpretation Number                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|GAAP                            | Generally Accepted Accounting Principles of the United States of America                                                                                                                                                                                                                                                                                                                                                                                                                                           
|KWh                             | Kilowatt-hour                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Mcf                             | Thousand cubic feet                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|MW                              | Megawatt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|MWh                             | Megawatt-hour                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|NSR                             | The New Source Performance Review Standards or "New Source Review" standards applicable
to facilities deemed "new" sources of emissions;                                                                                                                                                                                                                                                                                                                                                                           
|New AE Facility                 | Agreement entered into on March 8, 2004 by AE with various credit providers to provide AE with an unsecured $300 million borrowing
facility.  The New AE Facility is part of the New Loan Facilities.                                                                                                                                                                                                                                                                                                              
|New Loan Facilities             | Agreements entered into on March 8, 2004 by AE and AE Supply with various credit providers
to refinance and restructure the majority of the Borrowing Facilities                                                                                                                                                                                                                                                                                                                                                   
|PJM                             | PJM Interconnection, LLC, a regional transmission organization                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|PLR                             | Provider-of-last-resort                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|PUHCA                           | Public Utility Holding Company Act of 1935, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|PURPA                           | Public Utility Regulatory Policies Act of 1978                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|SEC                             | United States Securities and Exchange Commission                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|SFAS                            | Statement of Financial Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|SFAS No. 71                     | SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation"                                                                                                                                                                                                                                                                                                                                                                                                                                           
|SFAS No. 133                    | SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No. 133", SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an
amendment of FASB Statement No. 133", and SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities"

6



---

# ALLEGHENY ENERGY, INC.
AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except
per share amounts)(unaudited)

|                                                       | Three Months Ended
June 30, | Six Months Ended
June 30, |   |        
|------------------------------------------------------ | --------------------------- | ------------------------- | - | -------
|
|Operating revenues                                     |                             |                           | $ | 657,114
|Operating expenses:                                    |                             |                          
|Fuel consumed in electric generation                   |                             |                           |   | 140,927
|Purchased power and transmission                       |                             |                           |   | 79,772 
|Cost of utility gas sold                               |                             |                           |   | 26,603 
|Deferred energy costs, net                             |                             |                           |   | (118   
|Operations and maintenance                             |                             |                           |   | 245,624
|Depreciation and amortization                          |                             |                           |   | 85,191 
|Taxes other than income taxes                          |                             |                           |   | 53,201 
|                                                       |                             |                           |   |        
|Total operating expenses                               |                             |                           |   | 631,200
|                                                       |                             |                           |   |        
|Operating income (loss)                                |                             |                           |   | 25,914 
|Other income, net (Note 11)                            |                             |                           |   | 4,790  
|Interest expense and preferred dividends:              |                             |                          
|Interest expense                                       |                             |                           |   | 98,917 
|Preferred dividend requirements of subsidiary          |                             |                           |   | 1,260  
|                                                       |                             |                           |   |        
|Total interest expense and preferred dividends         |                             |                           |   | 100,177
|                                                       |                             |                           |   |        
|Loss before income taxes, minority interest            |                             |                          
|and cumulative effect of accounting changes            |                             |                           |   | (69,473
|Income tax benefit                                     |                             |                           |   | (29,297
|Minority interest in net (loss) income of subsidiaries |                             |                           |   | (720   
|                                                       |                             |                           |   |        
|Loss before cumulative effect of accounting            |                             |                          
|changes                                                |                             |                           |   | (39,456
|Cumulative effect of accounting changes, net of taxes  |                             |                          
|of $12,974 (Notes 3 and 12)                            |                             |                           |   | --     
|                                                       |                             |                           |   |        
|Net loss                                               |                             |                           | $ | (39,456
|                                                       |                             |                           |   |        
|Basic and diluted loss per common share:               |                             |                          
|Loss before cumulative effect of accounting changes    |                             |                           | $ | (0.31  
|Cumulative effect of accounting changes, net           |                             |                           |   | --     
|                                                       |                             |                           |   |        
|Net loss per common share                              |                             |                           | $ | (0.31  
|                                                       |                             |                           |   |        

See accompanying Combined Notes to Financial Statements

7

---



# ALLEGHENY ENERGY, INC.
AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)

|                                                     | Six Months Ended
June 30, | 
|---------------------------------------------------- | ------------------------- | 
|
|Cash Flows From Operating Activities:                |                           | 
|Net loss                                             |                           | 
|Cumulative effect of accounting changes, net         |                           | 
|                                                     |                           | 
|Loss before cumulative effect of accounting changes  |                           | 
|Adjustments for noncash (credits) and charges:       |                           | 
|Reapplication of SFAS No. 71                         |                           | 
|Depreciation and amortization                        |                           | 
|(Gain) loss on asset sales                           |                           | 
|Minority interest                                    |                           | 
|Deferred investment credit and income taxes, net     |                           | 
|Unrealized losses on commodity contracts, net        |                           | 
|Other, net                                           |                           | 
|Changes in certain assets and liabilities:           |                           | 
|Accounts receivable, net                             |                           | 
|Materials and supplies                               |                           | 
|Taxes receivable/accrued, net                        |                           | 
|Prepaid taxes                                        |                           | 
|Collateral deposits                                  |                           | 
|Accounts payable                                     |                           | 
|Accrued payroll                                      |                           | 
|Interest accrued                                     |                           | 
|Purchased options                                    |                           | 
|Commodity contract termination costs                 |                           | 
|Other, net                                           |                           | 
|                                                     |                           | 
|Net cash from operating activities                   |                           | 
|                                                     |                           | 
|Cash Flows Used In Investing Activities:             |                           | 
|Capital expenditures                                 |                           | 
|Acquisition of electric generating facility          |                           | 
|Proceeds from sale of businesses and assets          |                           | 
|Decrease (increase) in restricted funds              |                           | 
|Other investments                                    |                           | 
|                                                     |                           | 
|Net cash used in investing activities                |                           | 
|                                                     |                           | 
|Cash Flows (Used In) From Financing Activities:      |                           | 
|Net repayments of short-term debt                    |                           | 
|Issuance of long-term debt                           |                           | 
|Retirement of long-term debt                         |                           | 
|                                                     |                           | 
|Net cash (used in) from financing activities         |                           | 
|                                                     |                           | 
|Net (decrease) increase in cash and cash equivalents |                           | 
|Cash and cash equivalents at beginning of period     |                           | 
|                                                     |                           | 
|Cash and cash equivalents at end of period           |                           | 
|                                                     |                           | 

See accompanying Combined Notes to Financial Statements



# ALLEGHENY ENERGY, INC.
AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands)(unaudited)

|                                         | June 30,
2004 | December 31,
2003
|---------------------------------------- | ------------- | -----------------
|
|ASSETS                                   |               |                  
|Current Assets:                          |               |                  
|Cash and cash equivalents                |               |                  
|Accounts receivable:                     |               |                  
|Customer                                 |               |                  
|Unbilled utility revenues                |               |                  
|Wholesale and other                      |               |                  
|Allowance for uncollectible accounts     |               |                  
|Materials and supplies                   |               |                  
|Fuel, including stored gas               |               |                  
|Deferred income taxes                    |               |                  
|Prepaid taxes                            |               |                  
|Collateral deposits                      |               |                  
|Commodity contracts                      |               |                  
|Restricted funds                         |               |                  
|Regulatory assets                        |               |                  
|Other                                    |               |                  
|                                         |               |                  
|Total current assets                     |               |                  
|Property, Plant and Equipment:           |               |                  
|Generation                               |               |                  
|Transmission                             |               |                  
|Distribution                             |               |                  
|Other                                    |               |                  
|Accumulated depreciation                 |               |                  
|                                         |               |                  
|Subtotal                                 |               |                  
|Construction work in progress            |               |                  
|                                         |               |                  
|Total property, plant and equipment      |               |                  
|Investments and Other Assets:            |               |                  
|Goodwill                                 |               |                  
|Investments in unconsolidated affiliates |               |                  
|Intangible assets                        |               |                  
|Other                                    |               |                  
|                                         |               |                  
|Total investments and other assets       |               |                  
|Deferred Charges:                        |               |                  
|Commodity contracts                      |               |                  
|Regulatory assets                        |               |                  
|Other                                    |               |                  
|                                         |               |                  
|                                         |               |                  
|Total deferred charges                   |               |                  
|Total Assets                             |               |                  
|                                         |               |                  

See accompanying Combined Notes to Financial Statements

9



---

# ALLEGHENY ENERGY, INC.
AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (continued)(in thousands)(unaudited)

|                                             | June 30,
2004 | December 31,
2003
|-------------------------------------------- | ------------- | -----------------
|
|LIABILITIES AND STOCKHOLDERS EQUITY         |               |                  
|Current Liabilities:                         |               |                  
|Short-term debt                              |               |                  
|Long-term debt due within one year           |               |                  
|Accounts payable                             |               |                  
|Accrued taxes                                |               |                  
|Commodity contracts                          |               |                  
|Regulatory liabilities                       |               |                  
|Other                                        |               |                  
|                                             |               |                  
|Total current liabilities                    |               |                  
|Long-term Debt                               |               |                  
|Deferred Credits and Other Liabilities:      |               |                  
|Commodity contracts                          |               |                  
|Investment tax credit                        |               |                  
|Deferred income taxes                        |               |                  
|Obligations under capital leases             |               |                  
|Regulatory liabilities                       |               |                  
|Adverse power purchase commitments           |               |                  
|Other                                        |               |                  
|                                             |               |                  
|Total deferred credits and other liabilities |               |                  
|Minority Interest                            |               |                  
|Preferred Stock of Subsidiary                |               |                  
|Common Stockholders Equity:                 |               |                  
|Common stock                                 |               |                  
|Other paid-in capital                        |               |                  
|Retained (deficit) earnings                  |               |                  
|Treasury stock                               |               |                  
|Accumulated other comprehensive loss         |               |                  
|                                             |               |                  
|Total common stockholders equity            |               |                  
|Commitments and Contingencies (Note 15)      |               |                  
|Total Liabilities and Stockholders Equity   |               |                  
|                                             |               |                  

See accompanying
Combined Notes to Financial Statements

10



---

# ALLEGHENY ENERGY SUPPLY COMPANY, LLC
AND SUBSIDIARIESCONSOLIDATED STATEMENT OF OPERATIONS(in thousands)(unaudited)

|                                                      | Three Months Ended
June 30, | Six Months Ended
June 30, |   |        
|----------------------------------------------------- | --------------------------- | ------------------------- | - | -------
|
|Operating revenues                                    |                             |                           | $ | 265,875
|Operating expenses:                                   |                             |                          
|Fuel consumed in electric generation                  |                             |                           |   | 111,610
|Purchased power and transmission                      |                             |                           |   | 25,559 
|Operations and maintenance                            |                             |                           |   | 101,840
|Depreciation and amortization                         |                             |                           |   | 35,161 
|Taxes other than income taxes                         |                             |                           |   | 12,721 
|                                                      |                             |                           |   |        
|Total operating expenses                              |                             |                           |   | 286,891
|                                                      |                             |                           |   |        
|Operating (loss) income                               |                             |                           |   | (21,016
|Other income (expenses), net (Note 11)                |                             |                           |   | 322    
|Interest expense                                      |                             |                           |   | 52,680 
|                                                      |                             |                           |   |        
|Loss before income taxes, minority interest           |                             |                          
|and cumulative effect of accounting changes           |                             |                           |   | (73,374
|Income tax benefit                                    |                             |                           |   | (29,171
|Minority interest in net income of subsidiaries       |                             |                           |   | 1,341  
|                                                      |                             |                           |   |        
|Loss before cumulative effect of accounting changes   |                             |                           |   | (45,544
|Cumulative effect of accounting changes, net of taxes |                             |                          
|of $12,131 (Notes 3 and 12)                           |                             |                           |   | --     
|                                                      |                             |                           |   |        
|Net loss                                              |                             |                           | $ | (45,544
|                                                      |                             |                           |   |        

See accompanying Combined Notes to Financial Statements

11



# ALLEGHENY ENERGY SUPPLY
COMPANY, LLC AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) 
(unaudited)

|                                                        | Six Months Ended
June 30, | 
|------------------------------------------------------- | ------------------------- | 
|
|Cash Flows From (Used in) Operating Activities:         |                           | 
|Net loss                                                |                           | 
|Cumulative effect of accounting changes, net            |                           | 
|                                                        |                           | 
|Loss before cumulative effect of accounting changes     |                           | 
|Adjustments for noncash charges and (credits):          |                           | 
|Depreciation and amortization                           |                           | 
|(Gain) loss on asset sales                              |                           | 
|Minority interest in AGC                                |                           | 
|Deferred investment credit and income taxes, net        |                           | 
|Unrealized losses on commodity contracts, net           |                           | 
|Other, net                                              |                           | 
|Changes in certain assets and liabilities:              |                           | 
|Accounts receivable, net                                |                           | 
|Accounts receivable due from/payable to affiliates, net |                           | 
|Materials and supplies                                  |                           | 
|Taxes receivable/accrued, net                           |                           | 
|Collateral deposits                                     |                           | 
|Accounts payable                                        |                           | 
|Interest accrued                                        |                           | 
|Purchased options                                       |                           | 
|Commodity contract termination costs                    |                           | 
|Other, net                                              |                           | 
|                                                        |                           | 
|Net cash from (used in) operating activities            |                           | 
|                                                        |                           | 
|Cash Flows From (Used In) Investing Activities:         |                           | 
|Capital expenditures                                    |                           | 
|Acquisition of electric generating facility             |                           | 
|Proceeds from sale of assets                            |                           | 
|Decrease (increase) in restricted funds                 |                           | 
|Other investments                                       |                           | 
|                                                        |                           | 
|Net cash from (used in) investing activities            |                           | 
|                                                        |                           | 
|Cash Flows (Used in) From  Financing Activities:        |                           | 
|Net repayments of short-term debt                       |                           | 
|Issuance of long-term debt                              |                           | 
|Retirement of long-term debt                            |                           | 
|Parent company contribution                             |                           | 
|Return of parent company contribution                   |                           | 
|Cash dividends paid to parent                           |                           | 
|Cash dividends paid to minority shareholder in AGC      |                           | 
|                                                        |                           | 
|Net cash (used in) from financing activities            |                           | 
|                                                        |                           | 
|Net (decrease) increase in cash and cash equivalents    |                           | 
|Cash and cash equivalents at beginning of period        |                           | 
|                                                        |                           | 
|Cash and cash equivalents at end of period              |                           | 
|                                                        |                           | 

See accompanying Combined Notes to Financial Statements



# ALLEGHENY ENERGY
SUPPLY COMPANY, LLC AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (in thousands)
(unaudited)

|                                        | June 30,
2004 | December 31,
2003
|--------------------------------------- | ------------- | -----------------
|
|ASSETS                                  |               |                  
|Current Assets:                         |               |                  
|Cash and cash equivalents               |               |                  
|Accounts receivable:                    |               |                  
|Wholesale and other                     |               |                  
|Allowance for uncollectible accounts    |               |                  
|Materials and supplies                  |               |                  
|Fuel                                    |               |                  
|Deferred income taxes                   |               |                  
|Prepaid taxes                           |               |                  
|Commodity contracts                     |               |                  
|Collateral deposits                     |               |                  
|Restricted funds                        |               |                  
|Other                                   |               |                  
|                                        |               |                  
|Total current assets                    |               |                  
|Property, Plant and Equipment:          |               |                  
|Generation                              |               |                  
|Transmission                            |               |                  
|Other                                   |               |                  
|Accumulated depreciation                |               |                  
|                                        |               |                  
|Subtotal                                |               |                  
|Construction work in progress           |               |                  
|                                        |               |                  
|Total property, plant and equipment     |               |                  
|Investments and Other Assets:           |               |                  
|Goodwill                                |               |                  
|Investments in unconsolidated affiliate |               |                  
|Other                                   |               |                  
|                                        |               |                  
|Total investments and other assets      |               |                  
|Deferred Charges:                       |               |                  
|Commodity contracts                     |               |                  
|Other                                   |               |                  
|                                        |               |                  
|Total deferred charges                  |               |                  
|Total Assets                            |               |                  
|                                        |               |                  

See accompanying
Combined Notes to Financial Statements

13



---

# ALLEGHENY ENERGY
SUPPLY COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued)(in thousands)
(unaudited)

|                                             | June 30,
2004 | December 31,
2003
|-------------------------------------------- | ------------- | -----------------
|
|LIABILITIES AND MEMBERS EQUITY              |               |                  
|Current Liabilities:                         |               |                  
|Long-term debt due within one year           |               |                  
|Accounts payable                             |               |                  
|Accounts payable to affiliates, net          |               |                  
|Accrued taxes                                |               |                  
|Commodity contracts                          |               |                  
|Other                                        |               |                  
|                                             |               |                  
|Total current liabilities                    |               |                  
|Long-term Debt                               |               |                  
|Deferred Credits and Other Liabilities:      |               |                  
|Commodity contracts                          |               |                  
|Investment tax credit                        |               |                  
|Deferred income taxes                        |               |                  
|Other                                        |               |                  
|                                             |               |                  
|Total deferred credits and other liabilities |               |                  
|Minority Interest                            |               |                  
|Members Equity                              |               |                  
|Commitments and Contingencies (Note 15)      |               |                  
|Total Liabilities and Members Equity        |               |                  
|                                             |               |                  

See accompanying
Combined Notes to Financial Statements

14



---

# MONONGAHELA POWER
COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)(unaudited)

|                                                                     | Three Months Ended
June 30, | Six Months Ended
June 30, |   |        
|-------------------------------------------------------------------- | --------------------------- | ------------------------- | - | -------
|
|Operating revenues                                                   |                             |                           | $ | 201,363
|Operating expenses:                                                  |                             |                          
|Fuel consumed in electric generation                                 |                             |                           |   | 25,051 
|Purchased power and transmission                                     |                             |                           |   | 51,194 
|Cost of utility gas sold                                             |                             |                           |   | 26,600 
|Deferred energy costs, net                                           |                             |                           |   | (1,327 
|Operations and maintenance                                           |                             |                           |   | 75,773 
|Depreciation and amortization                                        |                             |                           |   | 18,886 
|Taxes other than income taxes                                        |                             |                           |   | 16,333 
|                                                                     |                             |                           |   |        
|Total operating expenses                                             |                             |                           |   | 212,510
|                                                                     |                             |                           |   |        
|Operating (loss) income                                              |                             |                           |   | (11,147
|Other income, net (Note 11)                                          |                             |                           |   | 2,906  
|Interest expense                                                     |                             |                           |   | 12,858 
|                                                                     |                             |                           |   |        
|(Loss) income before income taxes and cumulative effect of           |                             |                          
|accounting change                                                    |                             |                           |   | (21,099
|Income tax (benefit) expense                                         |                             |                           |   | (9,336 
|                                                                     |                             |                           |   |        
|(Loss) income before cumulative effect of accounting                 |                             |                          
|change                                                               |                             |                           |   | (11,763
|Cumulative effect of accounting change, net of tax of $314 (Note 12) |                             |                           |   | --     
|                                                                     |                             |                           |   |        
|Net (loss) income                                                    |                             |                           | $ | (11,763
|                                                                     |                             |                           |   |        

See accompanying
Combined Notes to Financial Statements

15



# MONONGAHELA POWER COMPANY
AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)(unaudited)

|                                                     | Six Months Ended
June 30, | 
|---------------------------------------------------- | ------------------------- | 
|
|Cash Flows From Operating Activities:                |                           | 
|Net income                                           |                           | 
|Cumulative effect of accounting change, net          |                           | 
|                                                     |                           | 
|Income before cumulative effect of accounting change |                           | 
|Adjustments for noncash (credits) and charges:       |                           | 
|Reapplication of SFAS No. 71                         |                           | 
|Depreciation and amortization                        |                           | 
|Deferred investment credit and income taxes, net     |                           | 
|Deferred energy costs, net                           |                           | 
|Other, net                                           |                           | 
|Changes in certain assets and liabilities:           |                           | 
|Accounts receivable, net                             |                           | 
|Materials and supplies                               |                           | 
|Taxes receivable/accrued, net                        |                           | 
|Prepaid taxes                                        |                           | 
|Accounts payable                                     |                           | 
|Accounts payable to affiliates, net                  |                           | 
|Other, net                                           |                           | 
|                                                     |                           | 
|Net cash from operating activities                   |                           | 
|                                                     |                           | 
|Cash Flows Used In Investing Activities:             |                           | 
|Capital expenditures                                 |                           | 
|Proceeds from land sale                              |                           | 
|Other investments                                    |                           | 
|                                                     |                           | 
|Net cash used in investing activities                |                           | 
|                                                     |                           | 
|Cash Flows From (Used In) Financing Activities:      |                           | 
|Notes receivable from affiliates                     |                           | 
|Notes payable to affiliate                           |                           | 
|Net (repayments) borrowings under short-term debt    |                           | 
|Issuance of long-term debt                           |                           | 
|Retirement of long-term debt                         |                           | 
|Cash dividends paid on capital stock:                |                           | 
|Preferred stock                                      |                           | 
|Common stock                                         |                           | 
|                                                     |                           | 
|Net cash from (used in) financing activities         |                           | 
|                                                     |                           | 
|Net increase in cash and cash equivalents            |                           | 
|Cash and cash equivalents at beginning of period     |                           | 
|                                                     |                           | 
|Cash and cash equivalents at end of period           |                           | 
|                                                     |                           | 

See accompanying Combined Notes to Financial Statements

16



# MONONGAHELA POWER
COMPANY AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands)
(unaudited)

|                                     | June 30,
2004 | December 31,
2003
|------------------------------------ | ------------- | -----------------
|
|ASSETS                               |               |                  
|Current Assets:                      |               |                  
|Cash and cash equivalents            |               |                  
|Accounts receivable:                 |               |                  
|Customer                             |               |                  
|Unbilled utility revenues            |               |                  
|Wholesale and other                  |               |                  
|Allowance for uncollectible accounts |               |                  
|Note receivable from affiliate       |               |                  
|Materials and supplies               |               |                  
|Fuel, including stored gas           |               |                  
|Taxes receivable                     |               |                  
|Prepaid taxes                        |               |                  
|Regulatory assets                    |               |                  
|Other                                |               |                  
|                                     |               |                  
|Total current assets                 |               |                  
|Property, Plant and Equipment:       |               |                  
|Generation                           |               |                  
|Transmission                         |               |                  
|Distribution                         |               |                  
|Other                                |               |                  
|Accumulated depreciation             |               |                  
|                                     |               |                  
|Subtotal                             |               |                  
|Construction work in progress        |               |                  
|                                     |               |                  
|Total property, plant and equipment  |               |                  
|Investments and Other Assets:        |               |                  
|Investment in AGC                    |               |                  
|Other                                |               |                  
|                                     |               |                  
|Total investments and other assets   |               |                  
|Deferred Charges:                    |               |                  
|Regulatory assets                    |               |                  
|Other                                |               |                  
|                                     |               |                  
|Total deferred charges               |               |                  
|Total Assets                         |               |                  
|                                     |               |                  

See accompanying
Combined Notes to Financial Statements

17



---

# MONONGAHELA POWER
COMPANY AND SUBSIDIARIESCONSOLIDATED BALANCE
SHEETS (continued)(in thousands)(unaudited)

|                                             | June 30,
2004 | December 31,
2003
|-------------------------------------------- | ------------- | -----------------
|
|LIABILITIES AND STOCKHOLDERS EQUITY         |               |                  
|Current Liabilities:                         |               |                  
|Short-term debt                              |               |                  
|Long-term debt due within one year           |               |                  
|Note payable to affiliate                    |               |                  
|Accounts payable                             |               |                  
|Accounts payable to affiliates, net          |               |                  
|Accrued taxes                                |               |                  
|Deferred income taxes                        |               |                  
|Interest accrued                             |               |                  
|Other                                        |               |                  
|                                             |               |                  
|Total current liabilities                    |               |                  
|Long-term Debt                               |               |                  
|Deferred Credits and Other Liabilities:      |               |                  
|Investment tax credit                        |               |                  
|Non-current income taxes payable             |               |                  
|Deferred income taxes                        |               |                  
|Obligations under capital leases             |               |                  
|Regulatory liabilities                       |               |                  
|Notes payable to affiliates                  |               |                  
|Other                                        |               |                  
|                                             |               |                  
|Total deferred credits and other liabilities |               |                  
|Preferred Stock                              |               |                  
|Common Stockholders Equity:                 |               |                  
|Common stock                                 |               |                  
|Other paid-in capital                        |               |                  
|Retained earnings                            |               |                  
|Accumulated other comprehensive income       |               |                  
|                                             |               |                  
|Total common stockholders equity            |               |                  
|Commitments and Contingencies (Note 15)      |               |                  
|Total Liabilities and Stockholders Equity   |               |                  
|                                             |               |                  

See accompanying
Combined Notes to Financial Statements

18



---

# THE POTOMAC EDISON
COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands)
(unaudited)

|                                                                      | Three Months Ended
June 30, | Six Months Ended
June 30, |   |        
|--------------------------------------------------------------------- | --------------------------- | ------------------------- | - | -------
|
|Operating revenues                                                    |                             |                           | $ | 216,711
|Operating expenses:                                                   |                             |                          
|Purchased power and transmission                                      |                             |                           |   | 150,344
|Deferred energy costs, net                                            |                             |                           |   | 1,209  
|Operations and maintenance                                            |                             |                           |   | 25,180 
|Depreciation and amortization                                         |                             |                           |   | 9,811  
|Taxes other than income taxes                                         |                             |                           |   | 7,739  
|                                                                      |                             |                           |   |        
|Total operating expenses                                              |                             |                           |   | 194,283
|                                                                      |                             |                           |   |        
|Operating income                                                      |                             |                           |   | 22,428 
|Other income, net (Note 11)                                           |                             |                           |   | 2,130  
|Interest expense                                                      |                             |                           |   | 7,665  
|                                                                      |                             |                           |   |        
|Income before income taxes and cumulative effect of accounting        |                             |                          
|change                                                                |                             |                           |   | 16,893 
|Income tax expense                                                    |                             |                           |   | 5,917  
|                                                                      |                             |                           |   |        
|Income before cumulative effect of accounting change                  |                             |                           |   | 10,976 
|Cumulative effect of accounting change, net of taxes of $50 (Note 12) |                             |                           |   | --     
|                                                                      |                             |                           |   |        
|Net income                                                            |                             |                           | $ | 10,976 
|                                                                      |                             |                           |   |        

See accompanying
Combined Notes to Financial Statements

19



---

# THE POTOMAC EDISON COMPANY
AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)(unaudited)

|                                                     | Six Months Ended
June 30, | 
|---------------------------------------------------- | ------------------------- | 
|
|Cash Flows From Operating Activities:                |                           | 
|Net income                                           |                           | 
|Cumulative effect of accounting change, net          |                           | 
|                                                     |                           | 
|Income before cumulative effect of accounting change |                           | 
|Adjustments for noncash (credits) and charges:       |                           | 
|Reapplication of SFAS No. 71                         |                           | 
|Depreciation and amortization                        |                           | 
|Gain on land sale                                    |                           | 
|Deferred investment credit and income taxes, net     |                           | 
|Other, net                                           |                           | 
|Changes in certain assets and liabilities:           |                           | 
|Accounts receivable, net                             |                           | 
|Materials and supplies                               |                           | 
|Taxes receivable/accrued, net                        |                           | 
|Accounts payable                                     |                           | 
|Accounts payable to affiliates, net                  |                           | 
|Other, net                                           |                           | 
|                                                     |                           | 
|Net cash from operating activities                   |                           | 
|                                                     |                           | 
|Cash Flows Used In Investing Activities:             |                           | 
|Capital expenditures                                 |                           | 
|Proceeds from land sale                              |                           | 
|                                                     |                           | 
|Net cash used in investing activities                |                           | 
|                                                     |                           | 
|Cash Flows Used In Financing Activities:             |                           | 
|Note receivable from affiliate                       |                           | 
|Note payable to affiliate                            |                           | 
|Cash dividends paid on common stock                  |                           | 
|                                                     |                           | 
|Net cash used in financing activities                |                           | 
|                                                     |                           | 
|Net increase in cash and cash equivalents            |                           | 
|Cash and cash equivalents at beginning of period     |                           | 
|                                                     |                           | 
|Cash and cash equivalents at end of period           |                           | 
|                                                     |                           | 

See accompanying
Combined Notes to Financial Statements

20



---

# THE POTOMAC EDISON
COMPANY AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands)
(unaudited)

|                                     | June 30,
2004 | December 31,
2003
|------------------------------------ | ------------- | -----------------
|
|ASSETS                               |               |                  
|Current Assets:                      |               |                  
|Cash and cash equivalents            |               |                  
|Accounts receivable:                 |               |                  
|Customer                             |               |                  
|Unbilled utility revenues            |               |                  
|Wholesale and other                  |               |                  
|Allowance for uncollectible accounts |               |                  
|Note receivable from affiliate       |               |                  
|Materials and supplies               |               |                  
|Taxes receivable                     |               |                  
|Deferred income taxes                |               |                  
|Prepaid taxes                        |               |                  
|Other                                |               |                  
|                                     |               |                  
|Total current assets                 |               |                  
|Property, Plant and Equipment:       |               |                  
|Transmission                         |               |                  
|Distribution                         |               |                  
|Other                                |               |                  
|Accumulated depreciation             |               |                  
|                                     |               |                  
|Subtotal                             |               |                  
|Construction work in progress        |               |                  
|                                     |               |                  
|Total property, plant and equipment  |               |                  
|Other Assets                         |               |                  
|Deferred Charges:                    |               |                  
|Regulatory assets                    |               |                  
|Other                                |               |                  
|                                     |               |                  
|                                     |               |                  
|Total deferred charges               |               |                  
|Total Assets                         |               |                  
|                                     |               |                  

See accompanying
Combined Notes to Financial Statements

21



---

# THE POTOMAC EDISON
COMPANY AND SUBSIDIARIESCONSOLIDATED BALANCE
SHEETS (continued)(in thousands)
(unaudited)

|                                             | June 30,
2004 | December 31,
2003
|-------------------------------------------- | ------------- | -----------------
|
|LIABILITIES AND STOCKHOLDER'S EQUITY         |               |                  
|Current Liabilities:                         |               |                  
|Accounts payable                             |               |                  
|Accounts payable to affiliates, net          |               |                  
|Accrued taxes                                |               |                  
|Interest accrued                             |               |                  
|Regulatory liabilities                       |               |                  
|Other                                        |               |                  
|                                             |               |                  
|Total current liabilities                    |               |                  
|Long-term Debt                               |               |                  
|Deferred Credits and Other Liabilities:      |               |                  
|Investment tax credit                        |               |                  
|Non-current income taxes payable             |               |                  
|Deferred income taxes                        |               |                  
|Obligations under capital leases             |               |                  
|Regulatory liabilities                       |               |                  
|Other                                        |               |                  
|                                             |               |                  
|Total deferred credits and other liabilities |               |                  
|Stockholder's Equity:                        |               |                  
|Common stock                                 |               |                  
|Other paid-in capital                        |               |                  
|Retained earnings                            |               |                  
|                                             |               |                  
|Total stockholder's equity                   |               |                  
|Commitments and Contingencies (Note 15)      |               |                  
|Total Liabilities and Stockholder's Equity   |               |                  
|                                             |               |                  

See accompanying
Combined Notes to Financial Statements

22



---

# WEST PENN POWER
COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands)
(unaudited)

|                                                                     | Three Months Ended
June 30, | Six Months Ended
June 30, |   |        
|-------------------------------------------------------------------- | --------------------------- | ------------------------- | - | -------
|
|Operating revenues                                                   |                             |                           | $ | 278,519
|Operating expenses:                                                  |                             |                          
|Purchased power and transmission                                     |                             |                           |   | 173,479
|Operations and maintenance                                           |                             |                           |   | 36,013 
|Depreciation and amortization                                        |                             |                           |   | 18,421 
|Taxes other than income taxes                                        |                             |                           |   | 15,995 
|                                                                     |                             |                           |   |        
|Total operating expenses                                             |                             |                           |   | 243,908
|                                                                     |                             |                           |   |        
|Operating income                                                     |                             |                           |   | 34,611 
|Other income, net (Note 11)                                          |                             |                           |   | 819    
|Interest expense                                                     |                             |                           |   | 8,250  
|                                                                     |                             |                           |   |        
|Income before income taxes and cumulative effect of                  |                             |                          
|accounting change                                                    |                             |                           |   | 27,180 
|Income tax expense                                                   |                             |                           |   | 8,545  
|                                                                     |                             |                           |   |        
|Income before cumulative effect of accounting change                 |                             |                           |   | 18,635 
|Cumulative effect of accounting change, net of tax of $474 (Note 12) |                             |                           |   | --     
|                                                                     |                             |                           |   |        
|Net income                                                           |                             |                           | $ | 18,635 
|                                                                     |                             |                           |   |        

See accompanying Combined Notes to Financial Statements

23



---

# WEST PENN POWER COMPANY
AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)

|                                                     | Six Months Ended
June 30, | 
|---------------------------------------------------- | ------------------------- | 
|
|Cash Flows From Operating Activities:                |                           | 
|Net income                                           |                           | 
|Cumulative effect of accounting change, net          |                           | 
|                                                     |                           | 
|Income before cumulative effect of accounting change |                           | 
|Adjustments for noncash charges and (credits):       |                           | 
|Depreciation and amortization                        |                           | 
|Amortization of adverse power purchase contract      |                           | 
|Gain on land sales                                   |                           | 
|Deferred investment credit and income taxes, net     |                           | 
|Other, net                                           |                           | 
|Changes in certain assets and liabilities:           |                           | 
|Accounts receivable, net                             |                           | 
|Materials and supplies                               |                           | 
|Taxes receivable/accrued, net                        |                           | 
|Prepaid taxes                                        |                           | 
|Accounts payable                                     |                           | 
|Accounts payable to affiliates, net                  |                           | 
|Other, net                                           |                           | 
|                                                     |                           | 
|Net cash from operating activities                   |                           | 
|                                                     |                           | 
|Cash Flows Used In Investing Activities:             |                           | 
|Capital expenditures                                 |                           | 
|Proceeds from land sales                             |                           | 
|Increase in restricted funds                         |                           | 
|                                                     |                           | 
|Net cash used in investing activities                |                           | 
|                                                     |                           | 
|Cash Flows Used In Financing Activities:             |                           | 
|Note payable to affiliate                            |                           | 
|Retirement of long-term debt                         |                           | 
|Cash dividends paid on common stock                  |                           | 
|                                                     |                           | 
|Net cash used in investing activities                |                           | 
|                                                     |                           | 
|Net (decrease) increase in cash and cash equivalents |                           | 
|Cash and cash equivalents at beginning of period     |                           | 
|                                                     |                           | 
|Cash and cash equivalents at end of period           |                           | 
|                                                     |                           | 

See accompanying Combined Notes to Financial Statements

24



---

# WEST PENN POWER
COMPANY AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands)(unaudited)

|                                     | June 30,
2004 | December 31,
2003
|------------------------------------ | ------------- | -----------------
|
|ASSETS                               |               |                  
|Current Assets:                      |               |                  
|Cash and cash equivalents            |               |                  
|Accounts receivable:                 |               |                  
|Customer                             |               |                  
|Unbilled utility revenues            |               |                  
|Wholesale and other                  |               |                  
|Allowance for uncollectible accounts |               |                  
|Materials and supplies               |               |                  
|Taxes receivable                     |               |                  
|Deferred income taxes                |               |                  
|Prepaid taxes                        |               |                  
|Regulatory assets                    |               |                  
|Other                                |               |                  
|                                     |               |                  
|Total current assets                 |               |                  
|Property, Plant and Equipment:       |               |                  
|Transmission                         |               |                  
|Distribution                         |               |                  
|Other                                |               |                  
|Accumulated depreciation             |               |                  
|                                     |               |                  
|Subtotal                             |               |                  
|Construction work in progress        |               |                  
|                                     |               |                  
|Total property, plant and equipment  |               |                  
|Other Assets                         |               |                  
|                                     |               |                  
|Deferred Charges:                    |               |                  
|Regulatory assets                    |               |                  
|Other                                |               |                  
|                                     |               |                  
|                                     |               |                  
|Total deferred charges               |               |                  
|Total Assets                         |               |                  
|                                     |               |                  

See accompanying Combined Notes to Financial Statements

25



---

# WEST PENN POWER
COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued)(in thousands)(unaudited)

|                                             | June 30,
2004 | December 31,
2003
|-------------------------------------------- | ------------- | -----------------
|
|LIABILITIES AND STOCKHOLDER'S EQUITY         |               |                  
|Current Liabilities:                         |               |                  
|Long-term debt due within one year           |               |                  
|Note payable to affiliate                    |               |                  
|Accounts payable                             |               |                  
|Accounts payable to affiliates, net          |               |                  
|Accrued taxes                                |               |                  
|Interest accrued                             |               |                  
|Adverse power purchase commitments           |               |                  
|Other                                        |               |                  
|                                             |               |                  
|Total current liabilities                    |               |                  
|Long-term Debt                               |               |                  
|Deferred Credits and Other Liabilities:      |               |                  
|Investment tax credit                        |               |                  
|Non-current income taxes payable             |               |                  
|Deferred income taxes                        |               |                  
|Obligations under capital leases             |               |                  
|Regulatory liabilities                       |               |                  
|Adverse power purchase commitments           |               |                  
|Other                                        |               |                  
|                                             |               |                  
|Total deferred credits and other liabilities |               |                  
|Stockholder's Equity:                        |               |                  
|Common stock                                 |               |                  
|Other paid-in capital                        |               |                  
|Retained earnings                            |               |                  
|Accumulated other comprehensive income       |               |                  
|                                             |               |                  
|Total stockholders equity                   |               |                  
|Commitments and Contingencies (Note 15)      |               |                  
|Total Liabilities and Stockholders Equity   |               |                  
|                                             |               |                  

See accompanying Combined Notes to Financial Statements

26



---

# ALLEGHENY GENERATING COMPANYSTATEMENTS OF OPERATIONS(in thousands)(unaudited)

|                              | Three Months Ended
June 30, | Six Months Ended
June 30, |   |       
|----------------------------- | --------------------------- | ------------------------- | - | ------
|
|Operating revenues            |                             |                           | $ | 17,884
|Operating expenses:           |                             |                          
|Operations and maintenance    |                             |                           |   | 2,162 
|Depreciation                  |                             |                           |   | 4,251 
|Taxes other than income taxes |                             |                           |   | 812   
|                              |                             |                           |   |       
|Total operating expenses      |                             |                           |   | 7,225 
|                              |                             |                           |   |       
|Operating income              |                             |                           |   | 10,659
|Other income, net (Note 11)   |                             |                           |   | 22    
|Interest expense              |                             |                           |   | 1,974 
|                              |                             |                           |   |       
|Income before income taxes    |                             |                           |   | 8,707 
|Income tax expense            |                             |                           |   | 2,869 
|                              |                             |                           |   |       
|Net income                    |                             |                           | $ | 5,838 
|                              |                             |                           |   |       

See accompanying Combined Notes to Financial Statements

27



---

# ALLEGHENY GENERATING COMPANYSTATEMENTS OF CASH FLOWS(in thousands)(unaudited)

|                                                        | Six Months Ended
June 30, | 
|------------------------------------------------------- | ------------------------- | 
|
|Cash Flows From Operating Activities:                   |                           | 
|Net income                                              |                           | 
|Adjustments for noncash charges and (credits):          |                           | 
|Depreciation                                            |                           | 
|Deferred investment credit and income taxes, net        |                           | 
|Other, net                                              |                           | 
|Changes in certain assets and liabilities:              |                           | 
|Accounts receivable due from/payable to affiliates, net |                           | 
|Materials and supplies                                  |                           | 
|Taxes receivable/accrued, net                           |                           | 
|Accounts payable                                        |                           | 
|Interest accrued                                        |                           | 
|Other, net                                              |                           | 
|                                                        |                           | 
|Net cash from operating activities                      |                           | 
|                                                        |                           | 
|Cash Flows Used In Investing Activities:                |                           | 
|Capital expenditures                                    |                           | 
|                                                        |                           | 
|Cash Flows Used In Financing Activities:                |                           | 
|Notes payable to parent                                 |                           | 
|Net repayments of short-term debt                       |                           | 
|Cash dividends paid on common stock                     |                           | 
|                                                        |                           | 
|Net cash used in financing activities                   |                           | 
|                                                        |                           | 
|Net increase in cash and cash equivalents               |                           | 
|Cash and cash equivalents at beginning of period        |                           | 
|                                                        |                           | 
|Cash and cash equivalents at end of period              |                           | 
|                                                        |                           | 

See accompanying Combined Notes to Financial Statements

28



---

# ALLEGHENY GENERATING COMPANYBALANCE SHEETS(in thousands)(unaudited)

|                                         | June 30,
2004 | December 31,
2003
|---------------------------------------- | ------------- | -----------------
|
|ASSETS                                   |               |                  
|Current Assets:                          |               |                  
|Cash and cash equivalents                |               |                  
|Accounts receivable from affiliates, net |               |                  
|Materials and supplies                   |               |                  
|Other                                    |               |                  
|                                         |               |                  
|Total current assets                     |               |                  
|Property, Plant and Equipment:           |               |                  
|Generation                               |               |                  
|Transmission                             |               |                  
|Other                                    |               |                  
|Accumulated depreciation                 |               |                  
|                                         |               |                  
|Subtotal                                 |               |                  
|Construction work in progress            |               |                  
|                                         |               |                  
|Total property, plant and equipment      |               |                  
|Deferred Charges:                        |               |                  
|Regulatory assets                        |               |                  
|Other                                    |               |                  
|                                         |               |                  
|                                         |               |                  
|Total deferred charges                   |               |                  
|Total Assets                             |               |                  
|                                         |               |                  

See accompanying Combined Notes to Financial Statements

29



---

# ALLEGHENY GENERATING COMPANYBALANCE SHEETS (continued)(in thousands)(unaudited)

|                                             | June 30,
2004 | December 31,
2003
|-------------------------------------------- | ------------- | -----------------
|
|LIABILITIES AND STOCKHOLDERS' EQUITY         |               |                  
|Current Liabilities:                         |               |                  
|Accounts payable to affiliates, net          |               |                  
|Accrued taxes                                |               |                  
|Interest accrued                             |               |                  
|Other                                        |               |                  
|                                             |               |                  
|Total current liabilities                    |               |                  
|Long-term Debt:                              |               |                  
|Long-term debt                               |               |                  
|Long-term note payable to parent             |               |                  
|                                             |               |                  
|Total long-term debt                         |               |                  
|Deferred Credits and Other Liabilities:      |               |                  
|Investment tax credit                        |               |                  
|Non-current income taxes payable             |               |                  
|Deferred income taxes                        |               |                  
|Regulatory liabilities                       |               |                  
|                                             |               |                  
|Total deferred credits and other liabilities |               |                  
|Stockholders' Equity:                        |               |                  
|Common stock                                 |               |                  
|Other paid-in capital                        |               |                  
|Retained earnings                            |               |                  
|                                             |               |                  
|Total stockholders equity                   |               |                  
|Commitments and Contingencies (Note 15)      |               |                  
|Total Liabilities and Stockholders Equity   |               |                  
|                                             |               |                  

See accompanying Combined Notes to Financial Statements

30



---

# COMBINED NOTES TO
FINANCIAL STATEMENTS(unaudited)

The notes to the financial statements that follow are a combined presentation for Allegheny and its consolidated subsidiaries, including subsidiary registrants. The
following chart indicates the registrants to which each footnote applies:

|    | Note                                                                   | Allegheny | AE Supply | Monongahela | Potomac Edison | West Penn | AGC
|--- | ---------------------------------------------------------------------- | --------- | --------- | ----------- | -------------- | --------- | ---
|1.  | Basis of Presentation                                                  | X         | X         | X           | X              | X         | X  
|2.  | Long-Term Debt                                                         | X         | X         | X           | X              | X         | X  
|3.  | Wholesale Energy Activities                                            | X         | X         |             |                |           |    
|4.  | Goodwill and Intangible Assets                                         | X         | X         | X           | X              | X         | X  
|5.  | Pension Benefits and Postretirement Benefits       Other Than Pensions | X         | X         | X           | X              | X         |    
|6.  | Derivative Instruments and Hedging Activities                          | X         | X         |             |                |           |    
|7.  | Other Comprehensive Income (Loss)                                      | X         | X         | X           | X              | X         |    
|8.  | Business Segments                                                      | X         |           | X           |                |           |    
|9.  | Accounting for the Effects of Price Deregulation                       | X         |           | X           | X              | X         |    
|10. | Loss Per Share                                                         | X         |           |             |                |           |    
|11. | Other Income and Expenses, Net                                         | X         | X         | X           | X              | X         | X  
|12. | Asset Retirement Obligations                                           | X         | X         | X           | X              | X         |    
|13. | Guarantees and Letters of Credit                                       | X         | X         |             | X              |           |    
|14. | Variable Interest Entities                                             | X         | X         |             | X              | X         |    
|15. | Commitments and Contingencies                                          | X         | X         | X           | X              | X         | X  
|16. | Generating Unit Outages                                                | X         | X         | X           |                |           |    
|17. | OVEC Transaction                                                       | X         | X         |             |                |           |    
|18. | Subsequent Events                                                      | X         |           | X           |                |           |    

31



# COMBINED NOTES TO
FINANCIAL STATEMENTS (unaudited)

# NOTE 1:  BASIS
OF PRESENTATION

The accompanying unaudited interim
financial statements of Allegheny Energy, Inc., together with its consolidated
subsidiaries, should be read in conjunction with the 2003 Annual Report on Form
10-K.

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

In the opinion of management, the
unaudited interim financial statements included herein reflect all normal recurring
adjustments that are necessary for a fair presentation of the results of operations for
the three and six months ended June 30, 2004 and 2003, cash flows for the six months ended
June 30, 2004 and 2003 and financial position at June 30, 2004 and December 31, 2003.
Because of the seasonal nature of Alleghenys utility operations at Monongahela,
Potomac Edison and West Penn, results for the six months ended June 30, 2004 are not
necessarily indicative of results that may be expected for the year ending December 31,
2004. For more information on the seasonal nature of Alleghenys utility operations,
see Part I, Item 1, Risk Factors, Other Risk Factors Associated with Our Business, in the
2003 Annual Report on Form 10-K.

Monongahelas 2004 interim results of operations include adjustments to correct accounting errors made in prior years.
These adjustments increased net income in the three
and six months ended June 30, 2004 by $0.8 million and $4 million, respectively.

Certain amounts in the December 31,
2003 consolidated balance sheets and the June 30, 2003 statements of operations and cash
flows have been reclassified for comparative purposes.

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

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

Stock-Based Employee
Compensation.  Allegheny maintains a stock-based employee compensation plan,
which is described in greater detail in Item 8, Note 17, Stock-based Compensation, in the
2003 Annual Report on Form 10-K. Approximately 0.2 million and 5.4 million stock options were granted under
the plan during the three and six months ended June 30, 2004, respectively.

32



---

# COMBINED NOTES TO
FINANCIAL STATEMENTS (unaudited)

Allegheny accounts for stock options
under the recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock option based compensation expense has been recognized in
consolidated net loss, because all options granted under the plan had an exercise price
that equaled the market price of the underlying stock on the date of the grant. The
following table illustrates the effect on consolidated net loss and loss per share as if
Allegheny had recorded compensation expense determined under the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation.

|                                                                 | Three Months Ended
June 30, | Six Months Ended
June 30, |   |      
|---------------------------------------------------------------- | --------------------------- | ------------------------- | - | -----
|
|Consolidated net loss, as reported                               |                             |                           | $ | (39.5
|Add:                                                             |                             |                          
|Stock-based employee compensation included in consolidated net   |                             |                          
|loss, net of related tax effects                                 |                             |                           |   | 4.8  
|Deduct:                                                          |                             |                          
|Total stock-based employee compensation expense determined       |                             |                          
|under fair value based method for all awards, net of related tax |                             |                          
|effects                                                          |                             |                           |   | (5.8 
|                                                                 |                             |                           |   |      
|Consolidated net loss, pro forma                                 |                             |                           | $ | (40.5
|                                                                 |                             |                           |   |      
|                                                                 |                             |                           |   |      
|Basic loss per share:                                            |                             |                          
|As reported                                                      |                             |                           | $ | (0.31
|Pro forma                                                        |                             |                           | $ | (0.32
|Diluted loss per share:                                          |                             |                          
|As reported                                                      |                             |                           | $ | (0.31
|Pro forma                                                        |                             |                           | $ | (0.32

# NOTE
2:  LONG-TERM DEBT

In June 2004, Monongahela issued $120
million in aggregate principal amount of 6.70% First Mortgage Bonds, which mature on June
15, 2014. The net proceeds of the bond issuance were used to repay Monongahelas
$53.6 million short-term bridge loan in June 2004 and to fund the July 2004 redemption of
$40 million in aggregate principal amount of 8.375% First Mortgage Bonds due 2022 and $25
million in aggregate principal amount of 7.25% First Mortgage Bonds due 2007. Interest on
the newly issued 6.70% First Mortgage Bonds is payable semi-annually in arrears on each
June 15 and December 15, commencing December 15, 2004. These bonds are redeemable at
Monongahelas option and rank equally in right of payment with its existing or future
first mortgage bonds.

Under the New AE Facility, AE has
obtained a $300 million credit facility comprised of a $100 million term loan and a $200
million revolving credit facility. Debt outstanding under the New AE Facility is accounted
for as long-term debt because there are no scheduled repayments of such debt during the 12
months following June 30, 2004. The revolving credit facility contains a sub-facility
under which a maximum of $100 million of letters of credit may be outstanding at any given
time. At June 30, 2004, the full amount of the $100 million term loan was outstanding, and
$73.4 million was outstanding under the revolving credit facility, of which $16.4 million
represented outstanding letters of credit. Accordingly, AE, at June 30, 2004, had available revolving credit
capacity of $126.6 million, including up to $83.6 million available for the issuance of
additional letters of credit. In July 2004, an outstanding $10 million letter of credit
issued on behalf of Potomac Edison under an arrangement with
another bank expired and was replaced with a new
letter of credit issued under the New AE Facility.

33



---

# COMBINED NOTES TO
FINANCIAL STATEMENTS (unaudited)

Issuances and Redemptions:

The following issuances and redemptions of
debt were made by the registrants:

|                       | Three Months Ended
June 30, 2004 | Six Months Ended
June 30, 2004 |   |      
|---------------------- | -------------------------------- | ------------------------------ | - | -----
|
|Allegheny Energy:      |                                  |                                |   |      
|New AE Facility        |                                  |                                | $ | --   
|Borrowing Facilities   |                                  |                                |   | --   
|                       |                                  |                                |   |      
|                       |                                  |                                |   | --   
|                       |                                  |                                |   |      
|AE Supply:             |                                  |                               
|AE Supply Loans        |                                  |                                |   | --   
|Borrowing Facilities   |                                  |                                |   | --   
|                       |                                  |                                |   |      
|                       |                                  |                                |   | --   
|                       |                                  |                                |   |      
|Monongahela:           |                                  |                               
|First Mortgage Bonds   |                                  |                                |   | 120.0
|Short-Term Debt        |                                  |                                |   | --   
|                       |                                  |                                |   |      
|                       |                                  |                                |   | 120.0
|                       |                                  |                                |   |      
|West Penn:             |                                  |                               
|Medium-Term Notes      |                                  |                                |   | --   
|Transition Bonds       |                                  |                                |   | --   
|                       |                                  |                                |   |      
|                       |                                  |                                |   | --   
|                       |                                  |                                |   |      
|Total AE Consolidated: |                                  |                               
|Borrowing Facilities   |                                  |                                |   |      
|First Mortgage Bonds   |                                  |                                |   | 120.0
|Medium-Term Notes      |                                  |                                |   | --   
|Short-Term Debt        |                                  |                                |   | --   
|New AE Facility        |                                  |                                |   | --   
|AE Supply Loans        |                                  |                                |   | --   
|Transition Bonds       |                                  |                                |   | --   
|                       |                                  |                                |   |      
|Total                  |                                  |                                | $ | 120.0
|                       |                                  |                                |   |      

34



# COMBINED NOTES TO
FINANCIAL STATEMENTS (unaudited)

As of June 30, 2004, scheduled maturities of long-term debt for the remainder of 2004 and for full years thereafter are as
follows:

|(In millions)                    | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total
|-------------------------------- | ---- | ---- | ---- | ---- | ---- | ---------- | -----
|Allegheny Energy:                |      |      |      |      |      |            |      
|Medium-Term Notes                |      |      | $    | ---  |      | $          | 300  
|New AE Facility                  |      |      |      | --   |      |            | --   
|Convertible Preferred Securities |      |      |      | --   |      |            | --   
|                                 |      |      |      |      |      |            |      
|Total Allegheny Energy           |      |      | $    | ---  |      | $          | 300  
|                                 |      |      |      |      |      |            |      
|AE Supply:                       |      |     
|Pollution Control Bonds          |      |      | $    | ---  |      | $          | ---  
|Other Notes                      |      |      |      | --   |      |            | --   
|Debentures-AGC                   |      |      |      | --   |      |            | --   
|AE Supply Loans                  |      |      |      | 7    |      |            | 12   
|                                 |      |      |      |      |      |            |      
|Total AE Supply                  |      |      | $    | 7    |      | $          | 12   
|                                 |      |      |      |      |      |            |      
|Monongahela:                     |      |     
|First Mortgage Bonds             |      |      | $    | 65   |      | $          | ---  
|Pollution Control Bonds          |      |      |      | --   |      |            | --   
|Other Notes                      |      |      |      | 3    |      |            | 3    
|Medium-Term Notes                |      |      |      | --   |      |            | --   
|                                 |      |      |      |      |      |            |      
|Total Monongahela                |      |      | $    | 68   |      | $          | 3    
|                                 |      |      |      |      |      |            |      
|Potomac Edison:                  |      |     
|First Mortgage Bonds             |      |      | $    | ---  |      | $          | ---  
|Medium-Term Notes                |      |      |      | --   |      |            | --   
|                                 |      |      |      |      |      |            |      
|Total Potomac Edison             |      |      | $    | ---  |      | $          | ---  
|                                 |      |      |      |      |      |            |      
|West Penn:                       |      |     
|Transition Bonds                 |      |      | $    | 35   |      | $          | 73   
|Medium-Term Notes                |      |      |      | --   |      |            | --   
|                                 |      |      |      |      |      |            |      
|Total West Penn                  |      |      | $    | 35   |      | $          | 73   
|                                 |      |      |      |      |      |            |      
|AGC:                             |      |     
|Debentures                       |      |      | $    | ---  |      | $          | ---  
|                                 |      |      |      |      |      |            |      
|Total AGC                        |      |      | $    | ---  |      | $          | ---  
|                                 |      |      |      |      |      |            |      
|Total AE Consolidated:           |      |     
|First Mortgage Bonds             |      |      | $    | 65   |      | $          | ---  
|Transition Bonds                 |      |      |      | 35   |      |            | 73   
|Pollution Control Bonds          |      |      |      | --   |      |            | --   
|Other Notes                      |      |      |      | 3    |      |            | 3    
|Medium-Term Notes                |      |      |      | --   |      |            | 300  
|Debentures                       |      |      |      | --   |      |            | --   
|New AE Facility                  |      |      |      | --   |      |            | --   
|AE Supply Loans                  |      |      |      | 7    |      |            | 12   
|Convertible Preferred Securities |      |      |      | --   |      |            | --   
|Unamortized debt expense,        |      |     
|discount, premium and terminated |      |     
|interest rate swap               |      |      |      | (3   | )    |            | (3   
|Eliminations                     |      |      |      | --   |      |            | --   
|                                 |      |      |      |      |      |            |      
|Total AE Consolidated            |      |      | $    | 107  |      | $          | 385  



---

# COMBINED NOTES TO
FINANCIAL STATEMENTS (unaudited)

# NOTE
3:  WHOLESALE ENERGY ACTIVITIES

As of January 1, 2003, Allegheny
adopted EITF Issue No. 02-3, Accounting for Contracts Involved in Energy Trading and
Risk Management, which resulted in a change in Alleghenys accounting for
certain commodity contracts related to AE Supplys energy trading activities.
Accordingly, AE Supply recorded a charge against earnings in the first quarter of 2003 of
$12.2 million, net of income taxes ($19.7 million before income taxes), as the cumulative
effect of a change in accounting principle. See Note 6, Derivative Instruments and Hedging
Activities, below for more information regarding the treatment of these contracts.

During the second quarter of 2004, AE
Supply recorded a loss of $11.7 million related to the release to a third party of
pipeline capacity for the period November 2004 through November 2007. The release is
associated with a long-term natural gas transportation agreement effective through April
30, 2018. This loss was recorded in the statement of operations as purchased power and
transmission expense.

# NOTE
4:  GOODWILL AND INTANGIBLE ASSETS

There have been no changes in
goodwill for the period December 31, 2003 to June 30, 2004.

The components of intangible assets
that are included in the caption property, plant and equipment on the consolidated
balance sheets were as follows:

|                                            | As of June 30, 2004 | As of December 31, 2003 |   |      
|------------------------------------------- | ------------------- | ----------------------- | - | -----
|
|Land easements, amortizable:                |                     |                         |   |      
|AE Supply                                   |                     |                         | $ | 0.2  
|Monongahela                                 |                     |                         |   | 2.0  
|Potomac Edison                              |                     |                         |   | 54.8 
|West Penn                                   |                     |                         |   | 38.8 
|AGC                                         |                     |                         |   | 1.4  
|                                            |                     |                         |   |      
|Total land easements, amortizable           |                     |                         |   | 97.2 
|Land easements, unamortizable (Monongahela) |                     |                         |   | 31.6 
|Natural gas rights (Monongahela)            |                     |                         |   | 6.6  
|                                            |                     |                         |   |      
|Total                                       |                     |                         | $ | 135.4
|                                            |                     |                         |   |      

The intangible assets included in
investments and other assets on the consolidated balance sheets of $40 million at June 30,
2004 and $41.7 million at December 31, 2003 relate to an additional minimum pension
liability. See Item 8, Note 16, Pension Benefits and Postretirement Benefits Other Than
Pensions, in the 2003 Annual Report on Form 10-K for more information.

Amortization of intangible assets was
$0.4 million ($0.2 million for Potomac Edison and $0.1 million each for West Penn and
Monongahela) for the three months ended June 30, 2003. Amortization of intangible assets
for the six months ended June 30, 2003 was $0.8 million ($0.4 million for Potomac Edison
and $0.2 million each for West Penn and Monongahela).

Amortization expense is estimated to
be $1.5 million annually for 2004 through 2008.

36



---

# COMBINED NOTES TO
FINANCIAL STATEMENTS (unaudited)

# NOTE
5:  PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

Substantially all of the employees of
Allegheny are employed by Allegheny Energy Service Corporation (AESC) and are covered by
one noncontributory, defined benefit pension plan.

The components of the net periodic
benefit costs for pension benefits and for postretirement benefits other than pensions
(principally health care and life insurance) for employees and covered dependents for the
three and six months ended June 30, 2004 and 2003 and the allocation by Allegheny, through
AESC, of costs for pension and other postretirement benefits other than pensions were as
follows:

|                                                           | Pension Benefits for the
Three Months Ended
June 30, | Postretirement Benefits other than Pensions for the
Three Months Ended
June 30, |   |      
|---------------------------------------------------------- | ---------------------------------------------------- | ------------------------------------------------------------------------------- | - | -----
|
|Components of net periodic benefit cost:                   |                                                      |                                                                                 |   |      
|Service cost                                               |                                                      |                                                                                 | $ | 5.9  
|Interest cost                                              |                                                      |                                                                                 |   | 15.6 
|Expected return on plan assets                             |                                                      |                                                                                 |   | (17.3
|Amortization of unrecognized transition obligation         |                                                      |                                                                                 |   | 0.1  
|Amortization of prior service cost                         |                                                      |                                                                                 |   | 1.1  
|Amortization of net loss                                   |                                                      |                                                                                 |   | 1.3  
|                                                           |                                                      |                                                                                 |   |      
|                                                           |                                                      |                                                                                 |   | 6.7  
|Curtailments, settlements and special termination benefits |                                                      |                                                                                 |   | 1.9  
|                                                           |                                                      |                                                                                 |   |      
|Net periodic benefit cost                                  |                                                      |                                                                                 | $ | 8.6  
|                                                           |                                                      |                                                                                 |   |      
|Allocation of net periodic benefit costs:                  |                                                      |                                                                                
|Monongahela                                                |                                                      |                                                                                 | $ | 2.1  
|Potomac Edison                                             |                                                      |                                                                                 |   | 1.1  
|West Penn                                                  |                                                      |                                                                                 |   | 1.5  
|AE Supply                                                  |                                                      |                                                                                 |   | 3.8  
|AE                                                         |                                                      |                                                                                 |   | 0.1  
|                                                           |                                                      |                                                                                 |   |      
|Net periodic benefit cost                                  |                                                      |                                                                                 | $ | 8.6  
|                                                           |                                                      |                                                                                 |   |      

37



---

|                                                           | Pension Benefits for the
Six Months Ended
June 30, | Postretirement Benefits other than Pensions for the
Six Months Ended
June 30, |   |      
|---------------------------------------------------------- | -------------------------------------------------- | ----------------------------------------------------------------------------- | - | -----
|
|Components of net periodic benefit cost:                   |                                                    |                                                                               |   |      
|Service cost                                               |                                                    |                                                                               | $ | 11.7 
|Interest cost                                              |                                                    |                                                                               |   | 31.3 
|Expected return on plan assets                             |                                                    |                                                                               |   | (34.6
|Amortization of unrecognized transition obligation         |                                                    |                                                                               |   | 0.3  
|Amortization of prior service cost                         |                                                    |                                                                               |   | 2.1  
|Amortization of net loss                                   |                                                    |                                                                               |   | 2.5  
|                                                           |                                                    |                                                                               |   |      
|                                                           |                                                    |                                                                               |   | 13.3 
|Curtailments, settlements and special termination benefits |                                                    |                                                                               |   | 3.3  
|                                                           |                                                    |                                                                               |   |      
|Net periodic benefit cost                                  |                                                    |                                                                               | $ | 16.6 
|                                                           |                                                    |                                                                               |   |      
|Allocation of net periodic benefit costs:                  |                                                    |                                                                              
|Monongahela                                                |                                                    |                                                                               | $ | 4.4  
|Potomac Edison                                             |                                                    |                                                                               |   | 2.3  
|West Penn                                                  |                                                    |                                                                               |   | 3.2  
|AE Supply                                                  |                                                    |                                                                               |   | 6.4  
|AE                                                         |                                                    |                                                                               |   | 0.3  
|                                                           |                                                    |                                                                               |   |      
|Net periodic benefit cost                                  |                                                    |                                                                               | $ | 16.6 
|                                                           |                                                    |                                                                               |   |      

38



---

# COMBINED NOTES TO
FINANCIAL STATEMENTS(unaudited)

Employer
Contributions.  During the three months ended June 30, 2004, Allegheny made
voluntary contributions of $0.1 million to the Supplemental Executive Retirement Plan
(SERP), and voluntary contributions of $6.3 million to its postretirement benefits other
than pensions.

During the six months ended June 30,
2004, Allegheny made voluntary contributions of $19.4 million to its pension plans,
including $0.2 million to the SERP, and voluntary contributions of $10.9 million to its
postretirement benefits other than pensions.

As of June 30, 2004, Allegheny
anticipates contributing an additional $8.3 million to fund pension plans in 2004, including $0.1 million to the SERP, for a total contribution
to pension plans during 2004 of $27.7 million.  Allegheny anticipates contributing an additional amount ranging from $10.2 million to $15.2 million
to fund postretirement benefits other than pensions in 2004, for a total contribution to postretirement benefits other than pensions in
2004 ranging from approximately $21.1 million to $26.1 million.

Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (Medicare Act). As previously disclosed in
Item 8, Note 16, Pension Benefits and Postretirement Benefits Other Than Pensions, in the
2003 Annual Report on Form 10-K, Allegheny has elected to follow the deferral provisions
of FASB Staff Bulletin Position No. 106-1, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-1).
The Medicare Act provides for subsidies for employers that provide prescription drug
coverage for their retirees as long as the plan is equivalent to, or better than, the
Medicare Part D Prescription Drug Plan. FSP 106-1 permitted employers that provide such
drug benefits to make a one-time election to defer accounting for any effects of the
Medicare Act under certain circumstances.

FSP 106-2, which was issued in May
2004, supercedes FSP 106-1 and provides guidance on accounting for the effects of the new
Medicare prescription drug legislation for employers whose prescription drug benefits are
actuarially equivalent to the drug benefit under Medicare Part D. FSP 106-2 is effective
as of the first interim period after June 15, 2004. Allegheny has not yet determined
whether benefits provided by its plan are actuarially equivalent and, accordingly, any
measures of its accumulated postretirement benefit obligation and/or net postretirement
benefit costs do not reflect any amount associated with the subsidies provided under the
Medicare Act. When final regulations are adopted, the approach that Allegheny ultimately
selects to account for the effects of the new legislation may require Allegheny to change
previously reported information.

# NOTE
6:  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Allegheny utilizes derivative
instruments to manage its exposures to various market risks, as described in the 2003
Annual Report on Form 10-K. The following information supplements, and should be read in
conjunction with, Item 8, Note 4, Energy Trading Activities, and Note 9, Derivative
Instruments and Hedging Activities, in the 2003 Annual Report on Form 10-K.

Allegheny did not have any
instruments that were designated as hedges for accounting purposes for the three and six
months ended June 30, 2004. AE Supply records commodity contracts related to energy
trading that are derivative instruments at their fair value as components of operating
revenues, in accordance with SFAS No. 133, EITF 02-3 and EITF 03-11, unless the contract
falls within the normal purchases and normal sales scope exception. Contracts that are
designated as normal purchases and normal sales are accounted for under accrual accounting,
therefore, are not recorded on the balance sheet at their fair
values.

For the three months ended
June 30, 2004, AE Supply reported net losses (including realized and unrealized losses) of $36.5 million.
For the six months ended June 30, 2004, AE Supply reported net gains (including realized and unrealized gains)
of $4.3 million. For the three and six
months ended June 30, 2003, AE Supply reported net losses (including realized and unrealized losses) of
$303.4 million and $405.6 million, respectively.

AE Supply has designated certain
contracts as cash flow hedges effective July 1, 2004. Future changes in fair value will be
reflected in other comprehensive income (loss), and existing derivative liabilities
associated with each contract at the time of designation will be realized in earnings over
the remaining period of such contracts term, in accordance with the estimated cash
flow of such contract at the time of the designation. These contracts expire at various
dates through December 31, 2006 and represent an aggregate liability at June 30, 2004 of
$27.6 million.

39



---

# COMBINED NOTES TO
FINANCIAL STATEMENTS(unaudited)

# NOTE 7:  OTHER
COMPREHENSIVE INCOME (LOSS)

Alleghenys consolidated
comprehensive income (loss) and the components of other comprehensive income (loss), net
of income taxes, for the three and six months ended June 30, 2004 and 2003 were as
follows:

|                                              | Three Months Ended
June 30, | Six Months Ended
June 30, |   |      
|--------------------------------------------- | --------------------------- | ------------------------- | - | -----
|
|Consolidated net loss                         |                             |                           | $ | (39.5
|Other comprehensive income (loss) net of tax: |                             |                          
|Minimum pension liability adjustment          |                             |                           |   | --   
|Other                                         |                             |                           |   | 0.1  
|                                              |                             |                           |   |      
|Consolidated comprehensive loss               |                             |                           | $ | (39.4
|                                              |                             |                           |   |      

Monongahela and Potomac Edison
recorded unrealized gains on available-for-sale securities for the three and six months
ended June 30, 2004. West Penn recorded unrealized losses on available-for-sale securities
for the three and six months ended June 30, 2004. AE Supply recorded other comprehensive
income of $0.1 million for the six months ended June 30, 2004. None of these gains or
losses was material, either individually or in the aggregate.

The other comprehensive loss of $0.1
million for the six months ended June 30, 2003 relates primarily to AE Supply.

AE Supply contributed $45.5 million
and $37.4 million of the consolidated comprehensive loss of $39.4 million and $3.8 million
for the three and six months ended June 30, 2004, respectively. AE Supply also contributed
$237.9 million and $384.9 million of the consolidated comprehensive loss of $231.5 million
and $290.4 million for the three and six months ended June 30, 2003, respectively. These
losses by AE Supply were partially offset by comprehensive income attributable to other
consolidated subsidiaries of Allegheny included in the calculation of consolidated
comprehensive income.

40



# COMBINED NOTES TO
FINANCIAL STATEMENTS (unaudited)

# NOTE
8:  BUSINESS SEGMENTS

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

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

|                                                       | Three Months Ended
June 30, | Six Months Ended
June 30, |   |       
|------------------------------------------------------ | --------------------------- | ------------------------- | - | ------
|
|Total operating revenues:                              |                             |                           |   |       
|Delivery and Services                                  |                             |                           | $ | 699.7 
|Generation and Marketing                               |                             |                           |   | 326.4 
|Eliminations                                           |                             |                           |   | (369.0
|                                                       |                             |                           |   |       
|Total                                                  |                             |                           | $ | 657.1 
|                                                       |                             |                           |   |       
|Operating income (loss):                               |                             |                          
|Delivery and Services                                  |                             |                           | $ | 65.7  
|Generation and Marketing                               |                             |                           |   | (40.9 
|Eliminations                                           |                             |                           |   | 1.1   
|                                                       |                             |                           |   |       
|Total                                                  |                             |                           | $ | 25.9  
|                                                       |                             |                           |   |       
|Interest expense:                                      |                             |                          
|Delivery and Services                                  |                             |                           | $ | 33.6  
|Generation and Marketing                               |                             |                           |   | 65.3  
|Eliminations                                           |                             |                           |   | --    
|                                                       |                             |                           |   |       
|Total                                                  |                             |                           | $ | 98.9  
|                                                       |                             |                           |   |       
|Consolidated income (loss) before cumulative effect of |                             |                          
|accounting changes:                                    |                             |                          
|Delivery and Services                                  |                             |                           | $ | 24.2  
|Generation and Marketing                               |                             |                           |   | (64.4 
|Eliminations                                           |                             |                           |   | 0.7   
|                                                       |                             |                           |   |       
|Total                                                  |                             |                           | $ | (39.5 
|                                                       |                             |                           |   |       
|Cumulative effect of accounting changes, net:          |                             |                          
|Delivery and Services                                  |                             |                           | $ | ---   
|Generation and Marketing                               |                             |                           |   | --    
|Eliminations                                           |                             |                           |   | --    
|                                                       |                             |                           |   |       
|Total                                                  |                             |                           | $ | ---   
|                                                       |                             |                           |   |       
|Consolidated net income (loss):                        |                             |                          
|Delivery and Services                                  |                             |                           | $ | 24.2  
|Generation and Marketing                               |                             |                           |   | (64.4 
|Eliminations                                           |                             |                           |   | 0.7   
|                                                       |                             |                           |   |       
|Total                                                  |                             |                           | $ | (39.5 
|                                                       |                             |                           |   |       

---

# COMBINED NOTES TO
FINANCIAL STATEMENTS (unaudited)

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

|                                                                  | Three Months Ended
June 30, | Six Months Ended
June 30, |   |      
|----------------------------------------------------------------- | --------------------------- | ------------------------- | - | -----
|
|Total operating revenues:                                         |                             |                           |   |      
|Delivery and Services                                             |                             |                           | $ | 201.2
|Generation and Marketing                                          |                             |                           |   | 71.2 
|Eliminations                                                      |                             |                           |   | (71.0
|                                                                  |                             |                           |   |      
|Total                                                             |                             |                           | $ | 201.4
|                                                                  |                             |                           |   |      
|Operating income (loss):                                          |                             |                          
|Delivery and Services                                             |                             |                           | $ | 9.2  
|Generation and Marketing                                          |                             |                           |   | (20.3
|Eliminations                                                      |                             |                           |   | --   
|                                                                  |                             |                           |   |      
|Total                                                             |                             |                           | $ | (11.1
|                                                                  |                             |                           |   |      
|Interest expense:                                                 |                             |                          
|Delivery and Services                                             |                             |                           | $ | 8.5  
|Generation and Marketing                                          |                             |                           |   | 4.4  
|Eliminations                                                      |                             |                           |   | --   
|                                                                  |                             |                           |   |      
|Total                                                             |                             |                           | $ | 12.9 
|                                                                  |                             |                           |   |      
|Consolidated income (loss) before cumulative effect of accounting |                             |                          
|change:                                                           |                             |                          
|Delivery and Services                                             |                             |                           | $ | 2.4  
|Generation and Marketing                                          |                             |                           |   | (14.2
|Eliminations                                                      |                             |                           |   | --   
|                                                                  |                             |                           |   |      
|Total                                                             |                             |                           | $ | (11.8
|                                                                  |                             |                           |   |      
|Cumulative effect of accounting change, net:                      |                             |                          
|Delivery and Services                                             |                             |                           | $ | ---  
|Generation and Marketing                                          |                             |                           |   | --   
|Eliminations                                                      |                             |                           |   | --   
|                                                                  |                             |                           |   |      
|Total                                                             |                             |                           | $ | ---  
|                                                                  |                             |                           |   |      
|Consolidated net income (loss):                                   |                             |                          
|Delivery and Services                                             |                             |                           | $ | 2.4  
|Generation and Marketing                                          |                             |                           |   | (14.2
|Eliminations                                                      |                             |                           |   | --   
|                                                                  |                             |                           |   |      
|Total                                                             |                             |                           | $ | (11.8
|                                                                  |                             |                           |   |      

42



# COMBINED NOTES TO
FINANCIAL STATEMENTS (unaudited)

# NOTE
9:  ACCOUNTING FOR THE EFFECTS OF PRICE DEREGULATION

Alleghenys reserve for adverse
power purchase commitments, which is recorded entirely on West Penns consolidated
balance sheets, decreased for the six months ended June 30, 2004 and 2003 as follows:

|                                               | Six Months Ended
June 30, | 
|---------------------------------------------- | ------------------------- | 
|
|Decrease in adverse power purchase commitments |                           | 

Allegheny's consolidated balance sheets
include the amounts listed below for generating assets no longer subject to SFAS No. 71.

|(In millions)                             | June 30, 2004 | December 31, 2003
|----------------------------------------- | ------------- | -----------------
|Property, plant and equipment             |               |                  
|Amounts under construction included above |               |                  
|Accumulated depreciation                  |               |                  

As described in Item 8, Note 13,
Accounting for the Effects of Price Regulation, in the 2003 Annual Report on Form 10-K,
the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation, were reapplied to Monongahelas West Virginia jurisdictional
generating assets in the first quarter of 2003. Upon reapplication of SFAS No. 71,
Monongahela and Potomac Edison recorded gains of $61.7 million and $14.1 million,
respectively, in other income and expenses, net, in their consolidated statements of
operations. These gains were the result of the elimination of rate stabilization reserves
and the re-establishment of regulatory assets related to deferred income taxes and
deferred losses on reacquired debt.

# NOTE
10:  INCOME (LOSS) PER SHARE

The information used to compute
Alleghenys income (loss) per share for the three and six months ended June 30, 2004
and 2003 was as follows:

|                                                    | Three Months Ended
June 30, | Six Months Ended
June 30, |   |            
|--------------------------------------------------- | --------------------------- | ------------------------- | - | -----------
|
|Basic and Diluted Earnings Per Share--Numerator     |                             |                           |   |            
|Loss before cumulative effect of accounting changes |                             |                           | $ | (39.5      
|Cumulative effect of accounting changes             |                             |                           |   | --         
|                                                    |                             |                           |   |            
|Net loss                                            |                             |                           | $ | (39.5      
|                                                    |                             |                           |   |            
|Basic and Diluted Earnings Per Share--Denominator   |                             |                          
|Weighted average common shares outstanding          |                             |                           |   | 126,971,447
|                                                    |                             |                           |   |            
|Shares potentially issuable under:                  |                             |                          
|Stock options                                       |                             |                           |   | 209,319    
|Performance shares                                  |                             |                           |   | 106,963    
|Stock units                                         |                             |                           |   | 1,756,859  
|Convertible securities                              |                             |                           |   | 25,000,000 
|                                                    |                             |                           |   |            
|Total                                               |                             |                           |   | 27,073,141 
|                                                    |                             |                           |   |            

The effects of shares potentially
issuable under stock options, performance shares, stock units and convertible securities
are not included in the calculation of diluted earnings per share, as these amounts are
antidilutive.



---

# COMBINED NOTES TO
FINANCIAL STATEMENTS (unaudited)

# NOTE
11:  OTHER INCOME AND EXPENSES, NET

Other income and expenses, net,
represents non-operating income and expenses before income taxes. The following table
summarizes other income and expenses, net, for the three and six months ended June 30,
2004 and 2003.

|                                                      | Three Months Ended
June 30, | Six Months Ended
June 30, |   |     
|----------------------------------------------------- | --------------------------- | ------------------------- | - | ----
|
|Allegheny:                                            |                             |                           |   |     
|Reapplication of SFAS No. 71                          |                             |                           | $ | --- 
|Impairment charges related to unregulated investments |                             |                           |   | --  
|Coal brokering income                                 |                             |                           |   | 1.0 
|Gain on sale of land                                  |                             |                           |   | 0.5 
|Interest and dividend income                          |                             |                           |   | 1.3 
|Other                                                 |                             |                           |   | 2.0 
|                                                      |                             |                           |   |     
|Total                                                 |                             |                           | $ | 4.8 
|                                                      |                             |                           |   |     
|AE Supply:                                            |                             |                          
|Interest and dividend income                          |                             |                           | $ | 0.5 
|Other                                                 |                             |                           |   | (0.2
|                                                      |                             |                           |   |     
|Total                                                 |                             |                           | $ | 0.3 
|                                                      |                             |                           |   |     
|Monongahela:                                          |                             |                          
|Reapplication of SFAS No. 71                          |                             |                           | $ | --- 
|Equity in earnings of AGC                             |                             |                           |   | 1.3 
|Interest and dividend income                          |                             |                           |   | 0.3 
|Other                                                 |                             |                           |   | 1.3 
|                                                      |                             |                           |   |     
|Total                                                 |                             |                           | $ | 2.9 
|                                                      |                             |                           |   |     
|Potomac Edison:                                       |                             |                          
|Reapplication of SFAS No. 71                          |                             |                           | $ | --- 
|Coal brokering income                                 |                             |                           |   | 1.0 
|Gain on sale of land                                  |                             |                           |   | 0.3 
|Other                                                 |                             |                           |   | 0.8 
|                                                      |                             |                           |   |     
|Total                                                 |                             |                           | $ | 2.1 
|                                                      |                             |                           |   |     
|West Penn:                                            |                             |                          
|Gain on sale of land                                  |                             |                           | $ | 0.1 
|Interest and dividend income                          |                             |                           |   | 0.2 
|Other                                                 |                             |                           |   | 0.5 
|                                                      |                             |                           |   |     
|Total                                                 |                             |                           | $ | 0.8 
|                                                      |                             |                           |   |     
|AGC:                                                  |                             |                          
|Interest income                                       |                             |                           | $ | --- 
|                                                      |                             |                           |   |     

44

---



# COMBINED NOTES TO
FINANCIAL STATEMENTS (unaudited)

# NOTE
12:  ASSET RETIREMENT OBLIGATIONS (ARO)

The effect of adopting SFAS No. 143,
Asset Retirement Obligations, on Alleghenys consolidated statements of
operations was recorded as a cumulative effect of accounting change, net of tax, in the
three months ended March 31, 2003. The effect, by registrant, was as follows:

|(In millions)   | Property, Plant
and Equipment, Net | Non-Current
Regulatory Asset | Non-Current
Liabilities (AROs) | Decrease in
Pre-Tax Income | Decrease in
Net Income
|--------------- | ---------------------------------- | ---------------------------- | ------------------------------ | -------------------------- | ----------------------
|AE Supply       |                                    |                              | $                              | 0.3                        |                       
|Monongahela     |                                    |                              |                                | 3.0                        |                       
|Potomac Edison  |                                    |                              |                                | 0.1                        |                       
|West Penn       |                                    |                              |                                | --                         |                       
|                |                                    |                              |                                |                            |                       
|Total Allegheny |                                    |                              | $                              | 3.4                        |                       
|                |                                    |                              |                                |                            |                       

With respect to property, plant and
equipment at Monongahela for which AROs were identified and for which the cost of removal
currently is being recovered through rates, Allegheny believes it is probable that any
difference between expenses under SFAS No. 143 and expenses recovered currently in rates
will be recoverable in future rates. Accordingly, Allegheny is deferring such expenses as
a regulatory asset.

Alleghenys ARO balance
increased from $22.5 million at December 31, 2003 to $24.3 million at June 30, 2004. This
increase, of which $1.5 million and $0.3 million related to AE Supply and Monongahela,
respectively, was due to accretion.

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

|(In millions)  | June 30, 2004 | December 31, 2003
|-------------- | ------------- | -----------------
|
|Monongahela    |               |                  
|Potomac Edison |               |                  
|West Penn      |               |                  
|               |               |                  
|Total          |               |                  
|               |               |                  

# NOTE
13:  GUARANTEES AND LETTERS OF CREDIT

At June 30, 2004, Allegheny provided
guarantees, either directly or indirectly, of $39.7 million for contractual obligations of
affiliated companies.

Allegheny does not carry any amounts
as liabilities on its consolidated balance sheets for its obligations with respect to
$30.6 million of the $39.7 million in guarantees. Of these $30.6 million in guarantees,
approximately $15.8 million were issued by AE in connection with the purchase, sale, exchange or
transportation of wholesale natural gas, electric power and related services, $4.7 million
were issued by AE in connection with a lease agreement, $10 million were issued by Allegheny Ventures in connection with
loans and other financing-related matters and $0.1 million were issued by AE Supply in connection with the sale
of wholesale electric power.

Effective January 1, 2003, Allegheny
began recording as liabilities at their fair value, all guarantees issued or modified after that date. As of June
30, 2004, Alleghenys consolidated balance sheet reflected liabilities for $9.1
million of the total $39.7 million in outstanding guarantees. The $9.1
million in guarantees recorded as liabilities were issued by AE Supply in connection with the sale of the CDWR contract and
related hedge transactions and the performance of a put option issued in connection with
an asset sale.

In addition,
$26.4 million in letters of credit were outstanding at June 30,
2004, including $16.4 million in letters of credit under the New AE
Facility and a $10 million letter of credit issued on behalf of Potomac Edison under an
arrangement with a different bank. This $10 million letter of credit expired in July 2004
and was replaced with a new letter of credit under the New AE Facility. None of these letters of
credit is recorded on Alleghenys balance sheet.



---

# COMBINED NOTES TO
FINANCIAL STATEMENTS(unaudited)

# NOTE
14:  VARIABLE INTEREST ENTITIES

Allegheny adopted FASBs
Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities (FIN 46R), as of March 31, 2004. FIN 46R requires Allegheny to consolidate
entities or contracts that represent a variable interest in variable interest entities
(VIEs) if Allegheny is determined to be the primary beneficiary of the VIE.

Under FIN 46R, Allegheny consolidated
Hunlock Creek Energy Ventures as of March 31, 2004. This entity operates two plants that
produce and sell electricity to Allegheny and a third party. The consolidation resulted in
an increase in total assets as of March 31, 2004 of $16.5 million. Consolidation of this
entity had no impact on Alleghenys net income or stockholders equity.

Allegheny determined that West Penn
and Potomac Edison each has a long-term electricity purchase contract with an unrelated
independent power production company (IPP) that represents a variable interest under FIN
46R. These VIEs would be consolidated if either West Penn or Potomac Edison is determined
to be the primary beneficiary of the applicable VIE. Based on a qualitative analysis,
Allegheny does not believe that either West Penn or Potomac Edison is the primary
beneficiary of either of these VIEs. Allegheny has been unable to obtain certain
quantitative information from the IPPs necessary to fully support this position. Allegheny
is attempting to obtain the necessary financial information from each IPP in order to
complete such an analysis. FIN 46R does not require Allegheny to consolidate these VIEs
until Allegheny is able to obtain this information.

West Penn and Potomac Edison have
annual estimated power purchases from these two IPPs in the amount of $47 million and $95
million, respectively. West Penn recovers a portion and Potomac Edison recovers the full
amount of the cost of the applicable power contract in their rates charged to consumers.
Neither West Penn nor Potomac Edison is subject to any risk of loss associated with the
applicable VIE, because neither of them has any obligation to the applicable IPP other
than to purchase the power that the VIE produces according to the terms of the applicable
electricity purchase contract.

# NOTE
15:  COMMITMENTS AND CONTINGENCIES

Reference is made to Item 3, Legal
Proceedings, and Item 8, Note 24, Commitments and Contingencies, in the 2003 Annual Report
on Form 10-K.

# Environmental Matters:

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

Clean Air Act
Matters: Alleghenys compliance with the Clean Air Act
has required, and may require in the future, the installation of expensive post-combustion
control technologies on many of its power stations.

The Clean Air Act mandates
annual reductions of SO2 and created an SO2 emission allowance
trading program. AE Supply and Monongahela comply with current SO2 emission
standards through a system-wide plan combining emission controls, burning less sulfur fuel
and utilizing emission allowances. AE Supply estimates that its banked allowances will
permit it to comply economically with SO2 limits through 2005 and possibly
beyond. Allegheny continues to study a combination of banking and trading allowances,
additional emission controls and low sulfur fuel to meet future SO2 compliance
obligations.

46



---

In 1998, the EPA finalized its
Nitrogen Oxide (NOx) State Implementation Plan (SIP) call rule (known as the NOx SIP
call), which addressed the regional transport of ground-level ozone and required the
equivalent of a uniform 0.15 lb/mmBtu emission rate throughout a 22-state region,
including Maryland, Pennsylvania and West Virginia, beginning in May 2003. The District of
Columbia Circuit Court of Appeals issued a subsequent order that postponed the initial
compliance date of the NOx SIP call from May 2003 to May 2004. Maryland and Pennsylvania
implemented their respective SIP call rules in May 2003. West Virginias SIP call
rules were effective as of May 2004.

AE Supply and Monongahela are in the
process of installing NOx controls to meet the Pennsylvania, Maryland and West Virginia
SIP calls. These NOx controls include Selective Catalytic Reduction at the Harrison Power
Station and Pleasants Power Station and Selective Noncatalytic Reduction at
Hatfields Ferry Power Station and Fort Martin Power Station, as well as burner
modifications at Mitchell Power Station. The NOx compliance plan functions on a
system-wide basis, similar to the SO2 compliance plan. AE Supply and
Monongahela also have the option in some cases, to purchase alternate fuels, NOx
allowances or power on the market, if needed, to supplement their compliance strategies.
AE Supply and Monongahela estimate their emission control activities, in concert with
their inventory of banked allowances, will facilitate their compliance with NOx limits
established by the SIP through 2005 and possibly beyond.

In August 2000, AE received a letter
from the EPA requesting that it provide information and documentation relevant to the
operation and maintenance of the following ten electric generating stations, collectively
including 22 generating units: Albright, Armstrong, Fort Martin, Harrison, Hatfields
Ferry, Mitchell, Pleasants, Rivesville, R. Paul Smith and Willow Island. AE Supply and
Monongahela own these electric generating stations. The letter requested information under
Section 114 of the Clean Air Act to determine compliance with the Clean Air Act and
related requirements, including potential application of the NSR standards of the Clean
Air Act, which can require the installation of additional air pollution control equipment
upon the major modification of an existing facility. Responsive submissions were made
during 2000 and 2001. In July 2002, AE received a follow-up letter from the EPA requesting
clarifying information and provided responsive information. A meeting between the EPA and
AE was held on July 16, 2003. At this time, AE is engaged in discussions with the EPA with respect to environmental matters,
including NSR issues.

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

If NSR standards are applied to
Alleghenys generating stations, in addition to the possible imposition of fines,
compliance would entail significant expenditures. However, on April 13, 2004, Duke Energy
(Duke) reported that the EPA and three intervening environmental groups have agreed to
drop their lawsuit against Duke, which alleged that Duke violated the NSR standards. In
addition, the final Routine Maintenance, Repair and Replacement Rule (RMRR) recently
released by the EPA is more consistent with the energy industrys historical
compliance approach. On December 24, 2003, the U.S. Court of Appeals for the District of
Columbia Circuit issued an order to stay the RMRR, which was scheduled to go into effect
on December 26, 2003. The stay delays implementation of the RMRR. At this time, AE and its
subsidiaries are not able to determine the effect that these actions may have on them.

On February 2, 2004, the EPA informed
AE that it intended to provide the New York Attorney General, pursuant to his request,
certain records that AE provided to the EPA pursuant to its request under Section 114 of
the Clean Air Act. On April 23, 2004, AE Supply was notified by the Pennsylvania
Department of Environmental Protection (PADEP) that PADEP had requested that the EPA
provide it with records that AE provided to the EPA pursuant to the EPAs request
under Section 114 of the Clean Air Act. At this time, AE and its subsidiaries are not able
to determine the effect these actions may have on them.

47



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On May 20, 2004, AE, AE Supply,
Monongahela and West Penn received a Notice of Intent to Sue Pursuant to Clean Air Act
§7604 (the Notice) from the Attorneys General of New York, New Jersey and Connecticut
(collectively, the AGs) and from PADEP. The Notice alleges that Allegheny made major
modifications to some of its West Virginia facilities in violation of the Prevention of
Significant Deterioration (PSD) provisions of the Clean Air Act. The Notice alleged
modification in violation of the PSD provisions at the following coal-fired facilities:
Albright Unit No. 3; Fort Martin Units No. 1 and 2; Harrison Units No. 1, 2 and 3;
Pleasants Units No. 1 and 2 and Willow Island Unit No. 2. The Notice also alleged PSD
violations at the Armstrong, Hatfields Ferry and Mitchell plants in Pennsylvania and
identifies PADEP as the lead agency regarding those facilities. AE is in active
discussions with the AGs and PADEP to resolve the issues raised by the Notice. If
these issues are not resolved, the AGs and PADEP may commence
litigation. As stated above, AE is also engaged in discussions with the EPA relating to these issues.

Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 (CERCLA)
Claim:  On March 4, 1994, the Distribution Companies received
notice that the EPA had identified them as potentially responsible parties (PRPs) with
respect to the Jacks Creek/Sitkin Smelting Superfund Site. Initially, approximately
175 PRPs were involved, however, the current number of active PRPs has been reduced as a
result of settlements with de minimis contributors and other contributors to the site. The
costs of remediation will be shared by all past and active responsible parties. In 1999, a
PRP group that included the Distribution Companies entered into a consent order with the
EPA to remediate the site. It is currently estimated that the total remediation costs to
be borne by all of the responsible parties will not exceed $30 million. Allegheny accrued
$1 million representing its estimated share of the remediation costs. The balance of this
accrued liability was $0.5 million at June 30, 2004.

Other:  
Oil and PCB contamination has been noted at the Connellsville West Side facility as part
of the National Pollutant Discharge Elimination System permit review process. Steps have
been taken to control the contamination, and monitoring is continuing at the site. The
internal investigation into the source of the oil is ongoing in accordance with several
PADEP programs. West Penn has accrued estimated total remediation costs for this facility.

# Other Litigation:

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

On August 25, 2003, the U.S. District
Court granted AE Supplys motion to dismiss seven of the eight consumer class actions
with prejudice. The plaintiffs have appealed to the United States Court of Appeals for the
Ninth Circuit.

AE Supply was never served in the
eighth consumer class action, Kurtz v. Duke Energy Trading and Marketing, LLC. The
allegations in this complaint were substantively identical to those in the dismissed
actions. On February 18, 2004, plaintiffs in Kurtz voluntarily dismissed the action
without prejudice.

The District Court separately granted
plaintiffs motion to remand in the ninth action, Millar, on July 9, 2003. On
December 18, 2003, the plaintiffs filed an amended complaint, solely on behalf of
consumers, naming certain additional defendants, including The Goldman Sachs Group, Inc.
(Goldman Sachs) in California Superior Court, San Francisco County. The case was
transferred back to the U.S. District Court for the Southern District of California in
early 2004. In May 2004, plaintiffs moved to remand the case to state court. The
defendants have opposed the motion and it remains outstanding.

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

AE Supply cannot predict the outcome
of these matters.

48



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Nevada Power
Contracts:  On December 7, 2001, Nevada Power Company (NPC) filed
a complaint with the FERC against AE Supply seeking FERC action to modify prices payable
to AE Supply under three trade confirmations dated December 4, 2000, January 16, 2001 and
February 7, 2001, between Merrill Lynch and NPC, and entered into under the Western
Systems Power Pool Master Agreement. The transactions related to power sales during 2002.
NPCs claim was based, in part, on the assertion that dysfunctional California spot
markets had an adverse effect on the prices NPC was able to negotiate with Merrill Lynch
under the contracts. NPC filed substantially identical complaints against a number of
other energy suppliers. On December 19, 2002, the Administrative Law Judge (ALJ) issued
findings that no contract modification was warranted. The ALJ determined in favor of NPC
that AE Supply, rather than Merrill Lynch, was a proper subject of NPCs complaint.

On June 26, 2003, the FERC affirmed
the ALJs decision upholding the long-term contracts negotiated between NPC and
Merrill Lynch, among others. The FERC did not render a decision on whether AE Supply,
rather than Merrill Lynch, was the real party in interest to the three trade confirmations
at issue. On November 10, 2003, the FERC issued an order, on rehearing, affirming its
conclusion that the long-term contracts should not be modified. On July 3, 2003, Snohomish
County filed a petition for review of the FERCs June 26 order with the U.S. Court of
Appeals for the Ninth Circuit (Snohomish County Proceeding). On December 17, 2003, AE
Supply filed a motion to intervene in the Snohomish County Proceeding in the Ninth
Circuit. The NPC petitions have been consolidated in the Ninth Circuit, and additional
appeals have been filed. AE Supply cannot predict the outcome of this matter.

Sierra/Nevada:  On
April 2, 2003, NPC and Sierra Pacific Resources, Inc. (together, Sierra/Nevada) initiated
a lawsuit in U.S. District Court in Nevada against AE and AE Supply, together with Merrill
Lynch & Co. and Merrill Lynch Capital Services, Inc. (together, Merrill). The
complaint alleged that AE, AE Supply and Merrill engaged in fraudulent conduct in
connection with NPCs application to the Public Utilities Commission of Nevada
(Nevada PUC) for a deferred energy accounting adjustment, which allegedly caused the
Nevada PUC to disallow $180 million of NPCs deferred energy expenses. Sierra/Nevada
asserted three causes of action against AE and AE Supply arising from the alleged
fraudulent conduct. These include: (1) tortious interference with Sierra/Nevadas
contractual and prospective economic advantages; (2) conspiracy and (3) violations of the
Nevada state Racketeer Influenced and Corrupt Organization (RICO) Act. Sierra/Nevada filed
an amended complaint on May 30, 2003 in which it asserted a fourth cause of action against
AE and AE Supply for wrongful hiring and supervision. Sierra/Nevada seeks $180 million in
compensatory damages plus attorneys fees. Under the RICO count, Sierra/Nevada seeks in
excess of $850 million. AE and AE Supply filed motions to dismiss the complaints on May 6,
2003 and June 23, 2003. Additional motions have been filed. AE and AE Supply cannot
predict the outcome of this matter.

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

On September 24, 2002, certain
Merrill Lynch entities filed a complaint against AE in the U.S. District Court for the
Southern District of New York, alleging that AE breached the asset purchase agreement by
failing to repurchase the equity interest in AE Supply from Merrill Lynch and seeking
damages in excess of $125 million.

On September 25, 2002, AE and AE
Supply commenced an action against Merrill Lynch in the Supreme Court of the State of New
York for the County of New York. The complaint in that lawsuit alleges that Merrill Lynch
fraudulently induced AE to enter into the purchase agreement and that Merrill Lynch
breached certain representations and warranties contained in the purchase agreement. The
lawsuit sought damages in excess of $605 million, among other relief.

On October 23, 2002, AE filed a
motion to stay Merrill Lynchs federal court action in favor of AE and AE
Supplys action in New York state court. On May 29, 2003, the U.S. District Court for
the Southern District of New York denied AEs motion to stay Merrill Lynchs
action and ordered that AE and AE Supply assert their claims against Merrill Lynch, which
were initially brought in New York state court, as counterclaims in Merrill Lynchs
federal court action. As a result, AE and AE Supply dismissed the New York state action
and, on June 13, 2003, AE and AE Supply filed an answer and asserted affirmative defenses
and counterclaims against Merrill Lynch in the U.S. District Court for the Southern
District of New York. The counterclaims allege that Merrill Lynch fraudulently induced AE
and AE Supply to enter into the purchase agreement, that Merrill Lynch breached certain
representations and warranties contained in the purchase agreement and that Merrill Lynch
breached fiduciary duties owed to AE and AE Supply. The counterclaims seek damages in
excess of $605 million, among other relief.

49



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On August 29, 2003, AE and AE Supply
filed amended counterclaims that, among other things, added a claim against Merrill Lynch
for negligent misrepresentation. On November 24, 2003, the court dismissed AE and AE
Supplys counterclaim for rescission and struck their demand for a jury trial with
respect to certain counterclaims. AE and AE Supplys counterclaims for negligent
misrepresentation, fraudulent inducement, breach of contract, breach of fiduciary duty and
punitive damages remain in place. On January 23, 2004, the court granted a motion filed
under seal by the U.S. Attorney for the Southern District of New York to intervene and
stay deposition discovery for approximately six months. Document discovery continued
during the pendency of the stay, which expired on July 16, 2004. On July 12, 2004, AE and
AE Supply filed a motion for leave to file amended counterclaims to reflect, among other
things, developments concerning Daniel L. Gordon, the former head of energy trading for AE
Supply. The court has not yet ruled on this motion. The case has been set for trial on
February 3, 2005.

The federal government is holding
approximately $43 million and other assets of Daniel L. Gordon. Both AE and Merrill Lynch
have filed petitions with the U. S. District Court for the Southern District of New York
claiming rights to the funds.

AE and AE Supply cannot predict the
outcome of these matters.

Putative Shareholder,
Derivative and Benefit Plan Class Actions:  From October 2002
through December 2002, plaintiffs claiming to represent purchasers of AEs securities
filed 14 putative class action lawsuits against AE and several of its former senior
managers in U.S. District Courts for the Southern District of New York and the District of
Maryland. The complaints alleged that AE and senior management violated federal securities
laws when AE purchased Merrill Lynchs energy marketing and trading business with the
knowledge that the business was built on illegal wash or round-trip trades with Enron,
which the complaints alleged artificially inflated trading revenue, volume and growth. The
complaints asserted that AEs fortunes fell when Enrons collapse exposed what
plaintiffs claim were illegal trades in the energy markets. All of the securities cases
were transferred to the District of Maryland and consolidated. The plaintiffs filed an
amended complaint on May 3, 2004 that alleged that the defendants violated federal
securities laws by failing to disclose weaknesses in Merrill Lynchs energy marketing
and trading business, as well as other internal control and accounting deficiencies. The
amended complaint seeks unspecified compensatory damages and equitable relief. On July 2,
2004, AE moved to dismiss the amended complaint. The plaintiffs response to the
motion to dismiss is due on August 16, 2004.

In February and March 2003, two
putative class action lawsuits were filed against AE in U.S. District Courts for the
Southern District of New York and the District of Maryland. The suits allege that AE and a
senior manager violated the Employee Retirement Income Security Act of 1974 (ERISA)
by: (1) failing to provide complete and accurate information to plan beneficiaries
regarding the energy trading business, among other things; (2) failing to diversify plan
assets; (3) failing to monitor investment alternatives; (4) failing to avoid conflicts of
interest and (5) violating fiduciary duties. The ERISA cases were consolidated in the
District of Maryland. On April 26, 2004, the plaintiffs in the ERISA cases filed an
amended complaint, adding a number of individuals as defendants and clarifying the nature
of their claims. On June 25, 2004, the defendants filed a motion to dismiss the amended
complaint.

In June 2003, a shareholder
derivative action was filed against AEs Board of Directors and several former senior
managers in the Supreme Court of the State of New York for the County of New York. The
suit alleges that the Board and senior management breached fiduciary duties to AE that
have exposed AE to the securities class action lawsuits. The derivative action has been
stayed pending the commencement of discovery in the securities cases.

AE cannot predict the outcome of
these matters.

50



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Claims Related to Alleged
Asbestos Exposure:  Monongahela, Potomac Edison and West Penn
have also been named as defendants along with multiple other defendants in pending
asbestos cases alleging bodily injury involving multiple plaintiffs and multiple sites
(the asbestos suits). These suits have been brought mostly by seasonal contractor
employees and do not involve allegations of either the manufacture, sale or distribution
of asbestos-containing products by Allegheny. The asbestos suits arise out of historical
operations and are related to the removal of asbestos-containing materials from
Alleghenys premises. Alleghenys historical operations were insured by various
foreign and domestic insurers, including Lloyds of London. Alleghenys
asbestos-related litigation expenses have to date been reimbursed in full by recoveries
from its historical insurers, and Allegheny believes that it has sufficient insurance to
respond fully to the asbestos suits. Certain of Alleghenys insurers, however, have
contested their obligations to pay for the future defense and settlement costs relating to
the asbestos suits. Allegheny is currently involved in two asbestos insurance-related
actions that were commenced in 2003, Certain Underwriters at Lloyds, London et
al. v. Allegheny Energy, Inc. et al., Case No. 21-C-03-16733 (Washington County, Md.),
and Monongahela Power Company et al. v. Certain Underwriters at Lloyds London and
London Market Companies, et al., Civil Action No. 03-C-281 (Monongalia County, W.Va.),
(collectively, the actions). The parties in the actions are seeking an
allocation of responsibility for Alleghenys historic asbestos liability. Allegheny
is continuing to receive payments from its insurance during the pendency of these actions,
specifically the sum of $625,000, payable in equal parts on each of July 1, 2005 and 2006.
During the three months ended June 30, 2004, Allegheny did not receive any insurance
recoveries related to the asbestos cases. During the three months ended March 31, 2004,
Allegheny received insurance recoveries of $0.3 million, net of $0.1 million of legal
fees, related to the asbestos cases. There were no such insurance recoveries received
during the six months ended June 30, 2003. Allegheny does not believe that the existence
or pendency of either the asbestos suits or the actions involving its insurance will have
a material impact on its consolidated financial position, results of operations or cash
flows. Allegheny believes that it has established adequate reserves, net of insurance
receivables and recoveries, to cover existing and future asbestos claims. As of June 30,
2004, Allegheny had 1,434 open cases remaining. Between June 30, 2004 and July 26, 2004,
Allegheny was served with complaints filed on behalf of an additional 35 plaintiffs. While
Allegheny believes that all of the cases are without merit, it cannot predict the outcome
of the litigation.

Suits Related to the Gleason
Generating Facility:  Allegheny Energy Supply Gleason Generating
Facility, LLC, a subsidiary of AE Supply, is the defendant in a suit brought in the
Circuit Court for Weakley County, Tennessee, by residents living in the vicinity of the
generating facility in Gleason, Tennessee. The original suit was filed on September 16,
2002. AE Supply purchased the generating facility in 2001. The plaintiffs are asserting
claims based on trespass and/or nuisance, claiming personal injury and property damage as
a result of noise from the generating facility. They seek a restraining order with respect
to the operation of the plant and damages of $200 million. A mediation session was held on June 17, 2004,
but the parties did not reach settlement. AE has undertaken property purchases and other mitigation
measures. Allegheny cannot predict the outcome of this suit.

AE Supply has demanded
indemnification from Siemens Westinghouse, the manufacturer of the turbines used in the
Gleason Generating Facility, pursuant to the terms of the related equipment purchase
agreement. On October 17, 2002, Siemens Westinghouse filed a request for a declaratory
judgment in the Court of Common Pleas of Allegheny County, Pennsylvania seeking a
declaration that the prior owner released Siemens Westinghouse from this liability through
a release executed after Allegheny purchased the Gleason facility. AE Supply filed a
motion for summary judgment to dismiss the action, on May 6, 2004. AE cannot predict the
outcome of this matter or whether it will be able to recover amounts from Siemens
Westinghouse.

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

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

Commodities Futures Trading
Commission (CFTC) Subpoenas:  On October 2, 2002 and January 15,
2003, AE and AE Supply received subpoenas from the CFTC for documents relating to natural
gas and electricity trading. AE and AE Supply responded to the subpoenas. On July 6, 2004,
the CFTC closed its investigation, although it reserved the discretion to reopen the
investigation in the future.

51



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EPMI Adversary
Proceeding:  On May 9, 2003, Enron Power Marketing, Inc. (EPMI),
a Chapter 11 debtor, commenced an adversary proceeding against AE Supply in its bankruptcy
case that is pending in the U.S. Bankruptcy Court for the Southern District of New York.
The complaint alleges that AE Supply owes EPMI: (1) $27,646,725 for accounts receivable
due and owing for energy delivered prior to the commencement of EPMIs bankruptcy
case and (2) $8,250,000 in cash collateral previously posted to AE Supply, less any
amounts owed to AE Supply as a result of EPMIs default under a master trading
agreement between the parties and certain transactions arising thereunder. EPMI also seeks
certain declaratory relief, including a declaration that the arbitration provision found
in the master trading agreement is unenforceable. On August 1, 2003, AE Supply filed an
answer asserting affirmative defenses. Many similar cases have been filed by, or against,
EPMI in its bankruptcy case. The bankruptcy court has determined that such cases should be
resolved through mediation, if possible. Mediation of the subject complaint began on
October 28, 2003, and a second mediation session is scheduled for September 13, 2004. AE
Supply is unable to predict the outcome of this matter.

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

Ordinary Course of
Business:  The registrants are from time to time involved in
litigation and other legal disputes in the ordinary course of business. Each registrant is
of the belief that there are no other legal proceedings which could materially impair its
operations or materially or adversely affect its financial condition or liquidity.

# NOTE
16:  GENERATING UNIT OUTAGES

On November 3, 2003, a fire occurred
in Unit No. 2 at the Hatfields Ferry Power Station located near Masontown,
Pennsylvania. Hatfields Ferry Unit No. 2 is a 570 MW coal-fired generating unit
owned by AE Supply and Monongahela. As a result of the fire, the units generator,
turbine and certain associated equipment sustained significant damage.  On February
9, 2004, a generator failure occurred in Unit No. 1 at the Pleasants Power Station located
in Willow Island, West Virginia. Pleasants Unit No. 1 is a 650 MW coal-fired generating
unit owned by AE Supply and Monongahela. As a result of the generator failure, the
units generator and associated equipment sustained damage. Both units returned to
service in June 2004. Allegheny estimates that the costs associated with these outages for
the three and six months ended June 30, 2004 were approximately $59 million and $93
million, respectively, consisting primarily of lost revenues (net of fuel cost savings)
and repair and replacement costs (net of anticipated insurance proceeds).

# NOTE 17: OVEC Transaction

In May 2004, AE and AE Supply signed an agreement to sell their nine percent equity interest
and power rights in the Ohio Valley Electric Corporation (OVEC) to Buckeye Power Generating, LLC (Buckeye),
an affiliate of Buckeye Power, Inc. of Columbus, Ohio.  Buckeye will pay $102 million in cash
and become responsible for approximately $37 million in OVEC debt under the OVEC Inter-Company
Power Agreement.  Following the closing of the transaction, AE Supply will retain
the rights to nine percent of the power (approximately 203 megawatts) until March 12, 2006.
The agreement remains subject to certain closing conditions, including third party consents and
state and federal regulatory approvals.

# NOTE 18: SUBSEQUENT
EVENTS

# Sale of Mountaineer Gas

On August 4, 2004,
Monongahela signed a definitive agreement to sell its natural gas operations in West
Virginia to a partnership composed of IGS Utilities, LLC, IGS Holdings LLC and affiliates of ArcLight Capital Partners,
LLC for $141 million in cash and the assumption of approximately $87 million of
long-term debt, subject to certain closing adjustments. In addition, the buyer will pay Monongahela,
over a three-year period, certain amounts due to Monongahela from affiliates holding or owning West Virginia
natural gas operations.  These amounts currently aggregate approximately $16 million and will be finally determined
at the closing of the transaction.
Monongahela expects to utilize net proceeds from the sale to reduce debt. Monongahelas natural gas operations
consist of the natural gas assets of Monongahela referred to as the West Virginia Power
Gas Services assets, Mountaineer and Mountaineer Gas Services, which is a subsidiary of
Mountaineer. The total assets of the natural gas operations were approximately $338
million at June 30, 2004, and the revenues of the natural gas operations were
approximately $190 million for the six months ended June 30, 2004.



---

During the third quarter of 2004,
Monongahela expects to write-down its investment in its natural gas operations to the
expected net proceeds from the sale. The write-down is expected to result in a charge
against earnings of approximately $40 million, before income taxes ($25 million net of income taxes).

The agreement is subject to certain
closing conditions, third party consents and state and federal regulatory approvals,
including approval of a rate adjustment from the Public Service Commission of West
Virginia.

# Stock Unit Awards

Through June 30, 2004, Allegheny
recorded compensation expense related to stock units issued to certain of its executive
officers using the variable method of accounting. Allegheny intends to settle the stock
units as they vest in shares of common stock and received SEC authorization to do so on
June 30, 2004. Accordingly, commencing in the third quarter of 2004, Allegheny will record
compensation expense relating to stock unit awards using the fixed method of accounting.

ITEM  2.    
            MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (MD&A)

This MD&A includes information
relating to Allegheny, AE Supply, Monongahela, Potomac Edison, West Penn and AGC. Where
appropriate, information relating to a specific entity is identified as such. The
following discussion and analysis should be read in conjunction with the Financial
Statements and Combined Notes to Financial Statements included in this report, as well as
the Financial Statements and Supplementary Data and Managements Discussion and
Analysis of Financial Condition and Results of Operations included in the 2003 Annual
Report on Form 10-K.

# Forward-Looking
Statements

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

| | 
 regulation and the status of retail generation service supply competition in states served by the Distribution Companies;
  the closing of various agreements;
  results of litigation;  financing plans;
  demand for energy and the cost and availability of inputs;
  demand for products and services;
  capacity purchase commitments; 
  PLR and power supply contracts;
   results of operations;
 capital expenditures;
  status and condition of plants and equiment;
  regulatory matters;
  internal controls and procedures and
   accounting issues.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

53



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

| |   complications or other factors that render it difficult or impossible to obtain necessary lender consents or regulatory authorizations on a timely basis;
  general economic and business conditions;                                                                                          
  changes in access to capital markets;                                                                                              
  the continuing effects of global instability, terrorism and war;                                                                   
  changes in industry capacity, development and other activities by Allegheny's competitors;                                         
  changes in the weather and other natural phenomena;                                                                                
  changes in technology;                                                                                                             
  changes in the price of power and fuel for electric generation;                                                                    
  the results of regulatory proceedings, including proceedings related to rates;                                                     
  changes in the underlying inputs, including market conditions and assumptions used to estimate the fair values of commodity contracts;
  changes in laws and regulations applicable to Allegheny, its markets or its activities;                                            
  environmental regulations;                                                                                                            
  the loss of any significant customers and/or suppliers and
  the effects of accounting policies issued periodically by accounting standard-setting bodies.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A detailed discussion of certain
factors affecting the risk profile of the registrants is provided under the caption Item
1, Risk Factors, in the 2003 Annual Report on Form 10-K.

54



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# ALLEGHENY RESULTS OF
OPERATIONS

All comparisons presented under the
results of operations for Allegheny and each of the other registrants compare operating
results and other statistical information for the three and six months ended June 30, 2004
to operating results and other statistical information for the three and six months ended
June 30, 2003.

Executive Overview

Alleghenys core businesses are
its generation business and its electricity transmission and distribution business both of
which it operates primarily through direct and indirect subsidiaries. These operations are
aligned in two operating segments, the Delivery and Services segment and the Generation
and Marketing segment. Additional information regarding the composition and activities of
these segments is included in the 2003 Annual Report on Form 10-K. AE, Alleghenys
parent holding company, is a registered public utility holding company subject to SEC
regulation under PUHCA with respect to, among other things, transactions with affiliates,
sales or acquisitions of assets, issuance of securities, distributions and permitted lines
of business.

Operating Statistics

The following table provides
kilowatt-hour and cubic feet sales information for electricity and gas, respectively, for
the three and six months ended June 30, 2004 and 2003.

|                                           | Three Months Ended
June 30, | Six Months Ended
June 30, |  |         |  | 
|------------------------------------------ | --------------------------- | ------------------------- |  | ------- |  | 
|
|Delivery and Services:                     |                             |                           |  |         |  | 
|Electricity sales (million kilowatt-hours) |                             |                           |  | 11,300  |  | 
|Natural gas sales (million cubic feet)     |                             |                           |  | 3,229   |  | 
|Usage per customer (kilowatt-hours)        |                             |                          
|Residential                                |                             |                           |  | 2,614   |  | 
|Commercial                                 |                             |                           |  | 14,751  |  | 
|Industrial                                 |                             |                           |  | 192,836 |  | 
|Generation and Marketing:                  |                             |                          
|Generation (million kilowatt-hours)        |                             |                           |  | 10,218  |  | 
|Heating degree days*                       |                             |                           |  | 492     |  | 
|Cooling degree days*                       |                             |                           |  | 269     |  | 

---

* The regulated utility operations of
the Distribution Companies are weather sensitive. Weather conditions directly influence
the volume of electricity or natural gas delivered by the regulated utility. Degree
day data is used to estimate amounts of energy required to maintain comfortable indoor
temperature levels based on each days average temperature.
Heating degree days is the measure of the variation in the weather based on the extent to
which the average daily temperature falls below 65° Fahrenheit, and cooling degree
days is the measure of the variation in the weather based on the extent to which the
average daily temperature rises above 65° Fahrenheit.

55



---

Income
(Loss) Summary

|                                                  | Three Months Ended
June30, | Six Months Ended
June 30, |   |       
|------------------------------------------------- | -------------------------- | ------------------------- | - | ------
|
|Segment Basis*                                    |                            |                           |   |       
|Delivery and Services:                            |                            |                          
|Operating revenues                                |                            |                           | $ | 699.7 
|Operating income                                  |                            |                           | $ | 65.7  
|Income before income taxes, minority interest and |                            |                          
|cumulative effect of accounting changes           |                            |                           | $ | 35.7  
|Net income                                        |                            |                           | $ | 24.2  
|Generation and Marketing:                         |                            |                          
|Operating revenues                                |                            |                           | $ | 326.4 
|Operating (loss) income                           |                            |                           | $ | (40.9 
|Loss before income taxes, minority interest and   |                            |                          
|cumulative effect of accounting changes           |                            |                           | $ | (106.3
|Net loss                                          |                            |                           | $ | (64.4 
|Consolidated Basis                                |                            |                          
|Income (Loss)                                     |                            |                          
|Delivery and Services                             |                            |                           | $ | 24.2  
|Generation and Marketing                          |                            |                           |   | (64.4 
|Eliminations                                      |                            |                           |   | 0.7   
|                                                  |                            |                           |   |       
|Consolidated loss before cumulative effect        |                            |                          
|of accounting changes                             |                            |                           |   | (39.5 
|Cumulative effect of accounting changes, net      |                            |                           |   | --    
|                                                  |                            |                           |   |       
|Consolidated net loss                             |                            |                           | $ | (39.5 
|                                                  |                            |                           |   |       
|Basic and Diluted Income (Loss) Per Share**       |                            |                          
|Delivery and Services                             |                            |                           | $ | 0.19  
|Generation and Marketing                          |                            |                           |   | (0.51 
|Eliminations                                      |                            |                           |   | 0.01  
|                                                  |                            |                           |   |       
|Consolidated loss before cumulative effect        |                            |                          
|of accounting changes                             |                            |                           |   | (0.31 
|Cumulative effect of accounting changes, net      |                            |                           |   | --    
|                                                  |                            |                           |   |       
|Consolidated net loss                             |                            |                           | $ | (0.31 
|                                                  |                            |                           |   |       

---

*       
Excludes eliminations**    The effects of stock options,
performance shares, stock units and convertible securities are not included in the
calculation of diluted income (loss) per share, as these amounts are antidilutive.

Consolidated loss before cumulative
effect of accounting changes decreased $192 million and $263.3 million for the three and
six months ended June 30, 2004, respectively. These decreases were primarily due to
reduced realized and unrealized losses in the Generation and Marketing segment and, to a
lesser extent, improved profitability in the Delivery and Services segment offset by costs
associated with plant outages. Additionally, both the Delivery and Services segment and
the Generating and Marketing segment had lower operations and maintenance expense for the
three and six months ended June 30, 2004.

56



---

Results for the six months ended June
30, 2004 were significantly impacted by outages at two generating facilities. On November
3, 2003, a fire occurred in Unit No. 2 at the Hatfields Ferry Power Station located
near Masontown, Pennsylvania. Hatfields Ferry Unit No. 2 is a 570 MW coal-fired
generating unit owned by AE Supply and Monongahela. As a result of the fire, the
units generator, turbine and certain associated equipment sustained significant
damage. On February 9, 2004, a generator failure occurred in Unit No. 1 at the Pleasants
Power Station located in Willow Island, West Virginia. Pleasants Unit No. 1 is a 650 MW
coal-fired generating unit owned by AE Supply and Monongahela. As a result of the
generator failure, the units generator and associated equipment sustained damage.
Both units returned to service in June 2004. Allegheny estimates that the costs associated
with these outages for the three and six months ended June 30, 2004 were approximately $59
million and $93 million, respectively, consisting primarily of lost revenues (net of fuel
cost savings) and repair and replacement costs (net of anticipated insurance proceeds).

Consolidated net loss included $12.2
million, net of income taxes, for the six months ended June 30, 2003, reflecting the
cumulative effect of the accounting change associated with the adoption of EITF Issue No.
02-3, Accounting for Contracts Involved in Energy Trading and Risk Management.
See Note 3, Wholesale Energy Activities, above for additional information.

Consolidated net loss also included
$8.6 million, net of income taxes, for the six months ended June 30, 2003, reflecting the
cumulative effect of the accounting change associated with the adoption of SFAS No. 143,
Accounting for Asset Retirement Obligations. See Note 12, Asset Retirement
Obligations, above for additional information.

# Operating Revenues

Total operating revenues for the
three and six months ended June 30, 2004 and 2003 were as follows:

|                                                    | Three Months Ended
June 30, | Six Months Ended
June 30, |   |       
|--------------------------------------------------- | --------------------------- | ------------------------- | - | ------
|
|Delivery and Services:                              |                             |                           |   |       
|Retail electric                                     |                             |                           | $ | 610.5 
|Retail natural gas                                  |                             |                           |   | 37.7  
|Transmission services and bulk power                |                             |                           |   | 32.9  
|Unregulated services                                |                             |                           |   | 11.7  
|Other affiliated and non affiliated energy services |                             |                           |   | 6.9   
|                                                    |                             |                           |   |       
|Total Delivery and Services revenues                |                             |                           |   | 699.7 
|                                                    |                             |                           |   |       
|Generation and Marketing:                           |                             |                          
|Wholesale *                                         |                             |                           |   | (33.0 
|Affiliated and other                                |                             |                           |   | 359.4 
|                                                    |                             |                           |   |       
|Total Generation and Marketing revenues             |                             |                           |   | 326.4 
|                                                    |                             |                           |   |       
|Eliminations                                        |                             |                           |   | (369.0
|                                                    |                             |                           |   |       
|Total operating revenues                            |                             |                           | $ | 657.1 
|                                                    |                             |                           |   |       

* In accordance with EITF 02-3,
energy trading revenues are reported net of purchased energy, which resulted in negative
revenue amounts for the three months ended June 30, 2004 and 2003 and for the six months
ended June 30, 2003.

Delivery and
Services:  Retail electric revenues for the three and six months
ended June 30, 2004 increased $29.5 million and $40.7 million, respectively. These
increases were primarily due to increases in residential, commercial and industrial sales
resulting from increased usage. The increased usage by residential and commercial
customers was primarily the result of an increase in cooling degree days, partially offset
by a decrease in heating degree days.

57



---

Retail natural gas revenues increased
$4.2 million and $33.2 million for the three and six months ended June 30, 2004,
respectively, primarily due to an increase in retail tariffs effective October 2, 2003 and
April 1, 2004 to cover increases in purchased gas costs. These increases were partially
offset by decreases in residential, commercial and industrial gas sales resulting from
decreased usage. The decreased usage by residential and commercial customers was primarily
the result of a decrease in heating degree days.

Transmission services and bulk power
revenues decreased $2 million and $12 million for the three and six months ended June 30,
2004, respectively. The decrease in transmission services and bulk power revenues for the
three months ended June 30, 2004 was primarily due to the loss of several wholesale
customers as a result of contract expirations, partially offset by higher PJM transmission
service revenue. The decrease in transmission services and bulk power revenues for the six
months ended June 30, 2004 was due to the loss of several wholesale customers and lower
PJM transmission service revenue.

Unregulated services revenues
increased $1 million for the three months ended June 30, 2004, due to higher revenue
recognition on the South Mississippi Electric Power Association (SMEPA) percentage of
completion construction contract. Unregulated services revenues decreased $9.7 million for
the six months ended June 30, 2004, primarily due to lower revenue recognition on the
SMEPA construction contract.

Generation and
Marketing:  Operating revenues for the three and six months ended June
30, 2004 increased by $293.1 million and $445.1 million, respectively. These increases
principally resulted from lower realized and unrealized losses in 2004.

Operating revenues
for the three months ended June 30, 2004, were $326.4 million.  These revenues include PLR revenues of $367.7 million,
revenues from other trading activities of $3.8 million and other revenues of $9.3 million, less
$54.4 million representing the excess of PJM load expense over PJM generation and other revenues.

Operating revenues for the six months ended June 30, 2004
were $759.2 million. These revenues include PLR revenues of $773.3 million,
revenues from other trading activities of $4.4 million,
other revenues of $16.9 million and the release of $68.1 million in escrow proceeds associated with the sale of the CDWR contract
and related hedge transactions, less $103.5 million representing the excess of PJM load expense
over PJM generation and other revenues.

Operating revenues for the three and six months ended June 30, 2004 were negatively impacted by
the outages at Hatfield's Ferry Unit No. 2 and Pleasants Unit No. 1.

Wholesale and other revenues for the
three and six months ended June 30, 2004 increased $271.1 million and $413.4 million,
respectively, primarily due to reduced realized and unrealized losses. These reductions
reflect AE Supplys exit from the Western U.S. energy markets in 2003 and the release
of escrow proceeds related to the sale of the CDWR contract and related hedge
transactions.

Affiliated and other revenues for the
three and six months ended June 30, 2004 increased $22 million and $31.7 million,
respectively. These increases were primarily due to increased sales volumes and prices
under long-term power sales agreements between AE Supply and the Distribution Companies.

# Operating Expenses

Fuel consumed in electric
generation:  Fuel consumed in electric generation, which relates
entirely to the Generation and Marketing segment, represents the cost of coal, natural gas
and oil burned at Alleghenys generating stations to produce electricity. Fuel
consumed in electric generation increased $6.9 million and $10.1 million for the three and
six months ended June 30, 2004, respectively. This increase was primarily due to the
increased cost of fuel consumed at the gas-fired generating stations. The usage of
gas-fired facilities increased partly as the result of the July 2003 start-up of the
generating facility in Springdale, Pennsylvania. These increases were partially offset by
a decrease in coal expenses in the three and six months ended June 30, 2004, primarily due
to a decrease in coal consumed at Hatfields Ferry Unit No. 2 and Pleasants Unit No.
1 during the outages at those facilities.

58



---

Purchased power and
transmission:  Purchased power and transmission expense for the
three and six months ended June 30, 2004 and 2003 consisted of the following items:

|                                       | Three Months Ended
June 30, | Six Months Ended
June 30, |   |       
|-------------------------------------- | --------------------------- | ------------------------- | - | ------
|
|Delivery and Services:                 |                             |                           |   |       
|From PURPA generation *                |                             |                           | $ | 45.0  
|Other purchased energy                 |                             |                           |   | 379.1 
|                                       |                             |                           |   |       
|Total Delivery and Services            |                             |                           |   | 424.1 
|Generation and Marketing               |                             |                           |   | 23.4  
|Eliminations                           |                             |                           |   | (367.7
|                                       |                             |                           |   |       
|Total purchased power and transmission |                             |                           | $ | 79.8  
|                                       |                             |                           |   |       
|* PURPA cost (cents per KWh)           |                             |                           |   | 5.2   

Purchased power and transmission
expense from PURPA generation for the Delivery and Services segment decreased $8 million
and $12.8 million for the three and six months ended June 30, 2004, respectively. These
decreases were primarily due to decreases in certain contract rates and to a maintenance
outage at one of the PURPA facilities.

Other purchased energy expense for
the Delivery and Services segment, which consists primarily of the Distribution
Companies purchases of energy from AE Supply, increased $25.1 million and $35.5
million for the three and six months ended June 30, 2004, respectively. These increases
were primarily due to increased sales volumes and prices under power sales agreements
between AE Supply and the Distribution Companies.

Purchased power and transmission
expense for the Generation and Marketing segment increased $4.2 million and $4.1 million
for the three and six months ended June 30, 2004, respectively. These increases were
primarily due to an $11.7 million charge, which was recorded in the second quarter of 2004, related to the release to a third party
of pipeline capacity for the period November 2004 through November 2007.
This release is associated with AE Supplys long-term natural gas transportation agreement
with Kern River Gas Transmission Company that is effective through April 30, 2018.

Cost of utility gas
sold:  Cost of utility gas sold for the three and six months
ended June 30, 2004 and 2003 was as follows:

|                               | Three Months Ended
June 30, | Six Months Ended
June 30, |   |     
|------------------------------ | --------------------------- | ------------------------- | - | ----
|
|Delivery and Services          |                             |                           | $ | 26.6
|Generation and Marketing       |                             |                           |   | --  
|                               |                             |                           |   |     
|Total cost of utility gas sold |                             |                           | $ | 26.6
|                               |                             |                           |   |     

Cost of utility gas sold for the
Delivery and Services segment increased $1.1 million for the three months ended June 30,
2004, primarily due to an increase in gas prices, which was partially offset by a volume
decrease in gas purchases. Cost of utility gas sold for the Delivery and Services segment
decreased $4.4 million for the six months ended June 30, 2004, primarily due to a volume
decrease in gas purchases, which was partially offset by an increase in gas prices.

Deferred energy costs,
net:  Deferred energy costs, net, which relates entirely to the
Delivery and Services segment, is the difference between energy costs and revenues
collected from customers and is deferred until recovered from, or credited to, customers
under a purchased energy adjustment. Such deferred energy costs have no impact on
operating income. Deferred energy costs, net, increased $6.8 million and $37.2 million for
the three and six months ended June 30, 2004, respectively, primarily as a result of
increases in retail tariffs to recover higher gas costs.



---

Operations and
maintenance:  Operations and maintenance expense for the three
and six months ended June 30, 2004 and 2003 were as follows:

|                                         | Three Months Ended
June 30, | Six Months Ended
June 30, |   |      
|---------------------------------------- | --------------------------- | ------------------------- | - | -----
|
|Delivery and Services                    |                             |                           | $ | 109.8
|Generation and Marketing                 |                             |                           |   | 138.3
|Eliminations                             |                             |                           |   | (2.5 
|                                         |                             |                           |   |      
|Total operations and maintenance expense |                             |                           | $ | 245.6
|                                         |                             |                           |   |      

Total operations and maintenance
expense decreased $38.3 million and $139 million for the three and six months ended June
30, 2004, respectively. The decrease for the Delivery and Services segment for the three
months ended June 30, 2004 was primarily the result of decreases in uncollectible expense,
salary and employee benefit costs, outside services expense and rent expense. The decrease
for the Generation and Marketing segment for the three months ended June 30, 2004 was
primarily the result of contract termination costs of $32 million recorded in 2003, and
also includes decreases in outside services expense and employee salary and benefit costs.
These decreases were partially offset by increases in contract work expense and materials
and supplies expense relating to planned
power station outages. The decrease for the Delivery and Services segment for the six
months ended June 30, 2004 was primarily the result of decreases in uncollectible expense,
outside services expense and rent expense.  The decrease
for the Generation and Marketing segment for the six months ended June 30, 2004, was
primarily the result of $33.5 million in impairment charges related to assets held for
sale and $32 million of contract termination costs, both of which occurred in the second
quarter of 2003, and also includes decreases in outside services expense, asset retirement
costs and employee salary and benefit costs. These decreases were partially offset by
increases in contract work expense and materials and supplies expense
relating to planned power station outages.

Depreciation and
amortization:  Depreciation and amortization expense increased
$5.7 million and $11.4 million for the three and six months ended June 30, 2004,
respectively. These increases primarily related to the July 2003 start-up of the
generating facility in Springdale, Pennsylvania and the installation of environmental
control equipment at Pleasants Units No. 1 and No. 2.

Taxes other than income
taxes:  Taxes other than income taxes increased $2.5 million and
$1.4 million for the three and six months ended June 30, 2004, respectively. The increase
for the three months ended June 30, 2004 was primarily the result of increases in business
and occupation and gross receipts taxes. These amounts were partially offset by a decrease
in property tax.

The increase for the six months ended
June 30, 2004 was primarily the result of increases in gross receipts, business and
occupation taxes and fuel taxes. These amounts were partially offset by decreases in
property taxes, capital stock and franchise taxes and sales taxes.

# Other Income, Net

Other income, net, represents
non-operating income and expenses before income taxes. Other income, net, increased $3.4
million for the three months ended June 30, 2004, primarily as a result of increased coal
brokering income and a gain on the sale of land. Other income, net, decreased $68.7
million for the six months ended June 30, 2004. This decrease was primarily a result of a
$75.8 million gain recognized in the first six months of 2003 related to the reapplication
of the provisions of SFAS No. 71 to generation assets in West Virginia. The decrease in
other income, net, was partially offset by the recognition of increased gain in the first
six months of 2004 related to the sale of land and increased interest and dividend income.
See Note 9, Accounting for the Effects of Price Deregulation, above for more information
regarding the reapplication of SFAS No. 71.

60



---

# Interest Expense and
Preferred Dividends

Interest expense and preferred
dividends for the three and six months ended June 30, 2004 and 2003 were as follows:

|                                         | Three Months Ended
June 30, | Six Months Ended
June 30, |   |      
|---------------------------------------- | --------------------------- | ------------------------- | - | -----
|
|Delivery and Services                    |                             |                           | $ | 34.4 
|Generation and Marketing                 |                             |                           |   | 65.8 
|Eliminations                             |                             |                           |   | --   
|                                         |                             |                           |   |      
|Interest expense and preferred dividends |                             |                           | $ | 100.2
|                                         |                             |                           |   |      

Interest expense and preferred dividends
decreased $15.7 million for the three months ended June 30, 2004, primarily due to reduced
amortization expense, lower interest rates and to a lesser extent, lower average debt
outstanding. These decreases were partially offset by an $8.9 million increase in interest
expense resulting from the
July 2003 issuance of mandatorily convertible preferred securities.

Interest expense and preferred
dividends increased $19.7 million for the six months ended June 30, 2004, primarily due to
the $14.1 million write-off of 2003 refinancing costs during the first quarter of 2004 and the July 2003
issuance of mandatorily convertible preferred securities. These increases were mitigated
by lower interest rates associated with the March 2004 refinancing.

# Income Tax Expense
(Benefit)

The effective income tax rates for
the three months ended June 30, 2004 and 2003 were 42.2 percent and 41.5 percent,
respectively.

The effective income tax rates for
the six months ended June 30, 2004 and 2003 were 42.5 percent and 42.6 percent,
respectively.

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

# Cumulative Effect of
Accounting Changes, Net

The following items were recorded in
the six months ended June 30, 2003.

Effective January 1, 2003, Allegheny adopted
EITF Issue No. 02-3. As a result, Allegheny recorded a charge against earnings, related
entirely to the operations at AE Supply, as the cumulative effect of a change in
accounting principle of $12.2 million, net of income taxes ($19.7 million before income
taxes). This charge represents the fair value of those contracts previously accounted for
under EITF Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and
Risk Management Activities, that no longer qualify for mark-to-market accounting.

Effective January 1, 2003, Allegheny
adopted SFAS No. 143. As a result, Allegheny recorded a charge against earnings as the
cumulative effect of a change in accounting principle of $8.6 million, net of income taxes
($14 million before income taxes). See Note 12, Asset Retirement Obligations, above for
additional information.

61



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# AE SUPPLY RESULTS OF
OPERATIONS

# Income (Loss) Summary

|                                                           | Three Months Ended
June 30, | Six Months Ended
June 30, |   |      
|---------------------------------------------------------- | --------------------------- | ------------------------- | - | -----
|
|Operating revenues                                         |                             |                           | $ | 265.9
|Operating (loss) income                                    |                             |                           | $ | (21.0
|Loss before income taxes, minority interest and cumulative |                             |                          
|effect of accounting changes                               |                             |                           | $ | (73.4
|Net loss                                                   |                             |                           | $ | (45.5

Net loss decreased by $192.4 million
and $347.4 million for the three and six months ended June 30, 2004, respectively. These
decreases were primarily due to increased operating revenues as a result of lower realized
and unrealized losses and lower operation and maintenance expenses, partially offset by higher depreciation
expense. The decrease in realized and unrealized losses was primarily due to trading
activities in the Western U.S. energy markets, which AE Supply exited in 2003.

Results for the six months ended June
30, 2004 were significantly impacted by outages at two generating facilities. On November
3, 2003, a fire occurred in Unit No. 2 at the Hatfields Ferry Power Station located
near Masontown, Pennsylvania. Hatfields Ferry Unit No. 2 is a 570 MW coal-fired
generating unit owned by AE Supply and Monongahela. As a result of the fire, the
units generator, turbine and certain associated equipment sustained significant
damage. On February 9, 2004, a generator failure occurred at the Pleasants Power Station
located in Willow Island, West Virginia. Pleasants Unit No. 1 is a 650 MW coal-fired
generating unit owned by AE Supply and Monongahela. As a result, the units generator
and associated equipment sustained damage. Both units returned to service in June 2004. As
a consequence of these outages, during the six months ended June 30, 2004, AE Supply
incurred a loss of revenues and at times had to purchase power in the market at costs that
were higher than the internal cost of production, each of which resulted in reduced
operating income.

In the six months ended June 30,
2003, earnings decreased by $12.2 million and $7.4 million, net of income taxes,
reflecting the cumulative effect of the accounting changes associated with the adoptions
of EITF Issue No. 02-3 and SFAS No. 143, respectively. These amounts were recorded during
the three months ending March 31, 2003.

# Operating Revenues

Total operating revenues for the
three and six months ended June 30, 2004 and 2003 were as follows:

|                         | Three Months Ended
June 30, | Six Months Ended
June 30, |   |      
|------------------------ | --------------------------- | ------------------------- | - | -----
|
|Operating revenues:      |                             |                           |   |      
|Wholesale and other*     |                             |                           | $ | (36.5
|Affiliated               |                             |                           |   | 302.4
|                         |                             |                           |   |      
|Total operating revenues |                             |                           | $ | 265.9
|                         |                             |                           |   |      

---

*  In accordance with EITF 02-3, energy trading revenues are reported net of purchased energy,
which resulted in negative revenue amounts for the three months ended June 30, 2004 and 2003 and for the six
months ended June 30, 2003.

62



---

Operating revenues for the three and
six months ended June 30, 2004 increased $296.1 million and $447.5 million, respectively.

Operating revenues for
the three months ended June 30, 2004 were $265.9 million. These revenues include PLR revenues of $296.7 million, other
trading activities of $3.8 million and other revenues of $13.1 million, net of $47.7 million representing the excess of PJM load expense
over PJM generation and other revenues.

Operating revenues for the six months ended
June 2004 were $628.5 million.  These revenues include PLR revenues of $622.4 million, other
trading activities of $4.4 million, other revenues of $24.6 million and the release of $68.1 million in
escrow proceeds related to the sale of the CDWR contract and related hedge transactions,
less $91 million representing excess PJM load expense over PJM generation and other revenues.

Operating revenues for the three and six months ended June 30, 2004 were negatively impacted by the outages
in Hatfields Ferry Unit No. 1 and Pleasants Unit No. 2.

Wholesale Revenue:

Wholesale revenue increased by $266.9
million and $409.9 million in the three and six months ended June 30, 2004, respectively,
primarily due to a significant reduction in realized and unrealized losses. Realized and
unrealized gains and losses for the three and six months ended June 30, 2004 and 2003 were
as follows:

|                                             | Three Months Ended
June 30, | Six Months Ended
June 30, |   |      
|-------------------------------------------- | --------------------------- | ------------------------- | - | -----
|
|Realized (losses) gains                      |                             |                           | $ | (38.1
|Unrealized gains (losses)                    |                             |                           |   | 1.6  
|                                             |                             |                           |   |      
|Total realized and unrealized (losses) gains |                             |                           | $ | (36.5
|                                             |                             |                           |   |      

Approximately $321.6 million and
$424.8 million of the increases in wholesale revenues for the three and six months ended
June 30, 2004, respectively, relate to AE Supplys exit from the Western U.S. energy
markets in 2003. The increase for the six months ended June 30, 2004 also includes the release, during the first quarter of
2004, of $68.1 million in escrow proceeds related to the sale of the CDWR contract and
associated hedge transactions. These increases were partially offset by reduced generation
revenue as a result of the outages at Hatfields Ferry Unit No. 2 and Pleasants Unit
No. 1.

See Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, for AE Supply in
the 2003 Annual Report on Form 10-K for discussions surrounding the methodology,
tenor and description of AE Supplys trading portfolio, as well as a description with
respect to the range of observable market prices and overall market liquidity. There has
been no significant change in the methodology for valuing the portfolio during the three
and six months ended June 30, 2004. All changes in the fair value of the portfolio are the
result of changes in market conditions.

The fair values of trading contracts,
which represent net unrealized gain and loss positions, are recorded as assets and
liabilities after applying the appropriate counterparty netting agreements. At June 30,
2004, the fair values of trading contract assets and liabilities were $46.8 million and
$115.6 million, respectively. At December 31, 2003, the fair values of energy trading
contract assets and liabilities were $37.2 million and $102.6 million, respectively. As of
June 30, 2004, the remaining trading portfolio fair value was comprised primarily of
interest rate swap agreements.

63



---

The following table describes the net
fair values of contract assets and liabilities, excluding AE Supplys generating
assets and power sales agreements with its regulated utility affiliates for their PLR
obligations, as of June 30, 2004, based on the underlying market price source and the
contract delivery periods.

|Source of fair value
(In millions) | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total
Fair
Value
|---------------------------------- | ---- | ---- | ---- | ---- | ---- | ---------- | ----------------
|Prices actively quoted             |      |      | $    | (4.7 | )    | $          | (19.7           
|Prices provided by other           |      |     
|external sources                   |      |      |      | --   |      |            | (7.8            
|Prices based on models             |      |      |      | 11.5 |      |            | 0.7             
|                                   |      |      |      |      |      |            |                 
|Total                              |      |      | $    | 6.8  |      | $          | (26.8           
|                                   |      |      |      |      |      |            |                 

In the table above, each contract is
classified by the source of fair value, based upon the individual settlement dates within
an entire contract. Therefore, portions of a single contract may be assigned to multiple
classifications based upon the source of the underlying market prices used to determine
the fair value of the contract. AE Supply determines prices actively quoted from various
industry services, broker quotes and the New York Mercantile Exchange. Electricity markets
are generally liquid for approximately one year, and most natural gas markets are
generally liquid for approximately three years. Afterward, some market prices can be
observed, but market liquidity is less robust.

The most significant variables in AE
Supplys models used to value these contracts are the forward prices for both
electricity and natural gas. These forward prices are based on observable market prices to
the extent available. Generally, electricity forward prices are actively quoted for
approximately one year, and some observable market prices are available for approximately
three years. After three years, the forward prices for electricity are based on the
forward price of natural gas and a marginal heat rate for generation to convert natural
gas into electricity. For natural gas, forward prices are generally actively quoted for
approximately three years, and some observable market prices are available for
approximately five years. Beyond five years, forward prices for natural gas generally are
modified based on trends in prior years. The fair value of AE Supplys contracts
classified above as prices based on models was $12.8 million. For deliveries through
December 31, 2004, the fair value of AE Supplys contracts was $6.8 million.

Net unrealized gains of $1.6 million
and losses of $4.5 million for the three and six months ended June 30, 2004, respectively,
were recorded in wholesale revenues to reflect the change in the estimated net fair value
of contract assets. The following table describes changes in the net fair value, or
contract assets less contract liabilities, of AE Supplys contracts for the three and
six months ended June 30, 2004.

|(In millions)                                                     | Three Months Ended
June 30, 2004 | Six Months Ended
June 30, 2004 |   |      
|----------------------------------------------------------------- | -------------------------------- | ------------------------------ | - | -----
|
|Net fair value of contract assets and liabilities as of March     |                                  |                                |   |      
|31, 2004 and December 31, 2003, respectively                      |                                  |                                | $ | (69.9
|                                                                  |                                  |                                |   |      
|Unrealized losses on contracts, net during 2004:                  |                                  |                               
|Unrealized gains (losses) on commodity                            |                                  |                               
|contracts, net                                                    |                                  |                                |   | 1.6  
|Net options paid and received                                     |                                  |                                |   | (0.5 
|                                                                  |                                  |                                |   |      
|Net fair value of commodity contract assets and liabilities as of |                                  |                               
|June 30, 2004                                                     |                                  |                                | $ | (68.8
|                                                                  |                                  |                                |   |      

---

*         Amount
is net of $0.1 million of option premium expirations.
**       Amount is net of $(1.5) million of option premium
expirations.

64



---

Affiliated Revenue:

Affiliated revenue increased $29.2
million and $37.6 million for the three and six month periods ended June 30, 2004,
respectively. These increases were primarily due to increased sales volume and prices
under long-term power sales agreements between AE Supply and the Distribution Companies.
In addition, AE Supply sold additional electricity to Monongahela to enable Monongahela to
meet its contractual obligations during the outages at Hatfields Ferry Unit No. 2
and Pleasants Unit No. 1.

The tables below separate operating
revenues and fuel and purchased power into two components, PLR and Excess Generation and
Trading, for the three and six months ended June 30, 2004 and 2003. See Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operations, for AE Supply in the 2003 Annual Report on Form 10-K for a further
description.

|                                 | Three Months Ended June 30, |  |   |       |  |  
|-------------------------------- | --------------------------- |  | - | ----- |  | -
|
|
|Operating revenues:              |                             |  |   |       |  |  
|Physical delivery                |                             |  | $ | 249.0 |  | $
|Financial settlement             |                             |  |   | --    |  |  
|                                 |                             |  |   |       |  |  
|Total revenues                   |                             |  |   | 249.0 |  |  
|                                 |                             |  |   |       |  |  
|Fuel and purchased power:        |                             | 
|Fuel consumed in electric        |                             | 
|generation                       |                             |  |   | 110.0 |  |  
|Purchased power and              |                             | 
|transmission:                    |                             | 
|Physical delivery                |                             |  |   | 12.4  |  |  
|Financial settlement .           |                             |  |   | --    |  |  
|                                 |                             |  |   |       |  |  
|Total fuel and purchased power . |                             |  |   | 122.4 |  |  
|                                 |                             |  |   |       |  |  
|Total, net                       |                             |  | $ | 126.6 |  | $
|                                 |                             |  |   |       |  |  

65



---

|                               | Six Months Ended June 30, |  |   |       |  |  
|------------------------------ | ------------------------- |  | - | ----- |  | -
|
|
|Operating revenues:            |                           |  |   |       |  |  
|Physical delivery              |                           |  | $ | 531.5 |  | $
|Financial settlement           |                           |  |   | --    |  |  
|                               |                           |  |   |       |  |  
|Total revenues                 |                           |  |   | 531.5 |  |  
|                               |                           |  |   |       |  |  
|Fuel and purchased power:      |                           | 
|Fuel consumed in electric      |                           | 
|generation                     |                           |  |   | 239.0 |  |  
|Purchased power and            |                           | 
|transmission:                  |                           | 
|Physical delivery              |                           |  |   | 30.8  |  |  
|Financial settlement           |                           |  |   | --    |  |  
|                               |                           |  |   |       |  |  
|Total fuel and purchased power |                           |  |   | 269.8 |  |  
|                               |                           |  |   |       |  |  
|Total, net                     |                           |  | $ | 261.7 |  | $
|                               |                           |  |   |       |  |  

---

* Includes a net gain of $68.1
million related to the release during the first quarter of 2004 of escrow proceeds
associated with the sale of the CDWR contract and related hedge transactions.

# Operating Expenses

Fuel consumed in electric
generation:  Total fuel consumed in electric generation increased
$8.8 million and $16.3 million in the three and six months ended June 30, 2004,
respectively. These increases were primarily due to increased cost of fuel consumed at the
gas-fired generating stations. The increased usage of gas-fired facilities was partly the
result of the July 2003 start-up of the generating facility in Springdale, Pennsylvania.
Coal expenses decreased in the three and six months ended June 30, 2004, principally due
to the decrease in coal consumed at Hatfields Ferry Unit No. 2 and Pleasants Unit
No. 1 during the outages at those facilities.

Purchased power and
transmission: Purchased power and transmission expense includes energy
purchases from Monongahela, net of sales to Monongahela.

Purchased power and transmission
expense increased by $0.2 million and decreased $12.9 million in the three and six months
ended June 30, 2004, respectively. Net energy purchases from Monongahela during the three
and six months ended June 30, 2004 decreased by approximately $10.6 million and $25.8
million, respectively, primarily due to the outages at Hatfields Ferry Unit No. 2
and Pleasants Unit No. 1. Transmission expense for the three and six months ended June 30,
2004 includes an $11.7 million loss, which was recorded in the second quarter of 2004,
related to the release to a third party of pipeline capacity for the period November 2004
through November 2007. This release is associated with AE Supplys long-term natural
gas transportation agreement with Kern River Gas Transmission Company that is effective
through April 30, 2018.

Operations and
maintenance:  Operations and maintenance expense decreased $29.1
million for the three months ended June 30, 2004, primarily as of a result of $32
million of contract termination cost recorded in the second quarter of 2003, as well as
decreases in certain other expenses. These decreases were partially
offset by increases in contract work expense and materials and supplies expense related to
planned power station outages.

66



---

For the six months ended June 30,
2004, operations and maintenance expense decreased $113.7 million, primarily as a result
of a $33.5 million decrease in impairment charges associated with assets held for sale,
contract termination costs of $32 million recorded in 2003 and a $25.7 million reduction
in outside services expense, as well as decreases in certain other expenses. These decreases were partially offset by increases in
contract work expense and materials and supplies expense related to planned power station
outages.

Depreciation and
amortization:  Depreciation and amortization expense increased
$3.8 million and $8.7 million for the three and six months ended June 30, 2004,
respectively. These increases were primarily due to the July 2003 start-up of the
generating facility in Springdale, Pennsylvania and the installation of certain
environmental control equipment during the first six months of 2003.

Taxes other than income taxes:Taxes other than income taxes for the three months ended June 30, 2004
decreased $2.9 million.  This decrease was primarily due to a $2.7 million
favorable adjustment for capital stock and franchise taxes.

Taxes other than income taxes
decreased $6 million for the six months ended June 30, 2004, primarily due to decreases in
capital stock and franchise taxes and property taxes. These decreases were partially offset
by increased payroll and business and occupation taxes.

# Interest Expense

Interest expense decreased $19.6
million for the three months ended June 30, 2004, primarily as a result of lower interest
rates associated with the March 2004 refinancing.

For the six months ended June 30,
2004, interest expense increased by $6.8 million, primarily due to an increase in AE
Supplys average long-term debt outstanding and the write-off of $13.9 million of
2003 refinancing costs as a result of the March 2004 refinancing. These increases were
mitigated by lower interest rates associated with the March 2004 refinancing.

Additionally, capitalized interest
decreased $6.5 million and $10.6 million for the three and six months ended June 30, 2004,
respectively. These decreases are primarily attributable to the start-up of the generating
facility in Springdale, Pennsylvania.

# Income Tax Benefit

The effective income tax rates for
the three months ended June 30, 2004 and 2003 were 39.8 percent and 42.1 percent,
respectively.

The effective income tax rates for
the six months ended June 30, 2004 and 2003 were 47.2 percent and 41 percent,
respectively.

The changes in the effective income
tax rates were the result of increased consolidated savings and depreciation.

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

67



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# Cumulative Effect of
Accounting Changes, Net

The following items were recorded in
the first quarter of 2003.

Effective January 1, 2003, Allegheny adopted
EITF Issue No. 02-3. As a result, AE Supply recorded a charge against earnings, as the
cumulative effect of a change in accounting principle of $12.2 million, net of income
taxes ($19.7 million before income taxes), representing the fair value of those contracts
previously accounted for under EITF Issue No. 98-10, Accounting for Contracts
Involved in Energy Trading and Risk Management Activities, that no longer qualify
for mark-to-market accounting. See Note 3, Wholesale Energy Activities, above for
additional information.

Effective January 1, 2003, Allegheny
adopted SFAS No. 143. As a result, AE Supply recorded a charge against earnings as the
cumulative effect of a change in accounting principle of $7.4 million, net of income taxes
($11.9 million before income taxes). See Note 12, Asset Retirement Obligations, above for
additional information.

68



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# MONONGAHELA RESULTS OF
OPERATIONS

# Income (Loss) Summary

|                                                     | Three Months Ended
June 30, | Six Months Ended
June 30, |   |      
|---------------------------------------------------- | --------------------------- | ------------------------- | - | -----
|
|Segment Basis*                                       |                             |                           |   |      
|Delivery and Services:                               |                             |                          
|Operating revenues                                   |                             |                           | $ | 201.2
|Operating income (loss)                              |                             |                           | $ | 9.2  
|Income (loss) before income taxes and cumulative     |                             |                          
|effect of accounting change                          |                             |                           | $ | 2.2  
|Net income (loss)                                    |                             |                           | $ | 2.4  
|Generation and Marketing:                            |                             |                          
|Operating revenues                                   |                             |                           | $ | 71.2 
|Operating (loss) income                              |                             |                           | $ | (20.3
|(Loss) income before income taxes,                   |                             |                          
|and cumulative effect of accounting change           |                             |                           | $ | (23.3
|Net (loss) income                                    |                             |                           | $ | (14.2
|Consolidated Basis                                   |                             |                          
|Net Income (Loss):                                   |                             |                          
|Delivery and Services                                |                             |                           | $ | 2.4  
|Generation and Marketing                             |                             |                           |   | (14.2
|                                                     |                             |                           |   |      
|(Loss) income before cumulative effect of accounting |                             |                          
|change                                               |                             |                           |   | (11.8
|Cumulative effect of accounting change, net          |                             |                           |   | --   
|                                                     |                             |                           |   |      
|Net (loss) income                                    |                             |                           | $ | (11.8
|                                                     |                             |                           |   |      

---

* Excludes eliminations



---

Net loss increased $4.5 million for
the three months ended June 30, 2004. The increase was primarily due to a $5.5 million
increase in purchased power and transmission expenses and a $1.6 million increase in
operations and maintenance expense, which were partially offset by an increase in
operating revenues of $3.2 million.

Net income decreased $55.4 million
for the six months ended June 30, 2004, primarily due to the recognition of a $48.1
million gain, net of tax, for the reapplication of SFAS No. 71 during the first quarter of
2003. See Note 9, Accounting for the Effects of Price Deregulation, above for additional
information regarding the effect of SFAS No. 71.

# Operating Revenues

Total operating revenues for the
three and six months ended June 30, 2004 and 2003 were as follows:

|                                                    | Three Months Ended
June 30, | Six Months Ended
June 30, |   |      
|--------------------------------------------------- | --------------------------- | ------------------------- | - | -----
|
|Delivery and Services:                              |                             |                           |   |      
|Retail electric                                     |                             |                           | $ | 150.2
|Retail natural gas                                  |                             |                           |   | 37.7 
|Transmission services and bulk power                |                             |                           |   | 10.7 
|Other affiliated and non affiliated energy services |                             |                           |   | 2.6  
|                                                    |                             |                           |   |      
|Total Delivery and Services revenues                |                             |                           |   | 201.2
|                                                    |                             |                           |   |      
|Generation and Marketing:                           |                             |                          
|Transmission services and bulk power                |                             |                           |   | (0.6 
|Affiliated and other                                |                             |                           |   | 71.8 
|                                                    |                             |                           |   |      
|Total Generation and Marketing revenues             |                             |                           |   | 71.2 
|                                                    |                             |                           |   |      
|Eliminations                                        |                             |                           |   | (71.0
|                                                    |                             |                           |   |      
|Total operating revenues                            |                             |                           | $ | 201.4
|                                                    |                             |                           |   |      

Retail electric revenues increased
$9.6 million and $12.5 million for the three and six months ended June 30, 2004,
respectively. These increases were primarily due to increases in residential, commercial
and industrial sales resulting from increased usage. The increased usage by residential
and commercial customers was primarily the result of an increase in cooling degree days,
partially offset by a decrease in heating degree days.

Retail natural gas revenues increased
$4.3 million and $33.3 million for the three and six months ended June 30, 2004,
respectively. These increases were primarily due to increases in retail tariffs effective
October 2, 2003 and April 1, 2004 to cover the increase in purchased gas costs, partially
offset by a decrease in residential, commercial and industrial natural gas usage. The
decreased usage by residential and commercial customers was primarily the result of a
decrease in heating degree days.

Transmission services and bulk power
revenues for the Delivery and Services segment did not change materially for the three and
six months ended June 30, 2004.

Affiliated and other revenues for the
Generation and Marketing segment decreased $6.4 million and $16.4 million for the three
and six months ended June 30, 2004, respectively. These decreases were primarily due to
decreased sales of energy to the Delivery and Services segment resulting from the outages
at Hatfields Ferry Unit No. 2 and Pleasants Unit No. 1.

70



---

The following table shows heating
degree days and cooling degree days for the three and six months ended June 30, 2004 and
their variance from prior periods and normal.

|                               | Three Months Ended
June 30, | Six Months Ended
June 30, |  |       |    | 
|------------------------------ | --------------------------- | ------------------------- |  | ----- | -- | 
|
|Heating Degree Days:           |                             |                           |  |       |    | 
|Actual                         |                             |                           |  | 457   |    | 
|Percent change from normal     |                             |                           |  | (31.1 | %) | 
|Percent change from prior year |                             |                           |  | (8.0  | %) | 
|Cooling Degree Days:           |                             |                          
|Actual                         |                             |                           |  | 258   |    | 
|Percent change from normal     |                             |                           |  | 33.7  | %  | 
|Percent change from prior year |                             |                           |  | 148.1 | %  | 

71



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# Operating Expenses

Fuel consumed in electric
generation:  Fuel consumed in electric generation, which relates
entirely to the Generation and Marketing segment, represents the cost of coal, natural gas
and oil burned at Monongahelas generating stations to produce electricity. For the
three and six months ended June 30, 2004, fuel consumed in electric generation decreased
$6.2 million and $10.6 million, respectively. These decreases were primarily due to
decreases in fuel consumption at Hatfields Ferry Unit No. 2 and Pleasants Unit No. 1
during the outages at those facilities.

Purchased power and
transmission:  Purchased power and transmission expense for the
three and six months ended June 30, 2004 and 2003 was as follows:

|                             | Three Months Ended
June 30, | Six Months Ended
June 30, |   |      
|---------------------------- | --------------------------- | ------------------------- | - | -----
|
|Delivery and Services:       |                             |                           |   |      
|From PURPA generation *      |                             |                           | $ | 14.5 
|Other purchased energy       |                             |                           |   | 89.3 
|                             |                             |                           |   |      
|Total delivery and services  |                             |                           |   | 103.8
|                             |                             |                           |   |      
|Generation and Marketing     |                             |                           |   | 18.4 
|Eliminations                 |                             |                           |   | (71.0
|                             |                             |                           |   |      
|Total                        |                             |                           | $ | 51.2 
|                             |                             |                           |   |      
|* PURPA cost (cents per KWh) |                             |                           |   | 4.3  

Purchased energy from PURPA
generation for the Delivery and Services segment decreased $4.4 million and $8.8 million
for the three and six months ended June 30, 2004, respectively. The decreases in PURPA
generation expense was due primarily to lower generation as a result of
unplanned outages at PURPA facilities.

Other purchased energy expense for
the Delivery and Services segment, which consists primarily of Monongahelas
purchases of energy from AE Supply, increased $5.9 million and $8 million for the three
and six months ending June 30, 2004, respectively. These increases were primarily due to
increased sales volumes and prices, as well as losses associated with power purchased to
serve certain customers in Ohio of $5.8 million and $11.7
million for the three and six months ended June 30, 2004, respectively.
See State Legislation and Regulatory Developments below.

Purchased power and transmission
expense for the Generation and Marketing segment increased $8 million and $9.1 million for
the three and six months ended June 30, 2004, respectively. These increases were primarily
due to increased market purchases resulting from decreases in the quantity of electricity
produced as a consequence of the outages at Hatfields Ferry Unit No. 2 and Pleasants
Unit No. 1.

Cost of utility gas
sold:  Cost of utility gas sold, which relates entirely to the
Delivery and Services segment increased $1.1 million for the three months ended June 30,
2004. This increase was primarily due to increased gas prices partially offset by a volume
decrease in gas purchases.

Cost of utility gas sold decreased
$4.4 million for the six months ended June 30, 2004. This decrease was primarily due to a
volume decrease in gas purchases partially offset by an increase in gas prices.

Deferred energy costs,
net:  The increases in deferred energy costs, net, of $6 million
and $37.4 million for the three and six months ended June 30, 2004, respectively,
were primarily the result of increases in retail tariffs to recover higher gas costs.

72



---

Operations and
maintenance:  Operations and maintenance expense for the three
months ended June 30, 2004 increased $1.6 million, primarily due to increases in contract
work expense and materials and supplies expense. These increases were partially offset by
decreases in customer account expense, employee benefit costs and outside services
expense. Operations and maintenance expense for the six months ended June 30, 2004
decreased $6.6 million, primarily due to decreases in outside services expense, employee
benefits costs and customer account expense, which were partially offset by an increase in
contract work expense.

Depreciation and
amortization: Depreciation and amortization expense increased $0.3
million and $2.3 million for the three and six months ended June 30, 2004,
respectively, primarily due to an increase in property, plant and equipment.

Taxes other than income
taxes:  Taxes other than income taxes increased $3.9 million and
$7.9 million, respectively, for the three and six months ended June 30, 2004. The increase
for the three months ended June 30, 2004 was primarily due to an increase in business and
occupation taxes and a favorable sales tax adjustment recorded in 2003. The increase for
the six months ended June 30, 2004 was primarily due to an increase in gross receipts and
business and occupation taxes, a favorable adjustment of business and occupation taxes
recorded in 2003 and a net reduction in capital stock and franchise taxes recorded in
2003.

# Other Income, Net

Other income, net, represents
non-operating income and expenses before income taxes. Other income, net, for the three
months ended June 30, 2004 increased $1 million. Other income, net, for the six months
ended June 30, 2004 decreased $60.8 million, primarily due to the recognition of a $61.7
million gain related to the reapplication of the provisions of SFAS No. 71 to generation
assets in West Virginia that was recorded in the first quarter of 2003. See Note 9,
Accounting for the Effects of Price Deregulation, above for additional information
regarding the effect of SFAS No. 71.

# Income Tax Expense

The effective income tax rates for
the three months ended June 30, 2004 and 2003 were 44.2 percent and 48.7 percent,
respectively. The change in the effective income tax rate for the three months ended June
30, 2004 is primarily a result of the amortization of intangible charges.

The effective income tax rates for
the six months ended June 30, 2004 and 2003 were 49.6 percent and 24.4 percent,
respectively. The change in the effective income tax rate is a result of the effect of
rate-making on depreciation offset by a decrease in the allocation of consolidated tax
savings generated by parent company losses.

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

73



---

# POTOMAC EDISONS
RESULTS OF OPERATIONS

# Income Summary

|                                                  | Three Months Ended
June 30, | Six Months Ended
June 30, |   |      
|------------------------------------------------- | --------------------------- | ------------------------- | - | -----
|
|Operating revenues                                |                             |                           | $ | 216.7
|Operating income                                  |                             |                           | $ | 22.4 
|Income before income taxes and cumulative  effect |                             |                          
|of accounting changes                             |                             |                           | $ | 16.9 
|Net income                                        |                             |                           | $ | 11.0 

Net income increased $4.9 million for
the three months ended June 30, 2004. This increase was primarily due to an increase in
operating revenues of $9.1 million, partially offset by an increase in income tax expense
of $5.5 million resulting from increased income before taxes.

Net income decreased $4.8 million for
the six months ended June 30, 2004, primarily due to the recognition, during the first
quarter of 2003, of an $8.6 million gain, net of tax, for the reapplication of SFAS No.
71. See Note 9, Accounting for the Effects of Price Deregulation, above for more
information regarding the reapplication of SFAS No. 71.

# Operating Revenues

Operating revenues increased by $9.1
million for the three months ended June 30, 2004, primarily due to increased residential
and commercial customer usage. This increased usage was primarily the result of an
increase in cooling degree days, partially offset by a decrease in heating degree days.

Operating revenues increased by $2.1
million for the six months ended June 30, 2004, primarily due to increased residential and
commercial customer usage, as well as an increase in the number of
customers served. The increase in residential and commercial customer usage was primarily
the result of an increase in cooling degree days partially offset by a decrease in heating
degree days.

The following table shows heating
degree days and cooling degree days for the three and six months ended June 30, 2004 and
their variance from prior periods and normal.

|                               | Three Months Ended
June 30, | Six Months Ended
June 30, |  |       |    | 
|------------------------------ | --------------------------- | ------------------------- |  | ----- | -- | 
|
|Heating Degree Days:           |                             |                           |  |       |    | 
|Actual                         |                             |                           |  | 431   |    | 
|Percent change from normal     |                             |                           |  | (21.2 | %) | 
|Percent change from prior year |                             |                           |  | (34.2 | %) | 
|Cooling Degree Days:           |                             |                          
|Actual                         |                             |                           |  | 353   |    | 
|Percent change from normal     |                             |                           |  | 47.1  | %  | 
|Percent change from prior year |                             |                           |  | 111.4 | %  | 

74



---

# Operating Expenses

Purchased power and
transmission:  Purchased power and transmission expense increased
$2.7 million for the three months ended June 30, 2004. This increase was primarily
due to an increase in power purchased from AE Supply.

Purchased power and transmission
expense decreased $5 million for the six months ended June 30, 2004. This decrease was
primarily due to an $18 million decrease in purchased power from affiliates resulting from
the loss of four wholesale customers in the first quarter of 2004 and a reduction in
heating degree days, partially offset by an increase of $10.4 million in purchased power expense
and $2 million in transportation expenses to affiliates.

Operations and
Maintenance:  Operations and maintenance expense for the three
months ended June 30, 2004 decreased $4.7 million. This decrease was primarily a result of
decreases in salary and benefits costs, outside services expense and bad debt expense.
Operations and maintenance expense for the six months ended June 30, 2004 decreased $5.9
million. This decrease was primarily due to decreases in salary and benefits costs and
uncollectible expense, as well as insurance expense recorded in the first quarter of 2003
related to an ice storm.

Depreciation and
Amortization:Depreciation and amortization expense for the three
and six months ended June 30, 2004 increased $0.5 million and $0.6 million, respectively,
primarily due to an increase in property, plant and equipment.

Taxes other than income taxes:Taxes other than income taxes increased $0.4 million and $0.8 million for
the three and six months ended June 30, 2004, respectively. The increase for the three
months ended June 30, 2004 was primarily due to increases in fuel, gross receipts and
business and occupation taxes. These increases were partially offset
by a reduction in property taxes. The increase for the six months ended June 30, 2004 was
primarily due to increases in fuel and payroll taxes partially offset by a reduction in
property taxes.

# Other Income, Net

Other income, net, represents
non-operating income and expenses before income taxes. Other income, net, increased $0.9
million for the three months ended June 30, 2004, primarily due to increased coal brokering
income and a gain on the sale of land.

Other income, net, decreased $15.9
million for the six months ended June 30, 2004, primarily due to the recognition of a
$14.1 million gain related to the reapplication of SFAS No. 71 in the first quarter of
2003 and a reduction of $1.6 million gain from land sales. See Note 9, Accounting for the
Effects of Price Deregulation, above for more information regarding the reapplication of
SFAS No. 71.

# Income Tax Expense

The effective income tax rates for
the three months ended June 30, 2004 and 2003 were 35 percent and 7.1 percent,
respectively. The change in effective income tax rates is the result of a similar amount
of net tax benefits but based on a larger amount of pre-tax income.

The effective income tax rates for
the six months ended June 30, 2004 and 2003 were 35.3 percent and 29.9 percent,
respectively. The change in effective income tax rates is primarily due to the effect of
regulation on deferred income taxes for depreciation and allocated consolidated tax
benefits.

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

75



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# WEST PENNS
RESULTS OF OPERATIONS

# Income Summary

|                                                    | Three Months Ended
June 30, | Six Months Ended
June 30, |   |      
|--------------------------------------------------- | --------------------------- | ------------------------- | - | -----
|
|Operating revenues                                  |                             |                           | $ | 278.5
|Operating income                                    |                             |                           | $ | 34.6 
|Income before income taxes and cumulative effect of |                             |                          
|accounting change                                   |                             |                           | $ | 27.2 
|Net income                                          |                             |                           | $ | 18.6 

Net income increased $2.1 million for the
three months ended June 30, 2004, primarily due to a $1.8 million decrease in interest
expense.

Net income increased $9.3 million for
the six months ended June 30, 2004. This increase was primarily due to a $6.3 million
increase in other income, net, decreased interest expense of $3.2 million and increased
operating income of $1.6 million. These amounts were partially offset by a $2.4 million
increase in income tax expense.

# Operating Revenues

Operating revenues increased $9
million and $18.3 million for the three and six months ended June 30, 2004, respectively,
primarily due to increased residential, commercial and industrial usage and an increase in
affiliated rent revenue. The increased usage by residential and commercial customers was
primarily the result of an increase in cooling degree days, partially offset by a decrease
in heating degree days.

The following table shows heating
degree days and cooling degree days for the three and six months ended June 30, 2004 and
their variance from prior periods and normal.

|                               | Three Months Ended
June 30, | Six Months Ended
June 30, |  |       |    | 
|------------------------------ | --------------------------- | ------------------------- |  | ----- | -- | 
|
|Heating Degree Days:           |                             |                           |  |       |    | 
|Actual                         |                             |                           |  | 541   |    | 
|Percent change from normal     |                             |                           |  | (23.3 | %) | 
|Percent change from prior year |                             |                           |  | (8.6  | %) | 
|Cooling Degree Days:           |                             |                          
|Actual                         |                             |                           |  | 233   |    | 
|Percent change from normal     |                             |                           |  | 21.4  | %  | 
|Percent change from prior year |                             |                           |  | 128.4 | %  | 

76



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# Operating Expenses

Purchased power and
transmission:  Purchased power and transmission expense increased
$12.6 million and $28.4 million for the three and six months ended June 30, 2004,
respectively. These increases were primarily a result of increases in affiliated purchased
power expense of $15.3 million and $32.9 million, respectively, primarily due to increased
purchases at higher prices under a power sales agreement with AE Supply and increases in
transmission and other expenses. These increases were partially offset by decreases in
PURPA purchased power expense of $2.8 million and $4.3 million for the three and six months ended
June 30, 2004, respectively. The decreases in PURPA purchased power expense were due to reduced
purchases because of outages at PURPA facilities and lower costs per MWh purchased.

Operations and
maintenance:  Operations and maintenance expense decreased $4.2
million for the three months ended June 30, 2004, primarily as a result of decreases in
salary and benefits costs and outside services expense.

Operations and maintenance expense
decreased $7.7 million for the six months ended June 30, 2004, primarily as a result of
decreased salary and benefits costs, partially offset by an increase in outside services
expense and insurance expense recorded in the first quarter of 2003 related to an ice
storm.

Depreciation and
amortization:  Depreciation and amortization expense decreased $1.1 million and
$2.5 million for the three and six months ended June 30, 2004, respectively, primarily as
a result of decreases in amortization related to intangible assets.

Taxes other than income taxes:Taxes other than income taxes increased $0.8 million for the three months
ended June 30, 2004, primarily due to increases in capital stock, franchise and gross
receipts taxes.

Taxes other than income taxes
decreased $1.5 million for the six months ended June 30, 2004 primarily due to a decrease
in sales taxes, partially offset by additional gross receipts taxes.

Other Income,
Net:  Other income, net, represents non-operating income and
expenses before income taxes. Other income, net, decreased $0.7 million for the three
months ended June 30, 2004. Other income, net, increased $6.3 million for the six months
ended June 30, 2004, primarily due to gains from the sale of land.

Interest
Expense:  Interest expense decreased $1.8 million and $3.2
million for the three and six months ended June 30, 2004, respectively, primarily due to
lower levels of debt outstanding following the repayment of transition bonds.

# Income Tax Expense

The effective income tax rates for
the three months ended June 30, 2004 and 2003 were 31.4 percent and 34.7 percent,
respectively. The effective income tax rates for the six months ended June 30, 2004 and
2003 were 30.2 percent and 31.9 percent, respectively. The changes in the effective income
tax rates were a result of the effect of rate-making on depreciation and increases in the
allocation of consolidated tax savings generated by parent company losses.

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

77



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# AGCS RESULTS OF
OPERATIONS

# Income Summary

|                           | Three Months Ended
June 30, | Six Months Ended
June 30, |   |     
|-------------------------- | --------------------------- | ------------------------- | - | ----
|
|Operating revenues         |                             |                           | $ | 17.9
|Operating income           |                             |                           | $ | 10.7
|Income before income taxes |                             |                           | $ | 8.7 
|Net income                 |                             |                           | $ | 5.8 

Net income increased $1.1 million and
$3.3 million for the three and six months ended June 30, 2004, respectively, primarily due
to decreases in interest expense. Interest expense decreased $1.6 million and $2.9 million
for the three and six months ended June 30, 2004, respectively, as a result of the
September 2003 repayment of the $50 million of long-term debt and the June 2003 repayment
of $25 million of affiliated loans.

The effective income tax rates for
the three months ended June 30, 2004 and 2003 were 33 percent and 36.7 percent,
respectively. The change in the effective income tax rate was a result of the effect of
depreciation.

The effective income tax rates for
the six months ended June 30, 2004 and 2003 were 25.7 percent and 33.9 percent,
respectively. The change in the effective income tax rate was the result of the effect of
depreciation and decreased parent company losses during 2004.

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

78



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# FINANCIAL CONDITION,
REQUIREMENTS AND RESOURCES

# Liquidity and Capital
Requirements

To meet cash needs for operating
expenses, the payment of interest, retirement of debt and acquisition and construction
programs, Allegheny and its subsidiaries have used internally generated funds (net cash
provided by operations less common and preferred dividends), the sale of non-core assets
and external financings, including the sale of common and preferred stock, debt
instruments, installment loans and lease arrangements. The timing and amount of external
financings depend primarily upon Alleghenys anticipated cash needs and capital
structure objectives.

Alleghenys consolidated capital
structure, including short-term debt, as of June 30, 2004, December 31, 2003 and June 30,
2003 was as follows:

|                 | June 30, 2004 | December 31, 2003 | June 30, 2003 |       |  | 
|---------------- | ------------- | ----------------- | ------------- | ----- |  | 
|
|Debt             |               |                   | $             | 5,436 |  | 
|Common equity    |               |                   |               | 1,514 |  | 
|Preferred equity |               |                   |               | 74    |  | 
|                 |               |                   |               |       |  | 
|                 |               |                   | $             | 7,024 |  | 
|                 |               |                   |               |       |  | 

On March 8, 2004, AE and AE Supply
refinanced approximately $1.7 billion of long-term debt outstanding at December 31, 2003
under the Borrowing Facilities (except for the A-Notes related to AE Supplys St.
Joseph, Indiana generating project) with new borrowings in an aggregate amount of $1.55
billion. These new borrowings consisted of secured Term B Loans and a secured Term C Loan
(collectively, the AE Supply Loans) at AE Supply, in the aggregate amount of $750 million
and $500 million, respectively, and unsecured revolving and term loan facilities at AE in
the aggregate amount of $300 million (the New AE Facility and collectively with the AE
Supply Loans, the New Loan Facilities). See Note 2, Long-Term Debt, above for additional
information. See also Item 8 Note 3, Capitalization, in the 2003 Annual Report on Form
10-K, for additional information concerning the refinancing and the debt covenants related
to the New Loan Facilities.

In June 2004, Monongahela issued $120
million in aggregate principal amount of 6.70% First Mortgage Bonds, which mature on June
15, 2014. The net proceeds of the bond issuance were used to repay Monongahelas
$53.6 million short-term bridge loan in June 2004 and to fund the July 2004 redemption of
$40 million aggregate principal amount of 8.375% First Mortgage Bonds due 2022 and $25
million aggregate principal amount of 7.25% First Mortgage Bonds due 2007. Interest on the
newly issued First Mortgage Bonds is payable semi-annually in arrears on each June 15 and
December 15, commencing December 15, 2004. These bonds are redeemable at
Monongahelas option and rank equally in right of payment with its existing or future
first mortgage bonds.

As of June 30, 2004, Allegheny
anticipates contributing an additional $8.3 million to fund pension plans in 2004,
including $0.1 million to the Supplemental Executive Retirement Plan, for a total
contribution to pension plans during 2004 of $27.7 million. In addition, Allegheny anticipates contributing
an additional amount ranging from $10.2 million to $15.2 million to fund postretirement
benefits other than pensions in 2004, for a total contribution to postretirement benefits
other than pensions in 2004 ranging from approximately $21.1 million to $26.1 million.

# Off-Balance Sheet
Arrangements

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

79



---

# Long-Term Debt

See Note 2, Long-Term Debt, above for
additional information and details regarding Alleghenys debt. See also Item 8 Note
3, Capitalization, in the 2003 Annual Report on Form 10-K for additional details and
discussion regarding debt covenants, refinancing and other debt issuances and redemptions.

As discussed above, in June 2004,
Monongahela issued $120 million in aggregate principal amount of 6.70% First Mortgage
Bonds, which mature on June 15, 2014.

Under the New AE Facility, AE has
obtained a $300 million credit facility comprised of a $100 million term loan and a $200
million revolving credit facility. The revolving credit facility contains a sub-facility
under which a maximum of $100 million of letters of credit may be outstanding at any given
time. At June 30, 2004, the full amount of the $100 million term loan was outstanding, and
$73.4 million was outstanding under the revolving credit facility, of which $16.4 million
represented outstanding letters of credit. Accordingly, AE, at June 30, 2004, had available
revolving credit capacity of $126.6 million, including up to $83.6 million available for
the issuance of additional letters of credit. In July 2004, an outstanding $10 million
letter of credit issued on behalf of Potomac Edison under an arrangement with another bank
expired and was replaced with a new letter of credit issued under the New AE Facility.

Allegheny has various obligations and
commitments to make future cash payments under contracts, such as debt instruments, lease
arrangements and fuel agreements. The table below provides a summary of the payments due
by period for these obligations and commitments as of June 30, 2004. This table does not
include capacity contract commitments that were accounted for under fair value accounting,
as discussed above under Managements Discussion and Analysis of Financial Condition
and Results of Operations, Operating Revenues for AE Supply, or contingencies.

|                          | Payments Due by Period |  |   |       | 
|------------------------- | ---------------------- |  | - | ----- | 
|
|Long-term debt *          |                        |  | $ | 113.3 | 
|Capital lease obligations |                        |  |   | 6.6   | 
|Operating lease           |                        | 
|obligations               |                        |  |   | 6.5   | 
|PURPA purchased           |                        | 
|power                     |                        |  |   | 101.8 | 
|Fuel purchase and         |                        | 
|transportation            |                        | 
|commitments               |                        |  |   | 218.0 | 
|                          |                        |  |   |       | 
|Total                     |                        |  | $ | 446.2 | 
|                          |                        |  |   |       | 

---

* Does not include unamortized debt
expense, discounts, premiums and terminated interest rate swaps that were accounted for as
fair value hedges under SFAS No. 133.

80



---

Amounts related to debt and capital
lease obligations in the table above represent contractual principal repayments required
without taking into account their classification on the consolidated balance sheet.

As a result of the March 8, 2004
refinancing, AE Supplys long-term debt repayment schedule changed significantly from
the amounts disclosed in the 2003 Annual Report on Form 10-K. As of June 30, 2004,
scheduled maturities of long-term debt for AE Supply (excluding unamortized debt expense,
discounts, premiums and terminated interest rate swaps that were accounted for as fair
value hedges under SFAS No. 133) were as follows:

|               | Payments Due by Period |  |   |     | 
|-------------- | ---------------------- |  | - | --- | 
|
|Long-term debt |                        |  | $ | 6.2 | 

As a result of the June 2004 issuance
of $120 million of its 6.70% First Mortgage Bonds due 2014, Monongahelas scheduled
maturities of long-term debt (excluding unamortized debt expense, discounts and premiums)
changed substantially from the amounts disclosed in the 2003 Annual Report on Form 10-K.
As of June 30, 2004, Monongahelas scheduled maturities of long-term debt were as
follows:

|               | Payments Due by Period |  |   |      | 
|-------------- | ---------------------- |  | - | ---- | 
|
|Long-term debt |                        |  | $ | 68.3 | 

The long-term debt repayment
schedules for Potomac Edison and West Penn did not change materially from the amounts
reported in the 2003Annual Report on Form 10-K.

Alleghenys capital
expenditures for the last six months of 2004 and for
the full year of 2005 are estimated at $135.1 million and $344.2 million, respectively,
and include estimated expenditures of $23 million and $128 million, respectively, for
environmental control technology. See Item 8, Note 24, Commitments and Contingencies, to
the 2003 Annual Report on Form 10-K for additional information. See also Note 15,
Commitments and Contingencies, above.

81



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# Financing

Debt: See Note
2, Long-Term Debt, above for a discussion of the issuances and redemptions of debt by the
registrants during the three and six months ended June 30, 2004.

Short-term Debt:
AE and AE Supply manage short-term obligations with cash on hand and amounts available
under revolving credit facilities. Monongahela, Potomac Edison and West Penn manage
short-term obligations through an internal money pool or cash on hand. As a method to
accommodate intercompany short-term borrowing needs to the extent that certain companies
have funds available, the money pool provides funds to approved Allegheny subsidiaries at
the lower of the previous days Federal Funds Effective Interest Rate, as quoted by
the Federal Reserve, or the previous days seven-day commercial paper rate, as quoted
by the same source, less four basis points.

At June 30, 2004, no registrant had
access to any short-term revolving credit facilities or lines of credit with third party
financial institutions, beyond those described above. As mentioned above, AE had $126.6
million of revolving credit available under its $200 million revolving credit facility,
which is classified as long-term debt in accordance with its terms. See Note 3,
Capitalization, of the 2003 Annual Report on Form 10-K for additional information.

# Asset Sales

In April 2004, West Penn, through its
subsidiary The West Virginia Power & Transmission Company, completed the sale of
approximately 592 acres of land in Tucker County, West Virginia to the Allegheny Wood
Products, Inc. for a net sales price of $1.4 million.West Penn consummated
land sales during the first quarter of 2004 for aggregate proceeds of $6.6 million.

# Cash Flows

# AE

Operating Activities:Cash
flows from operating activities for the six months ended June 30, 2004 and 2003 were
$175.1 million and $52.4 million, respectively. Significant cash flows from (used in)
operating activities for the six months ended June 30, included:

2004

| |   $70.8 million in proceeds related to the 2003 sale of the CDWR contract and
related hedges to J. Aron & Company,    $46.5 million decrease in accounts
receivable, net,    $29.7 million increase in accounts payable,   
$(66.4) million increase in collateral deposits held as security for certain
contracts and    $(30.3) million in payments for contributions to AEs pension plans and postretirement
benefits other than pensions plans.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003

| |   $93.9 million decrease in accounts receivable, net and
  $(47.7) million in payments to
terminate various energy trading contracts.
| | ---------------------------------------------------------------------------------------------------------------------------------------

Investing Activities:Cash
flows used in investing activities for the six months ended June 30, 2004 and 2003 were
$79.6 million and $419.4 million, respectively. Significant cash flows used in investing
activities for the six months ended June 30, 2003 included $318.4 million paid for the
acquisition of the Springdale, Pennsylvania generating facility.

82



---

Financing Activities:Cash
flows from (used in) financing activities for the six months ended June 30, 2004 and 2003
were $(317.3) million and $538.4 million, respectively. Significant cash flows from (used
in) financing activities for the six months ended June 30, included:

2004

| | 
  $(1,858.6) million in payments for the retirement of long-term debt, 
  $(21.7) million in payments for costs associated with the New Loan Facilities,
 $(53.6) million in payments for the retirement of short-term debt;
   $1,475 million in proceeds from the issuance of debt under the New Loan
Facilities,    $120 million in proceeds from the issuance of First Mortgage
Bonds, and   $28.3 million in proceeds from the issuance of debt under the
Borrowing Facilities and which occurred prior to the March 2004 refinancing under the New Loan Facilities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003

| |    $1,977.8 million in proceeds from the issuance of debt under the Borrowing
Facilities,     $(1,122.2) million in net payments for the repayment of
short-term debt,     $(270.9) million in payments for the retirement of
long-term debt and     $(46.3) million in payments for costs associated
with the Borrowing Facilities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# AE Supply

Operating Activities:Cash
flows from (used in) operating activities for the six months ended June 30, 2004 and 2003
were $32.2 million and $(211.2) million, respectively. Significant cash flows from (used in)
operating activities for the six months ended June 30, included:

2004

| |   $70.8 million in proceeds related to the 2003 sale of the CDWR contract and
related hedges to J. Aron & Company,    $(74.3) million increase
in collateral deposits held as security for certain contracts and  
$62.7 million increase in accounts payable to affiliates, net.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003

| |   $(47.7) million in payments to terminate various energy trading contracts,
  $(54.1) million increase in collateral deposits held as security for certain contracts and
  $(64.7) million decrease in accounts payable.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investing Activities:Cash
flows from (used in) investing activities for the six months ended June 30, 2004 and 2003
were $1 million and $(335.7) million, respectively. Significant cash flows used in
investing activities for the six months ended June 30, 2003 included $318.4 million paid
for the acquisition of the Springdale, Pennsylvania generating facility.

Financing Activities:Cash
flows from (used in) financing activities for the six months ended June 30, 2004 and 2003
were $(152.7) million and $614.6 million, respectively. Significant cash flows from (used
in) financing activities for the six months ended June 30, included:

2004

| |    $(1,410.9) million in payments for the retirement of long-term debt,
including the Borrowing Facilities,     $(15.4) million in payments for
costs associated with the New Loan Facilities,    $1,250 million in proceeds
from the issuance of debt under the New Loan Facilities and
  $28.3 million in proceeds from the issuance of debt under the Borrowing Facilities,
which occurred prior to the March 2004 refinancing under the New Loan Facilities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

83



---

2003

| |    $1,662.8 million in proceeds from the issuance of debt under the Borrowing
Facilities,     $(797) million in net payments for the repayment of
short-term debt,    $(197.3) million in payments for the retirement of
long-term debt and     $(41.2) million in payments for costs associated
with the Borrowing Facilities.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Monongahela

Internal generation of cash,
consisting of cash flows from operating activities reduced by common and preferred
dividends, was $51.1 million for the six months ended June 30, 2004, compared with $85.8
million for the same period of 2003.

Operating Activities:Cash
flows from operations for the six months ended June 30, 2004 and 2003 were $66.9 million
and $104.7 million, respectively. Significant cash flows from operating activities for the
six months ended June 30, included:

2004

| |    $17 million from the decrease in materials and supplies,
  $32.8 million from the change in deferred investment credit and income taxes, net,

  $16.5 million from the decrease in accounts receivable, net and 
  $14.5 million from the change in deferred energy costs, net.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003

| |   $18.4 million from the change in taxes receivable/accrued, net,
   $28.7 million from the change in deferred investment credit and income
taxes, net and    $37.9 million from the increase in accounts payable to
affiliates, net.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investing Activities:During
the six months ended June 30, 2004 and 2003, cash flows used in investing activities were
$33.9 million and $36.3 million, respectively. Cash flows used in investing activities for
both periods were primarily for capital expenditures.

Financing Activities:During
the six months ended June 30, 2004 and 2003, cash flows from (used in) financing
activities were $1 million and $(16.9) million, respectively. Significant cash flows from
(used in) financing activities for the six months ended June 30, included:

2004

| |    $120 million from the issuance of first mortgage bonds,    
$(53.6) million for the retirement of short-term debt,    $(47.3) million to
fund a note receivable from affiliate and    $(15.7) million for cash
dividends paid on capital stock.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003

| |    $(16.3) million for the retirement of notes, bonds, and other long-term
debt,    $(18.9) million for cash dividends paid on capital stock,
    $(8.5) million from notes receivable issued to affiliates, net of
repayments and    $9.8 million from the net borrowings under short-term debt.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

84



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# Potomac Edison

Internal generation of cash,
consisting of cash flows from operating activities reduced by common and preferred
dividends, was $54.5 million for the six months ended June 30, 2004, compared with $49
million for the same period of 2003.

Operating Activities:Cash
flows from operations for the six months ended June 30, 2004 and 2003 were $71.2 million
and $65.8 million, respectively. Significant cash flows from operating activities for the
six months ended June 30, included:

2004

| |    $7.2 million from the increase in accounts payable and   
$5.9 million from the decrease in accounts receivable, net.
| | --------------------------------------------------------------------------------------------------------------------------

2003

| |   $21.5 million from the change in taxes receivable/accrued, net.
| | ------------------------------------------------------------------

Investing Activities:During
the six months ended June 30, 2004 and 2003, cash flows used in investing activities were
$31.1 million and $22.2 million, respectively. Cash flows used in investing activities for
both periods were primarily for capital expenditures.

Financing Activities:During
the six months ended June 30, 2004 and 2003, cash flows used in financing activities were
$35 million and $25.3 million, respectively. Significant cash flows used in financing
activities for the six months ended June 30, included:

2004

| |    $18.2 million for payment on a note receivable from affiliate and 
   $16.8 million for dividends paid on common stock.
| | ----------------------------------------------------------------------------------------------------------------------------

2003

| |    $16.8 million for dividends paid on common stock and    
$8.5 million for payments on notes payable to affiliates.
| | -----------------------------------------------------------------------------------------------------------------------

# West Penn

Internal use of cash, consisting of
cash flows from operating activities reduced by common and preferred dividends, was $5.1
million for the six months ended June 30, 2004, compared with $75.1 million for the same
period of 2003.

Operating Activities:Cash
flows from operations for the six months ended June 30, 2004 and 2003 were $33.9 million
and $87.1 million, respectively. Significant cash flows from (used in) operating activities for the
six months ended June 30, included:

2004

| |    $7.6 million from the decrease in accounts receivable, net.
| | ---------------------------------------------------------------

2003

| |   ($24.9) million from the increases in prepaid taxes and     $12.8 million from the decrease in accounts
receivable.
| | -----------------------------------------------------------------------------------------------------------------------

85



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Investing Activities:During
the six months ended June 30, 2004 and 2003, cash flows used in investing activities were
$8.8 million and $24.3 million, respectively. Significant cash flows (used in) from investing
activities for the six months ended June 30, included:

2004

| |    ($17) million for capital expenditures, offset by
  $8.3 million proceeds from land sales.
| | -----------------------------------------------------------------------------------------------

2003

| |   ($22.9) million for capital expenditures.
| | --------------------------------------------

Financing Activities:During
the six months ended June 30, 2004 and 2003, cash flows from (used in) financing
activities were $83.6 million and $51.3 million, respectively. Significant cash flows from
(used in) financing activities for the six months ended June 30, included:

2004

| |    $(122.7) million for the retirement of notes, bonds and other long-term debt,
   $(28.7) million for cash dividends paid on common stock and
   $67.9 million from the proceeds of a note payable issued to an affiliate.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003

| |   ($39.4) million for the retirement of notes, bonds and other long-term debt and 
  ($11.9) million for cash dividends paid on common stock.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

# AGC

Internal generation of cash,
consisting of cash flows from operating activities reduced by common and preferred
dividends, was $7.1 million for the six months ended June 30, 2004, compared with $38
million for the same period of 2003.

Operating Activities:During
the six months ended June 30, 2004 and 2003, cash flows from operations were $19.6 million
and $45 million, respectively. Significant cash flows from operating activities for the
six months ended June 30, included:

2004

| |   $3.7 million from the decrease in accounts receivable due from/payable to affiliates, net.
| | ---------------------------------------------------------------------------------------------

2003

| |   $18.9 million from the change in taxes receivable/accrued, net and 
  $10 million from the decrease in accounts receivable due from/payable to affiliats, net.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

86



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Investing Activities:During
the six months ended June 30, 2004 and 2003, cash flows used in investing activities were
$1.7 million and $1.9 million, respectively. Significant cash flows used in investing
activities for both periods were for capital expenditures.

Financing Activities:During
the six months ended June 30, 2004 and 2003, cash flows used in financing activities were
$12.5 million and $32 million, respectively. Significant cash flows from (used in)
financing activities for the six months ended June 30, included:

2004

| |    $(12.5) million for cash dividends paid on common stock.
| | ------------------------------------------------------------

2003

| |   $30 million from the issuance of notes payable to parent in order to fund the repayment of $(55) million in short-term debt and
  $(7) million for cash dividends paid on common stock.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

87



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# OTHER MATTERS

# Critical Accounting
Policies

A summary of Alleghenys
critical accounting policies is included under Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, in the 2003 Annual Report on
Form 10-K. Alleghenys critical accounting policies have not changed materially from
those reported in the 2003 Annual Report on Form 10-K.

# REGULATORY MATTERS

See, Item 1, Rate Matters and
Regulatory Matters Affecting Allegheny, in the 2003 Annual Report on Form 10-K for
additional information.

# Federal Regulation

In November 2003, the FERC, in Order
No. 2004, issued revised Standards of Conduct for natural gas and electric industries.
Order No. 2004 governs the relationship between transmission providers and their energy
affiliates. In April 2004, FERC issued Order No. 2004-A, which clarified the Standards of
Conduct and deferred full implementation for transmission providers, such as the
Distribution Companies, until September 1, 2004.

# State Legislation and
Regulatory Developments

Maryland: Recently enacted
legislation requires the implementation of a renewable energy portfolio standard in
Maryland. Beginning in 2006, or upon the expiration of the transition period for any
particular customer class served by a supplier, whichever is later, retail electricity
suppliers in Maryland will have to provide certain percentages of their energy supply from
renewable energy resources. The law provides that if renewable resources are too
expensive, or unavailable in quantities sufficient to meet the standard in any given year,
suppliers can opt instead to pay a compliance fee. The law directs the
Maryland Public Service Commission to allow standard offer service suppliers to recover
their costs, including compliance fees if incurred, as described above.

Ohio: The Ohio General
Assembly adopted legislation in 1999 to restructure its electric utility industry and
provide retail electric customers the right to choose their electricity generation
supplier, which started a transition to market rates. The 1999 legislation granted
Ohios residential customers a five-percent reduction in the generation portion of
their rates until December 31, 2005, which is when the transition period ends. Pursuant to
a settlement, Monongahelas transition period, or market development period, for
large industrial, commercial and street lighting customers was scheduled to end on
December 31, 2003, but, as discussed below, has been extended by the Public Utilities
Commission of Ohio (PUCO) until December 31, 2005.

In July 2003, the PUCO authorized
Monongahela to issue a request for proposals for wholesale power to supply new standard
market-based retail rate service to its medium and large industrial and commercial
customers and to its street lighting customers, totaling approximately 130 MW of load,
effective January 1, 2004. In October 2003, the PUCO denied approval of the wholesale bid
and new retail rates and froze the current fixed rates for these customer classes until
December 31, 2005, on the grounds that certain conditions to allow market-based rates
prior to December 31, 2005 were not met. In February 2004, Monongahela appealed the
PUCOs decision to the Ohio Supreme Court seeking to overturn the PUCOs denial
of new rates. Oral argument is scheduled for October 26, 2004.

Since January 2004, Monongahela has
been purchasing power at PJM market prices for these customers and anticipates that the
price for that power will continue to be higher than the current retail generation rates.
Monongahela cannot be certain that the federal court or PUCO will allow it to recover any
or all of these costs. Monongahela expensed these costs, which were approximately $4.9
million for the first six months of 2004.

In February 2004, Monongahela filed
for an injunction in Federal Court seeking to recover, in retail rates, its costs of
purchasing power in the wholesale market. In May, the Court partially granted
Monongahelas request, ruling that the Ohio legislation adopted in 1999 to
restructure the electric utility industry was unconstitutional to the extent it did not
permit Monongahela to make a claim with the PUCO that its rates are confiscatory.
Monongahela requested reconsideration of the Courts order, which the Court partially
granted by retaining jurisdiction of this matter. The PUCO initiated a proceeding in
compliance with the Court directive, and Monongahela filed its application for rate relief
on June 18, 2004 and supplemented the filing on June 28. The hearing is scheduled for
September 29, 2004.

88



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Virginia:In 2001, Potomac
Edison filed an application with the Virginia State Corporation Commission (Virginia SCC)
to transfer management and control of its transmission facilities to PJM. The Distribution
Companies transferred functional control over their transmission systems to PJM effective
April 1, 2002. In July 2002, the Virginia SCC staff issued a report observing that Potomac
Edisons application met each of Virginia SCCs rules for electric utilities to
join a regional transmission organization (RTO), but to date, no decision has been issued.
Additionally, the Virginia General Assembly, in its 2003 legislative session, enacted a
bill precluding electric utility companies such as Potomac Edison from transferring
ownership or control of, or responsibility to operate, any portion of any transmission
system located in the Commonwealth to an RTO prior to July 1, 2004. The effect of this
legislation on Potomac Edison is unclear. As directed by the Virginia SCC, Potomac Edison
filed a cost/benefit analysis on its membership in PJM on June 18, 2004. A hearing on this
matter is scheduled for September 28, 2004.

Virginia recently enacted legislation
to extend its capped-rate period for an additional three and one-half years (through
December 31, 2010) at the current capped-rate levels. The new legislation provides that
the Virginia SCC will adjust a utilitys capped rates once in a twelve-month period
for the timely recovery of the incremental costs associated with transmission or
distribution reliability and compliance with state or federal environmental laws to the
extent such costs are prudently incurred on and after July 1, 2004. Electric companies
that have sold or transferred their generating facilities, such as Potomac Edison, would
be allowed a one-time opportunity to file for a rate increase between July 1, 2007 and
December 31, 2010. The legislation also allows Potomac Edison to utilize adjustment
provisions for the recovery of increases in the cost of purchased power beginning on July
1, 2007. We cannot predict what effect this new legislation might have on Potomac Edison.

# Rate Matters

Transmission:In November
2003, the FERC issued a series of orders related to transmission rate design for the PJM
and Midwest regions. Specifically, the FERC found that the payment of multiple and
additive (i.e., pancaked) rates for movement of power between PJM and the
Midwest region is not just and reasonable. The FERC ordered the elimination of pancaked
rates and the implementation of a transitional rate design for a two-year period and
ordered the parties to develop a long-term rate design solution. In a settlement submitted
to the FERC on March 5, 2004, the parties have agreed to continue pancaked rates through
December 1, 2004, and to forego a transitional rate design. A long-term rate design
solution would be implemented on December 1, 2004. On March 19, 2004, the FERC issued an
order accepting the settlement. On July 1, 2004, the transmission owners provided four
rate design proposals for stakeholder review and input. A series of stakeholder meetings
will take place through September 2004. A rate filing is due to the FERC by October 1,
2004. While the long-term rate design is intended to keep transmission owners neutral with
respect to transmission revenues and to minimize the shifting of costs, there is no
assurance that this will be the actual result. Allegheny cannot predict the financial
impact the long-term rate design will have on its transmission revenues or the
Distribution Companies transmission costs.

89



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# ITEM 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

A summary of Alleghenys market
risks is included under Item 7A, Quantitative and Qualitative Disclosures About
Market Risk, of the 2003 Annual Report on Form 10-K. Alleghenys market
risks have not changed materially from those reported in the 2003 Annual Report on Form
10-K.

As reported in the 2003 Annual Report
on Form 10-K, Allegheny and AE Supply use various methods to measure their exposure to
market risk on a daily basis, including a value at risk model (VaR). Allegheny calculates
VaR using the full term of all remaining positions being marked-to-market. This
calculation is based upon managements best estimates and modeling assumptions, which
could materially differ from actual results. As of June 30, 2004 and December 31, 2003,
this calculation yielded a VaR of $0.9 million and $0.2 million, respectively. The
increase over the period is primarily a result of increases in price volatility and
correlation of forward market power prices.

# ITEM 4.  
CONTROLS AND PROCEDURES

In August 2002, Alleghenys
independent auditor, PricewaterhouseCoopers LLP (PwC), advised Allegheny that it
considered Alleghenys internal controls to have material weaknesses, principally
relating to trading operations and related information systems. In the third quarter of
2002, Allegheny initiated a comprehensive review of its financial information. In March
2004, PwC advised Alleghenys Audit Committee that although management has made
significant progress in addressing the specific control weaknesses previously identified,
not all of these deficiencies have been remedied, and certain internal control material
weaknesses remain. Alleghenys management, Audit Committee and Board of Directors are
fully committed to resolving Alleghenys internal control deficiencies. Ultimate
resolution of the deficiencies will include a focus on accountability and strict, timely
adherence to a set of sound internal control policies and procedures.

Allegheny has implemented corrective
actions to mitigate the risk that its internal control deficiencies would prevent
information required to be disclosed by Allegheny in its periodic reports, including this
quarterly report, from being timely reported or impede the compilation and communication
of information to Alleghenys management sufficient to permit timely decisions
regarding required disclosures in the financial statements and other information included
in its periodic reports, including this quarterly report. These actions include the
continued development and implementation of new internal control policies, processes and
procedures to identify and remediate weaknesses and improve controls. Allegheny is
continuing to implement and install new transaction processing systems and to enhance
existing systems for front, middle, and back-office areas for its energy trading
operations. Internal control improvements also are being achieved through Alleghenys
efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

Before December 31, 2004, Allegheny
expects that it will have restored the effectiveness of its internal controls to ensure
the accuracy and completeness of its financial statements.

To address the weaknesses identified
in Alleghenys internal controls and disclosure practices, Allegheny substantially
augmented and revised its procedures in connection with the preparation of its 2002 annual
report, and has employed these procedures in connection with the preparation of each
subsequently filed periodic report, including this quarterly report. These augmented
procedures include a formal drafting group to comprehensively review, revise and update
disclosures. This exercise also includes direct involvement by senior officers, including
the Chief Executive Officer and the Chief Financial Officer. The principal elements of
these augmented procedures have formed the basis for Alleghenys written disclosure
controls and procedures applicable to periodic reports and certain public communications.

90



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In 2003, Allegheny created a
Disclosure Committee, which is chaired by Alleghenys General Counsel and is
comprised of executives, including Alleghenys Chief Risk Officer, Vice President and
Controller, Director of Audit Services and Vice President, Corporate Communications, as
well as the senior officers responsible for Alleghenys business segments. The
Disclosure Committee establishes, maintains, monitors and evaluates Alleghenys
written disclosure controls and procedures and coordinates the preparation of
Alleghenys periodic reports and certain other of its public communications pursuant
to formal written disclosure controls and procedures.

The Disclosure Committee, with the
participation of Alleghenys management, including the Chief Executive Officer and
Chief Financial Officer, reviewed, in accordance with Exchange Act Rules 13a-15(e) and
15d-15(e), the augmented procedures implemented by Allegheny in connection with the
preparation of this report as of June 30, 2004 and found them to be effective. However,
until Allegheny completes the actions described above to remedy internal controls
deficiencies, Allegheny intends to devote additional resources to ensure that its public
disclosures are accurate.

The above matters have been
undertaken by Allegheny at the direction and with the oversight of the Audit Committee of
the Board of Directors and with extensive involvement of PwC and other outside
professional services firms.

For additional information, see Item
9A, Controls and Procedures, of the 2003 Annual Report on Form 10-K.

91



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# PART
II.  OTHER INFORMATION

# ITEM 1.  
LEGAL PROCEEDINGS

See Note 15, Commitments and
Contingencies, above, for additional information about legal proceedings. In addition, the
registrants from time to time are involved in litigation and other legal disputes in the
ordinary course of business.

ITEM 2.    
            CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
          SECURITIES

There were no sales of equity
securities during the quarter covered by this report.

There were no issuer purchases of
equity securities during the quarter covered by the report.

# ITEM 3.  
DEFAULTS UPON SENIOR SECURITIES

None.

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

No matters were submitted to a vote
of Monongahelas or AGCs security holders during the second quarter of 2004.

AE Supply does not have equity
security holders. Thus, no matters were submitted to a vote of equity security holders of
AE Supply.

AEs annual meeting of
stockholders was held on May 13, 2004. At the annual meeting, votes were taken for: (1)
the election of directors; (2) a company proposal for the elimination of cumulative voting
in the election of directors; (3) a company proposal for approval of a director equity
compensation plan; (4) a company proposal for approval of an annual incentive plan; (5)
ratification of the appointment of PricewaterhouseCoopers LLP as independent auditors; (6)
a stockholder proposal regarding simple majority vote; (7) a stockholder proposal
regarding stockholder input on poison pills; (8) a stockholder proposal to elect each
director annually; (9) a stockholder proposal regarding an independent board chairman;
(10) a stockholder proposal regarding the expensing of stock options; (11) a stockholder
proposal regarding the retention of stock obtained through options; (12) a stockholder
proposal regarding auditor fees; (13) a stockholder proposal regarding pre-emptive rights
and (14) a stockholder proposal regarding reincorporation in Delaware.

AEs stockholders elected
Eleanor Baum, Cyrus F. Freidheim, Jr. and Ted J. Kleisner to serve on the Board of
Directors for three-year terms, which will expire in 2007. Stockholders approved the
director equity compensation plan and the annual incentive plan, ratified the appointment
of PricewaterhouseCoopers LLP as independent auditors and approved the stockholder
proposals regarding simple majority vote, shareholder input on poison pills and the
election of each director annually. The stockholders did not approve the company proposal
for the elimination of cumulative voting in the election of directors or any of the
remaining stockholder proposals.

92



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The following tables provide details
regarding the number of votes cast by AEs stockholders with respect to each of the
matters indicated above.

Election
of directors:

|Nominees for Director   | Votes For  | Votes withheld
|----------------------- | ---------- | --------------
|Eleanor Baum            | 90,029,674 | 11,190,814    
|Cyrus F. Freidheim, Jr. | 90,079,165 | 11,190,814    
|Ted J. Kleisner         | 89,991,544 | 11,190,814    

Other items as described above:

|Item                                                             | Votes For                                                                                                                                                  | Votes Against                                                                                                                                                          | Abstentions                                                                                                                                                           | Broker Non-Votes                                                                                                                              
|---------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------
|(2) 
(3) 
(4) 
(5) 
(6) 
(7) 
(8) 
(9) 
(10)
(11)
(12)
(13)
(14) | 47,241,034 
67,890,717 
91,188,005 
97,656,957 
73,726,539 
73,702,393 
98,372,224 
24,461,690 
35,486,925 
22,629,987 
12,014,980 
20,492,066 
21,731,640 | 28,082,860 
  6,754,633 
  8,143,356 
  2,557,987 
  1,655,578 
  1,609,533 
  1,762,089 
 50,437,515 
 39,114,641 
 52,245,408 
 62,553,469 
 54,042,105 
 52,863,343 | 1,206,430   
1,844,974   
1,892,912   
1,009,329   
1,148,207   
1,218,398   
1,089,960   
1,631,119   
1,928,758   
1,654,929   
1,961,875   
1,996,153   
1,935,341 | 24,693,949
24,693,949
         0
         0
24,693,949
24,693,949
         0
24,693,949
24,693,949
24,693,949
24,693,949
24,693,949
24,693,949

Potomac Edison. At the annual
meeting of the stockholder of Potomac Edison held on April 28, 2004, votes were taken for
the election of directors. The total number of votes cast was 22,385,000, with all votes
being cast for the election of the following directors: Paul J. Evanson; David C. Benson;
Joseph H. Richardson and Jeffrey D. Serkes. (Mr. Benson resigned as a director effective
July 11, 2004.)

West Penn. At the annual
meeting of the stockholder of West Penn held on April 21, 2004, votes were taken for the
election of directors. The total number of votes cast 24,361,586, with all votes being
cast for the election of the following directors: Paul J. Evanson; David C. Benson; Joseph
H. Richardson and Jeffrey D. Serkes. (Mr. Benson resigned as a director effective July 11,
2004.)

# ITEM 5.  
OTHER INFORMATION

None.

93



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# ITEM 6.   EXHIBITS
AND REPORTS ON FORM 8-K

(a)
Exhibits:

# EXHIBIT INDEX

# Allegheny Energy, Inc.

|     | Documents                                                                                                
|---- | ---------------------------------------------------------------------------------------------------------
|3.1  | Articles Supplementary to Articles of Incorporation, dated July 19, 2004                                 
|31.1 | Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under Securities Exchange Act of 1934
|31.2 | Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under Securities Exchange Act of 1934
|32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350                              
|32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350                              

94



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# EXHIBIT INDEX

# Allegheny Energy Supply
Company, LLC

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

95



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# EXHIBIT INDEX

# Monongahela Power Company

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

---

A Supplemental Indenture, dated June
9, 2004, to Monongahelas Indenture, dated as of August 1, 1945, is omitted.
Monongahela agrees to furnish to the SEC, upon its request, a copy of such Supplemental Indenture.

96



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# EXHIBIT INDEX

# The Potomac Edison Company

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

97



---

# EXHIBIT INDEX

# West Penn Power Company

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

98



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# EXHIBIT INDEX

# Allegheny Generating Company

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

(b)    
          Reports on Form 8-K

The
following companies filed or furnished reports on Form 8-K during the quarter ended June
30, 2004:

|   |                                                                                                                                                                                                    
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | AE on May 10, 2004, Item 12, attaching a press release announcing its financial
results for the first quarter of 2004;                                                                             
|2. | AE on May 20, 2004, Items 5 and 7, attaching a press release announcing that AE
Supply had signed an agreement to sell its equity interest and power rights in Ohio Valley Electric Corporation and
|3. | AE on June 25, 2004, Items 5 and 7 attaching a press release announcing that AE Supply
will proceed with the previously announced sale of its interests in Ohio Valley Electric Corporation.       

99



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# SIGNATURE

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

|Date:   August  5, 2004 |  | ALLEGHENY ENERGY, INC.BY: /s/ Jeffrey D. Serkes
JEFFREY D. SERKESSenior Vice President andChief Financial Officer
|----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------

|Date:   August  5, 2004 |  | ALLEGHENY ENERGY SUPPLY COMPANY, LLCBY: /s/ Jeffrey D. Serkes
JEFFREY D. SERKESVice President andPrincipal Financial Officer
|----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|Date:   August  5, 2004 |  | MONONGAHELA POWER COMPANYBY: /s/ Jeffrey D. Serkes
JEFFREY D. SERKESVice President andPrincipal Financial Officer
|----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------

|Date:   August  5, 2004 |  | THE POTOMAC EDISON COMPANYBY: /s/ Jeffrey D. Serkes
JEFFREY D. SERKESVice President andPrincipal Financial Officer
|----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------

|Date:   August  5, 2004 |  | WEST PENN POWER COMPANYBY: /s/ Jeffrey D. Serkes
JEFFREY D. SERKESVice President andPrincipal Financial Officer
|----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------

|Date:   August 5, 2004 |  | ALLEGHENY GENERATING COMPANYBY: /s/ Jeffrey D. Serkes
JEFFREY D. SERKESVice President andPrincipal Financial Officer
|---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------

100