10-Q 1 aescform_10q2ndqt.htm AE SUPPLY 2ND QUARTER

_________________

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


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


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 SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2004
2003
2004
2003
Operating revenues     $ 657,114   $ 359,214   $ 1,546,834   $ 1,074,905  

Operating expenses:
  
    Fuel consumed in electric generation    140,927    134,054    302,882    292,826  
    Purchased power and transmission    79,772    81,527    160,890    167,795  
    Cost of utility gas sold    26,603    25,545    117,106    121,504  
    Deferred energy costs, net    (118 )  (6,965 )  16,613    (20,624 )
    Operations and maintenance    245,624    283,867    457,408    596,368  
    Depreciation and amortization    85,191    79,474    168,482    157,085  
    Taxes other than income taxes    53,201    50,735    112,714    111,362  




        Total operating expenses    631,200    648,237    1,336,095    1,426,316  




Operating income (loss)    25,914    (289,023 )  210,739    (351,411 )

Other income, net (Note 11)
    4,790    1,353    12,864    81,613  

Interest expense and preferred dividends:
  
    Interest expense    98,917    114,662    229,846    210,227  
    Preferred dividend requirements of subsidiary    1,260    1,260    2,519    2,519  




        Total interest expense and preferred dividends    100,177    115,922    232,365    212,746  




Loss before income taxes, minority interest  
  and cumulative effect of accounting changes    (69,473 )  (403,592 )  (8,762 )  (482,544 )

Income tax benefit
    (29,297 )  (167,378 )  (3,723 )  (205,396 )

Minority interest in net (loss) income of subsidiaries
    (720 )  (4,695 )  1,139    (7,585 )




Loss before cumulative effect of accounting  
    changes    (39,456 )  (231,519 )  (6,178 )  (269,563 )
Cumulative effect of accounting changes, net of taxes  
    of $12,974 (Notes 3 and 12)    --    --    --    (20,765 )




Net loss   $ (39,456 ) $ (231,519 ) $ (6,178 ) $ (290,328 )




Basic and diluted loss per common share:  
    Loss before cumulative effect of accounting changes   $ (0.31 ) $ (1.82 ) $ (0.05 ) $ (2.13 )
    Cumulative effect of accounting changes, net    --    --    --    (0.16 )




    Net loss per common share   $ (0.31 ) $ (1.82 ) $ (0.05 ) $ (2.29 )




See accompanying Combined Notes to Financial Statements

7

Table of Contents

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

Six Months Ended
June 30,

2004
2003
Cash Flows From Operating Activities:            
    Net loss   $ (6,178 ) $ (290,328 )
    Cumulative effect of accounting changes, net    --    20,765  


    Loss before cumulative effect of accounting changes    (6,178 )  (269,563 )
    Adjustments for noncash (credits) and charges:  
       Reapplication of SFAS No. 71    --    (75,824 )
       Depreciation and amortization    168,482    157,085  
       (Gain) loss on asset sales    (12,074 )  30,917  
       Minority interest    1,139    (7,585 )
       Deferred investment credit and income taxes, net    (1,875 )  (142,499 )
       Unrealized losses on commodity contracts, net    8,350    380,710  
       Other, net    65,164    (18,681 )

    Changes in certain assets and liabilities:
  
       Accounts receivable, net    46,524    93,919  
       Materials and supplies    8,468    (31,351 )
       Taxes receivable/accrued, net    (38,957 )  96,709  
       Prepaid taxes    (5,803 )  (9,721 )
       Collateral deposits    (66,370 )  (54,110 )
       Accounts payable    29,705    (45,722 )
       Accrued payroll    (1,411 )  (18,397 )
       Interest accrued    8,482    4,672  
       Purchased options    (1,169 )  11,689  
       Commodity contract termination costs    (259 )  (47,706 )
       Other, net    (27,110 )  (2,115 )


               Net cash from operating activities    175,108    52,427  


Cash Flows Used In Investing Activities:  
       Capital expenditures    (118,514 )  (140,539 )
       Acquisition of electric generating facility    --    (318,435 )
       Proceeds from sale of businesses and assets    13,680    46,168  
       Decrease (increase) in restricted funds    26,840    (15,467 )
       Other investments    (1,653 )  8,826  


               Net cash used in investing activities    (79,647 )  (419,447 )


Cash Flows (Used In) From Financing Activities:  
       Net repayments of short-term debt    (53,610 )  (1,122,181 )
       Issuance of long-term debt    1,594,921    1,931,507  
       Retirement of long-term debt    (1,858,638 )  (270,928 )


               Net cash (used in) from financing activities    (317,327 )  538,398  


Net (decrease) increase in cash and cash equivalents    (221,866 )  171,378  
Cash and cash equivalents at beginning of period    528,612    204,231  


Cash and cash equivalents at end of period   $ 306,746   $ 375,609  


See accompanying Combined Notes to Financial Statements

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

June 30,
2004

December 31,
2003

ASSETS            
Current Assets:  
    Cash and cash equivalents   $ 306,746   $ 528,612  
    Accounts receivable:  
         Customer    202,248    203,801  
         Unbilled utility revenues    128,358    172,891  
         Wholesale and other    40,214    46,257  
         Allowance for uncollectible accounts    (23,086 )  (29,329 )
    Materials and supplies    109,901    109,651  
    Fuel, including stored gas    90,785    98,097  
    Deferred income taxes    59,501    44,610  
    Prepaid taxes    52,208    46,405  
    Collateral deposits    117,545    51,175  
    Commodity contracts    29,927    24,390  
    Restricted funds    18,187    120,873  
    Regulatory assets    52,289    68,665  
    Other    25,484    31,186  


         Total current assets    1,210,307    1,517,284  

Property, Plant and Equipment:
  
    Generation    6,648,399    6,597,195  
    Transmission    1,010,961    1,010,062  
    Distribution    3,602,729    3,549,813  
    Other    530,562    525,092  
    Accumulated depreciation    (4,537,368 )  (4,377,917 )


         Subtotal    7,255,283    7,304,245  
    Construction work in progress    194,525    149,232  


         Total property, plant and equipment    7,449,808    7,453,477  

Investments and Other Assets:
  
    Goodwill    367,287    367,287  
    Investments in unconsolidated affiliates    30,736    51,479  
    Intangible assets    39,983    41,710  
    Other    52,115    45,007  


         Total investments and other assets    490,121    505,483  

Deferred Charges:
  
    Commodity contracts    5,847    5,536  
    Regulatory assets    567,050    577,691  
    Other    145,803    112,425  


         Total deferred charges    718,700    695,652  

Total Assets
  
$
9,868,936
 

$
10,171,896
 


See accompanying Combined Notes to Financial Statements

9


ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
(unaudited)

June 30,
2004

December 31,
2003

LIABILITIES AND STOCKHOLDERS’ EQUITY            
Current Liabilities:  
    Short-term debt   $ --   $ 53,610  
    Long-term debt due within one year    157,434    544,843  
    Accounts payable    312,838    281,514  
    Accrued taxes    59,270    98,227  
    Commodity contracts    49,780    41,486  
    Regulatory liabilities    1,114    2,229  
    Other    227,351    259,034  


         Total current liabilities    807,787    1,280,943  

Long-term Debt
    5,278,874    5,127,437  

Deferred Credits and Other Liabilities:
  
    Commodity contracts    65,860    61,125  
    Investment tax credit    86,669    89,826  
    Deferred income taxes    878,850    860,323  
    Obligations under capital leases    28,502    32,483  
    Regulatory liabilities    443,370    436,118  
    Adverse power purchase commitments    209,742    218,105  
    Other    454,334    462,220  


         Total deferred credits and other liabilities    2,167,327    2,160,200  

Minority Interest
    26,676    13,457  

Preferred Stock of Subsidiary
    74,000    74,000  

Common Stockholders’ Equity:
  
    Common stock    158,946    158,761  
    Other paid-in capital    1,449,869    1,447,830  
    Retained (deficit) earnings    (3,268 )  2,910  
    Treasury stock    (1,438 )  (1,438 )
    Accumulated other comprehensive loss    (89,837 )  (92,204 )


         Total common stockholders’ equity    1,514,272    1,515,859  

Commitments and Contingencies (Note 15)
  

Total Liabilities and Stockholders’ Equity
   $ 9,868,936   $ 10,171,896  


See accompanying Combined Notes to Financial Statements

10

Table of Contents




ALLEGHENY ENERGY SUPPLY COMPANY, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
(unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2004
2003
2004
2003
Operating revenues     $ 265,875   $ (30,173 ) $ 628,510   $ 180,999  

Operating expenses:
  
    Fuel consumed in electric generation    111,610    102,853    240,911    224,567  
    Purchased power and transmission    25,559    25,411    48,298    61,255  
    Operations and maintenance    101,840    130,955    176,953    290,624  
    Depreciation and amortization    35,161    31,316    70,283    61,603  
    Taxes other than income taxes    12,721    15,617    23,728    29,738  




       Total operating expenses    286,891    306,152    560,173    667,787  




Operating (loss) income    (21,016 )  (336,325 )  68,337    (486,788 )

Other income (expenses), net (Note 11)
    322    (100 )  917    (416 )

Interest expense
    52,680    72,313    134,587    127,825  





Loss before income taxes, minority interest
  
  and cumulative effect of accounting changes    (73,374 )  (408,738 )  (65,333 )  (615,029 )

Income tax benefit
    (29,171 )  (171,951 )  (30,864 )  (251,950 )

Minority interest in net income of subsidiaries
    1,341    1,075    2,942    2,188  





Loss before cumulative effect of accounting changes
    (45,544 )  (237,862 )  (37,411 )  (365,267 )

Cumulative effect of accounting changes, net of taxes
  
  of $12,131 (Notes 3 and 12)    --    --    --    (19,533 )





Net loss
   $ (45,544 ) $ (237,862 ) $ (37,411 ) $ (384,800 )




See accompanying Combined Notes to Financial Statements

11

Table of Contents

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

Six Months Ended
June 30,
2004
2003
Cash Flows From (Used in) Operating Activities:            
    Net loss   $ (37,411 ) $ (384,800 )
    Cumulative effect of accounting changes, net    --    19,533  


    Loss before cumulative effect of accounting changes    (37,411 )  (365,267 )
    Adjustments for noncash charges and (credits):  
       Depreciation and amortization    70,283    61,603  
       (Gain) loss on asset sales    (5,000 )  32,802  
       Minority interest in AGC    2,942    2,188  
       Deferred investment credit and income taxes, net    (18,562 )  (124,701 )
       Unrealized losses on commodity contracts, net    4,496    368,341  
       Other, net    44,182    9,314  

    Changes in certain assets and liabilities:
  
       Accounts receivable, net    1,604    39,510  
       Accounts receivable due from/payable to affiliates, net    62,737    (54,747 )
       Materials and supplies    (8,065 )  (15,524 )
       Taxes receivable/accrued, net    (5,254 )  (1,618 )
       Collateral deposits    (74,275 )  (54,110 )
       Accounts payable    5,792    (64,721 )
       Interest accrued    7,332    5,043  
       Purchased options    (1,169 )  11,689  
       Commodity contract termination costs    (259 )  (47,706 )
       Other, net    (17,176 )  (13,267 )


            Net cash from (used in) operating activities    32,197    (211,171 )


Cash Flows From (Used In) Investing Activities:  
       Capital expenditures    (33,682 )  (58,592 )
       Acquisition of electric generating facility    --    (318,435 )
       Proceeds from sale of assets    5,000    45,835  
       Decrease (increase) in restricted funds    29,657    (13,976 )
       Other investments    --    9,452  


            Net cash from (used in) investing activities    975    (335,716 )


Cash Flows (Used in) From Financing Activities:  
       Net repayments of short-term debt    --    (796,966 )
       Issuance of long-term debt    1,261,040    1,621,603  
       Retirement of long-term debt    (1,410,905 )  (197,264 )
       Parent company contribution    189,400    1,552  
       Return of parent company contribution    --    (12,674 )
       Cash dividends paid to parent    (189,400 )  --  
       Cash dividends paid to minority shareholder in AGC    (2,871 )  (1,608 )


            Net cash (used in) from financing activities    (152,736 )  614,643  


Net (decrease) increase in cash and cash equivalents    (119,564 )  67,756  
Cash and cash equivalents at beginning of period    251,216    58,862  


Cash and cash equivalents at end of period   $ 131,652   $ 126,618  


See accompanying Combined Notes to Financial Statements

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

June 30,
2004

December 31,
2003

ASSETS            
Current Assets:  
    Cash and cash equivalents   $ 131,652   $ 251,216  
    Accounts receivable:  
         Wholesale and other    19,140    20,945  
         Allowance for uncollectible accounts    (2,703 )  (2,903 )
    Materials and supplies    54,071    54,791  
    Fuel    46,579    37,794  
    Deferred income taxes    20,646    15,317  
    Prepaid taxes    11,052    16,938  
    Commodity contracts    41,031    31,640  
    Collateral deposits    125,450    51,175  
    Restricted funds    2,002    107,504  
    Other    5,618    12,264  


         Total current assets    454,538    596,681  

Property, Plant and Equipment:
  
    Generation    5,671,031    5,656,369  
    Transmission    78,233    78,233  
    Other    15,809    15,615  
    Accumulated depreciation    (2,274,026 )  (2,200,197 )


         Subtotal    3,491,047    3,550,020  
    Construction work in progress    92,962    68,276  


         Total property, plant and equipment    3,584,009    3,618,296  

Investments and Other Assets:
  
    Goodwill    367,287    367,287  
    Investments in unconsolidated affiliate    26,478    27,038  
    Other    18,273    18,025  


         Total investments and other assets    412,038    412,350  

Deferred Charges:
  
    Commodity contracts    5,847    5,536  
    Other    104,185    74,619  


         Total deferred charges    110,032    80,155  

Total Assets
   $ 4,560,617   $ 4,707,482  


See accompanying Combined Notes to Financial Statements

Table of Contents

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   $ 12,422   $ 350,000  
    Accounts payable    139,621    133,244  
    Accounts payable to affiliates, net    72,428    9,310  
    Accrued taxes    16,503    22,912  
    Commodity contracts    49,780    41,486  
    Other    56,551    114,413  



         Total current liabilities
    347,305    671,365  

Long-term Debt
    3,039,919    2,834,479  

Deferred Credits and Other Liabilities:
  
    Commodity contracts    65,860    61,125  
    Investment tax credit    58,318    59,434  
    Deferred income taxes    159,630    171,294  
    Other    118,466    98,344  



         Total deferred credits and other liabilities
    402,274    390,197  

Minority Interest
    42,705    42,669  

Members’ Equity
    728,414    768,772  

Commitments and Contingencies (Note 15)
  

Total Liabilities and Members’ Equity
   $ 4,560,617   $ 4,707,482  


See accompanying Combined Notes to Financial Statements

14

Table of Contents




MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2004
2003
2004
2003
Operating revenues     $ 201,363   $ 198,220   $ 530,352   $ 515,067  

Operating expenses:
  
    Fuel consumed in electric generation    25,051    31,202    57,705    68,260  
    Purchased power and transmission    51,194    45,688    92,538    93,498  
    Cost of utility gas sold    26,600    25,541    117,100    121,500  
    Deferred energy costs, net    (1,327 )  (7,372 )  14,490    (22,942 )
    Operations and maintenance    75,773    74,198    138,374    144,936  
    Depreciation and amortization    18,886    18,584    37,668    35,414  
    Taxes other than income taxes    16,333    12,405    38,400    30,532  




      Total operating expenses    212,510    200,246    496,275    471,198  




Operating (loss) income    (11,147 )  (2,026 )  34,077    43,869  

Other income, net (Note 11)
    2,906    1,916    5,094    65,866  

Interest expense
    12,858    14,157    25,503    26,701  





(Loss) income before income taxes and cumulative effect of
  
  accounting change    (21,099 )  (14,267 )  13,668    83,034  

Income tax (benefit) expense
    (9,336 )  (6,950 )  6,778    20,296  




(Loss) income before cumulative effect of accounting  
  change    (11,763 )  (7,317 )  6,890    62,738  

Cumulative effect of accounting change, net of tax of $314 (Note 12)
    --    --    --    (456 )





Net (loss) income
   $ (11,763 ) $ (7,317 ) $ 6,890   $ 62,282  




See accompanying Combined Notes to Financial Statements

15

Table of Contents

MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

Six Months Ended
June 30,

2004
2003
Cash Flows From Operating Activities:            
    Net income   $ 6,890   $ 62,282  
    Cumulative effect of accounting change, net    --    456  


    Income before cumulative effect of accounting change    6,890    62,738  

    Adjustments for noncash (credits) and charges:
  
       Reapplication of SFAS No. 71    --    (61,724 )
       Depreciation and amortization    37,668    35,414  
       Deferred investment credit and income taxes, net    32,827    28,713  
       Deferred energy costs, net    14,490    (22,942 )
       Other, net    942    163  

    Changes in certain assets and liabilities:
  
       Accounts receivable, net    16,468    19,090  
       Materials and supplies    17,015    (15,074 )
       Taxes receivable/accrued, net    (37,516 )  18,405  
       Prepaid taxes    8,056    7,647  
       Accounts payable    (4,362 )  (9,359 )
       Accounts payable to affiliates, net    (16,143 )  37,895  
       Other, net    (9,484 )  3,726  


            Net cash from operating activities    66,851    104,692  


Cash Flows Used In Investing Activities:  
       Capital expenditures    (33,960 )  (36,313 )
       Proceeds from land sale    68    --  
       Other investments    (1 )  23  


            Net cash used in investing activities    (33,893 )  (36,290 )


Cash Flows From (Used In) Financing Activities:  
       Notes receivable from affiliates    (47,305 )  8,500  
       Notes payable to affiliate    78    --  
       Net (repayments) borrowings under short-term debt    (53,610 )  9,785  
       Issuance of long-term debt    117,334    --  
       Retirement of long-term debt    (8 )  (16,258 )
       Cash dividends paid on capital stock:  
          Preferred stock    (2,519 )  (2,519 )
          Common stock    (13,195 )  (16,377 )


            Net cash from (used in) financing activities    775    (16,869 )


Net increase in cash and cash equivalents    33,733    51,533  
Cash and cash equivalents at beginning of period    43,971    55,163  


Cash and cash equivalents at end of period   $ 77,704   $ 106,696  


See accompanying Combined Notes to Financial Statements

16

MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

June 30,
2004

December 31,
2003

ASSETS            
Current Assets:  
    Cash and cash equivalents   $ 77,704   $ 43,971  
    Accounts receivable:  
         Customer    69,608    58,991  
         Unbilled utility revenues    34,612    59,483  
         Wholesale and other    4,796    6,202  
         Allowance for uncollectible accounts    (5,768 )  (4,955 )
    Note receivable from affiliate    47,305    --  
    Materials and supplies    18,428    18,722  
    Fuel, including stored gas    43,582    60,303  
    Taxes receivable    21,180    --  
    Prepaid taxes    16,171    24,227  
    Regulatory assets    18,334    33,351  
    Other    13,302    8,582  


          Total current assets    359,254    308,877  

Property, Plant and Equipment:
  
    Generation    934,773    932,827  
    Transmission    295,378    294,616  
    Distribution    1,246,838    1,230,006  
    Other    125,528    127,555  
    Accumulated depreciation    (1,049,683 )  (1,024,285 )


         Subtotal    1,552,834    1,560,719  
   Construction work in progress    41,992    34,940  


          Total property, plant and equipment    1,594,826    1,595,659  

Investments and Other Assets:
  
    Investment in AGC    42,705    42,634  
    Other    10,643    10,319  


          Total investments and other assets    53,348    52,953  

Deferred Charges:
  
    Regulatory assets    102,182    102,705  
    Other    21,286    12,876  


          Total deferred charges    123,468    115,581  

Total Assets
   $ 2,130,896   $ 2,073,070  


See accompanying Combined Notes to Financial Statements

17

Table of Contents


MONONGAHELA POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
(unaudited)

June 30,
2004

December 31,
2003

LIABILITIES AND STOCKHOLDER’S EQUITY            
Current Liabilities:  
    Short-term debt   $ ---   $ 53,610  
    Long-term debt due within one year    68,348    3,348  
    Note payable to affiliate    1,650    --  
    Accounts payable    53,155    57,517  
    Accounts payable to affiliates, net    12,727    28,561  
    Accrued taxes    27,644    43,980  
    Deferred income taxes    5,205    --  
    Interest accrued    12,691    12,169  
    Other    25,630    34,234  


         Total current liabilities    207,050    233,419  

Long-term Debt
    770,305    715,501  

Deferred Credits and Other Liabilities:
  
    Investment tax credit    3,664    4,738  
    Non-current income taxes payable    45,671    45,671  
    Deferred income taxes    234,664    192,161  
    Obligations under capital leases    10,578    12,221  
    Regulatory liabilities    238,100    233,989  
    Notes payable to affiliates    12,912    14,484  
    Other    28,974    33,427  


         Total deferred credits and other liabilities    574,563    536,691  

Preferred Stock
    74,000    74,000  

Common Stockholder’s Equity:
  
    Common stock    294,550    294,550  
    Other paid-in capital    110,807    110,492  
    Retained earnings    99,509    108,333  
    Accumulated other comprehensive income    112    84  


         Total common stockholder’s equity    504,978    513,459  

Commitments and Contingencies (Note 15)
  

Total Liabilities and Stockholder’s Equity
   $ 2,130,896   $ 2,073,070  


See accompanying Combined Notes to Financial Statements

18

Table of Contents




THE POTOMAC EDISON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2004
2003
2004
2003
Operating revenues     $ 216,711   $ 207,640   $ 463,880   $ 461,765  

Operating expenses:
  
    Purchased power and transmission    150,344    147,625    321,964    326,981  
    Deferred energy costs, net    1,209    407    2,123    2,317  
    Operations and maintenance    25,180    29,842    52,714    58,571  
    Depreciation and amortization    9,811    9,319    19,552    18,955  
    Taxes other than income taxes    7,739    7,301    16,632    15,821  




      Total operating expenses    194,283    194,494    412,985    422,645  





Operating income
    22,428    13,146    50,895    39,120  

Other income, net (Note 11)
    2,130    1,150    2,910    18,766  

Interest expense
    7,665    7,782    15,452    15,620  





Income before income taxes and cumulative effect of accounting
  
  change    16,893    6,514    38,353    42,266  

Income tax expense
    5,917    463    13,555    12,623  





Income before cumulative effect of accounting change
    10,976    6,051    24,798    29,643  

Cumulative effect of accounting change, net of taxes of $50 (Note 12)
    --    --    --    (79 )





Net income
   $ 10,976   $ 6,051   $ 24,798   $ 29,564  




See accompanying Combined Notes to Financial Statements

19

Table of Contents


THE POTOMAC EDISON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

Six Months Ended
June 30,

2004
2003
Cash Flows From Operating Activities:            
    Net income   $ 24,798   $ 29,564  
    Cumulative effect of accounting change, net    --    79  


    Income before cumulative effect of accounting change    24,798    29,643  

    Adjustments for noncash (credits) and charges:
  
       Reapplication of SFAS No. 71    --    (14,100 )
       Depreciation and amortization    19,552    18,955  
       Gain on land sale    --    (1,885 )
       Deferred investment credit and income taxes, net    6,545    7,169  
       Other, net    2,518    2,693  

    Changes in certain assets and liabilities:
  
       Accounts receivable, net    5,912    (2,515 )
       Materials and supplies    (1,911 )  (89 )
       Taxes receivable/accrued, net    (2,041 )  21,542  
       Accounts payable    7,166    4,158  
       Accounts payable to affiliates, net    (5,677 )  5,394  
       Other, net    14,381    (5,128 )


            Net cash from operating activities    71,243    65,837  


Cash Flows Used In Investing Activities:  
       Capital expenditures    (31,404 )  (23,286 )
       Proceeds from land sale    330    1,087  


            Net cash used in investing activities    (31,074 )  (22,199 )


Cash Flows Used In Financing Activities:  
       Note receivable from affiliate    (18,199 )  --  
       Note payable to affiliate    --    (8,500 )
       Cash dividends paid on common stock    (16,790 )  (16,790 )


            Net cash used in financing activities    (34,989 )  (25,290 )


Net increase in cash and cash equivalents    5,180    18,348  
Cash and cash equivalents at beginning of period    31,790    3,169  


Cash and cash equivalents at end of period   $ 36,970   $ 21,517  


See accompanying Combined Notes to Financial Statements

20

Table of Contents


THE POTOMAC EDISON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

June 30,
2004

December 31,
2003

ASSETS            
Current Assets:  
    Cash and cash equivalents   $ 36,970   $ 31,790  
    Accounts receivable:  
         Customer    56,976    49,157  
         Unbilled utility revenues    33,590    45,099  
         Wholesale and other    4,096    6,358  
         Allowance for uncollectible accounts    (2,554 )  (2,590 )
    Note receivable from affiliate    18,199    --  
    Materials and supplies    15,054    13,143  
    Taxes receivable    11,174    11,607  
    Deferred income taxes    3,894    3,596  
    Prepaid taxes    3,408    5,102  
    Other    1,525    5,691  


          Total current assets    182,332    168,953  

Property, Plant and Equipment:
  
    Transmission    316,184    315,762  
    Distribution    1,123,081    1,100,894  
    Other    90,552    91,720  
    Accumulated depreciation    (459,776 )  (445,303 )


         Subtotal    1,070,041    1,063,073  
    Construction work in progress    29,458    21,865  


          Total property, plant and equipment    1,099,499    1,084,938  

Other Assets
    9,496    9,119  

Deferred Charges:
  
    Regulatory assets    66,223    68,392  
    Other    7,573    10,322  


          Total deferred charges    73,796    78,714  

Total Assets
   $ 1,365,123   $ 1,341,724  


See accompanying Combined Notes to Financial Statements

21

Table of Contents


THE POTOMAC EDISON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
(unaudited)

June 30,
2004

December 31,
2003

LIABILITIES AND STOCKHOLDER'S EQUITY            
Current Liabilities:  
    Accounts payable   $ 31,650   $ 24,484  
    Accounts payable to affiliates, net    44,119    49,667  
    Accrued taxes    7,669    10,143  
    Interest accrued    5,010    5,009  
    Regulatory liabilities    1,114    2,229  
    Other    27,555    16,565  


         Total current liabilities    117,117    108,097  

Long-term Debt
    416,369    416,255  

Deferred Credits and Other Liabilities:
  
    Investment tax credit    7,107    7,599  
    Non-current income taxes payable    57,561    57,561  
    Deferred income taxes    171,404    163,745  
    Obligations under capital leases    7,294    8,492  
    Regulatory liabilities    166,940    163,042  
    Other    7,225    10,835  


         Total deferred credits and other liabilities    417,531    411,274  

Stockholder's Equity:
  
    Common stock    224    224  
    Other paid-in capital    221,144    221,144  
    Retained earnings    192,738    184,730  


         Total stockholder's equity    414,106    406,098  

Commitments and Contingencies (Note 15)
  

Total Liabilities and Stockholder's Equity
   $ 1,365,123   $ 1,341,724  


See accompanying Combined Notes to Financial Statements

22

Table of Contents




WEST PENN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2004
2003
2004
2003
Operating revenues     $ 278,519   $ 269,484   $ 583,828   $ 565,530  

Operating expenses:
  
    Purchased power and transmission    173,479    160,868    365,106    336,740  
    Operations and maintenance    36,013    40,175    73,530    81,187  
    Depreciation and amortization    18,421    19,495    37,252    39,725  
    Taxes other than income taxes    15,995    15,146    33,181    34,728  




      Total operating expenses    243,908    235,684    509,069    492,380  





Operating income
    34,611    33,800    74,759    73,150  

Other income, net (Note 11)
    819    1,504    8,432    2,138  

Interest expense
    8,250    10,058    17,364    20,567  





Income before income taxes and cumulative effect of
  
   accounting change    27,180    25,246    65,827    54,721  

Income tax expense
    8,545    8,767    19,885    17,454  





Income before cumulative effect of accounting change
    18,635    16,479    45,942    37,267  

Cumulative effect of accounting change, net of tax of $474 (Note 12)
    --    --    --    (690 )





Net income
   $ 18,635   $ 16,479   $ 45,942   $ 36,577  




See accompanying Combined Notes to Financial Statements

23

Table of Contents


WEST PENN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

Six Months Ended
June 30,

2004
2003
Cash Flows From Operating Activities:            
    Net income   $ 45,942   $ 36,577  
    Cumulative effect of accounting change, net    --    690  


    Income before cumulative effect of accounting change    45,942    37,267  
    Adjustments for noncash charges and (credits):  
       Depreciation and amortization    37,252    39,725  
       Amortization of adverse power purchase contract    (9,020 )  (9,533 )
       Gain on land sales    (6,718 )  --  
       Deferred investment credit and income taxes, net    6,814    4,778  
       Other, net    352    287  

    Changes in certain assets and liabilities:
  
       Accounts receivable, net    7,589    12,756  
       Materials and supplies    (2,024 )  (653 )
       Taxes receivable/accrued, net    (25,624 )  2,406  
       Prepaid taxes    (21,475 )  (24,829 )
       Accounts payable    149    10,564  
       Accounts payable to affiliates, net    2,220    14,341  
       Other, net    (1,567 )  (50 )


          Net cash from operating activities    33,890    87,059  


Cash Flows Used In Investing Activities:  
       Capital expenditures    (17,046 )  (22,856 )
       Proceeds from land sales    8,282    --  
       Increase in restricted funds    (59 )  (1,491 )


          Net cash used in investing activities    (8,823 )  (24,347 )


Cash Flows Used In Financing Activities:  
       Note payable to affiliate    67,900    --  
       Retirement of long-term debt    (122,745 )  (39,378 )
       Cash dividends paid on common stock    (28,746 )  (11,938 )


          Net cash used in investing activities    (83,591 )  (51,316 )


Net (decrease) increase in cash and cash equivalents    (58,524 )  11,396  
Cash and cash equivalents at beginning of period    69,453    37,737  


Cash and cash equivalents at end of period   $ 10,929   $ 49,133  


See accompanying Combined Notes to Financial Statements

24

Table of Contents


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

June 30,
2004

December 31,
2003

ASSETS            
Current Assets:  
    Cash and cash equivalents   $ 10,929   $ 69,453  
    Accounts receivable:  
         Customer    74,075    71,793  
         Unbilled utility revenues    60,156    68,310  
         Wholesale and other    3,413    4,334  
         Allowance for uncollectible accounts    (11,790 )  (10,985 )
    Materials and supplies    18,208    16,184  
    Taxes receivable    12,538    --  
    Deferred income taxes    12,538    9,723  
    Prepaid taxes    21,475    --  
    Regulatory assets    33,955    35,314  
    Other    16,773    17,477  


         Total current assets    252,270    281,603  

Property, Plant and Equipment:
  
    Transmission    321,166    321,451  
    Distribution    1,231,585    1,217,687  
    Other    230,185    230,240  
    Accumulated depreciation    (717,101 )  (690,025 )


         Subtotal    1,065,835    1,079,353  
    Construction work in progress    27,767    22,183  


         Total property, plant and equipment    1,093,602    1,101,536  

Other Assets
  
     6,810    6,563  

Deferred Charges:
  
    Regulatory assets    389,693    397,517  
    Other    9,404    8,117  


         Total deferred charges    399,097    405,634  

Total Assets
   $ 1,751,779   $ 1,795,336  


See accompanying Combined Notes to Financial Statements

25

Table of Contents


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   $ 72,883   $ 157,714  
    Note payable to affiliate    67,900    --  
    Accounts payable    29,696    29,547  
    Accounts payable to affiliates, net    64,551    62,769  
    Accrued taxes    4,107    17,193  
    Interest accrued    1,475    1,963  
    Adverse power purchase commitments    17,385    18,042  
    Other    31,061    20,121  


         Total current liabilities    289,058    307,349  

Long-term Debt
    314,793    352,648  

Deferred Credits and Other Liabilities:
  
    Investment tax credit    17,581    18,055  
    Non-current income taxes payable    45,431    45,431  
    Deferred income taxes    294,751    283,681  
    Obligations under capital leases    8,130    9,453  
    Regulatory liabilities    13,339    13,675  
    Adverse power purchase commitments    209,742    218,105  
    Other    13,089    18,257  


         Total deferred credits and other liabilities    602,063    606,657  

Stockholder's Equity:
  
    Common stock    65,842    65,842  
    Other paid-in capital    248,407    248,407  
    Retained earnings    231,545    214,349  
    Accumulated other comprehensive income    71    84  


         Total stockholder’s equity    545,865    528,682  

Commitments and Contingencies (Note 15)
  

Total Liabilities and Stockholder’s Equity
   $ 1,751,779   $ 1,795,336  


See accompanying Combined Notes to Financial Statements

26

Table of Contents




ALLEGHENY GENERATING COMPANY
STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2004
2003
2004
2003
Operating revenues     $ 17,884   $ 17,224   $ 35,041   $ 34,437  

Operating expenses:
  
    Operations and maintenance    2,162    1,233    3,417    2,711  
    Depreciation    4,251    4,250    8,502    8,536  
    Taxes other than income taxes    812    854    1,624    1,709  




      Total operating expenses    7,225    6,337    13,543    12,956  





Operating income
    10,659    10,887    21,498    21,481  

Other income, net (Note 11)
    22    78    37    124  

Interest expense
    1,974    3,572    4,297    7,184  





Income before income taxes
    8,707    7,393    17,238    14,421  

Income tax expense
    2,869    2,712    4,431    4,895  




Net income   $ 5,838   $ 4,681   $ 12,807   $ 9,526  




See accompanying Combined Notes to Financial Statements

27

Table of Contents


ALLEGHENY GENERATING COMPANY
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

Six Months Ended
June 30,

2004
2003
Cash Flows From Operating Activities:            
    Net income   $ 12,807   $ 9,526  

    Adjustments for noncash charges and (credits):
  
       Depreciation    8,502    8,536  
       Deferred investment credit and income taxes, net    (3,002 )  (3,113 )
       Other, net    143    482  
    Changes in certain assets and liabilities:  
       Accounts receivable due from/payable to affiliates, net    3,741    10,042  
       Materials and supplies    941    (1 )
       Taxes receivable/accrued, net    (72 )  18,863  
       Accounts payable    --    6  
       Interest accrued    --    213  
       Other, net    (3,505 )  485  


          Net cash from operating activities    19,555    45,039  


Cash Flows Used In Investing Activities:  
       Capital expenditures    (1,675 )  (1,930 )


Cash Flows Used In Financing Activities:  
       Notes payable to parent    --    30,000  
       Net repayments of short-term debt    --    (55,000 )
       Cash dividends paid on common stock    (12,500 )  (7,000 )


          Net cash used in financing activities    (12,500 )  (32,000 )


Net increase in cash and cash equivalents    5,380    11,109  
Cash and cash equivalents at beginning of period    2,272    2,104  


Cash and cash equivalents at end of period   $ 7,652   $ 13,213  


See accompanying Combined Notes to Financial Statements

28

Table of Contents


ALLEGHENY GENERATING COMPANY
BALANCE SHEETS
(in thousands)
(unaudited)

June 30,
2004

December 31,
2003

ASSETS            
Current Assets:  
    Cash and cash equivalents   $ 7,652   $ 2,272  
    Accounts receivable from affiliates, net    --    1,254  
    Materials and supplies    1,353    2,294  
    Other    72    269  


         Total current assets    9,077    6,089  

Property, Plant and Equipment:
  
    Generation    782,700    782,643  
    Transmission    44,097    44,097  
    Other    3,542    3,542  
    Accumulated depreciation    (303,630 )  (295,127 )


         Subtotal    526,709    535,155  
    Construction work in progress    17,494    11,945  


         Total property, plant and equipment    544,203    547,100  

Deferred Charges:
  
    Regulatory assets    8,952    9,076  
    Other    105    108  


         Total deferred charges    9,057    9,184  

Total Assets
   $ 562,337   $ 562,373  


See accompanying Combined Notes to Financial Statements

29

Table of Contents


ALLEGHENY GENERATING COMPANY
BALANCE SHEETS (continued)
(in thousands)
(unaudited)

June 30,
2004

December 31,
2003

LIABILITIES AND STOCKHOLDERS' EQUITY            
Current Liabilities:  
    Accounts payable to affiliates, net   $ 2,770   $ --  
    Accrued taxes    2,337    2,409  
    Interest accrued    2,292    2,292  
    Other    229    283  


         Total current liabilities    7,628    4,984  

Long-term Debt:
  
    Long-term debt    99,377    99,360  
    Long-term note payable to parent    30,000    30,000  


         Total long-term debt    129,377    129,360  

Deferred Credits and Other Liabilities:
  
    Investment tax credit    39,253    39,913  
    Non-current income taxes payable    17,542    17,543  
    Deferred income taxes    157,643    159,565  
    Regulatory liabilities    24,991    25,412  


         Total deferred credits and other liabilities    239,429    242,433  

Stockholders' Equity:
  
    Common stock    1    1  
    Other paid-in capital    172,669    172,669  
    Retained earnings    13,233    12,926  


         Total stockholders’ equity    185,903    185,596  

Commitments and Contingencies (Note 15)
  

Total Liabilities and Stockholders’ Equity
   $ 562,337   $ 562,373  


See accompanying Combined Notes to Financial Statements

30

Table of Contents




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      


Table of Contents

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.

Table of Contents

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,

(In millions)
2004
2003
2004
2003
Consolidated net loss, as reported     $ (39.5 ) $ (231.5 ) $ (6.2 ) $ (290.3 )
Add:  
Stock-based employee compensation included in consolidated net  
   loss, net of related tax effects    4.8    --    8.8    --  
Deduct:  
Total stock-based employee compensation expense determined  
   under fair value based method for all awards, net of related tax  
   effects    (5.8 )  (0.2 )  (11.3 )  (1.1 )




Consolidated net loss, pro forma   $ (40.5 ) $ (231.7 ) $ (8.7 ) $ (291.4 )




Basic loss per share:  
  As reported   $ (0.31 ) $ (1.82 ) $ (0.05 ) $ (2.29 )
  Pro forma   $ (0.32 ) $ (1.82 ) $ (0.07 ) $ (2.30 )
Diluted loss per share:  
  As reported   $ (0.31 ) $ (1.82 ) $ (0.05 ) $ (2.29 )
  Pro forma   $ (0.32 ) $ (1.82 ) $ (0.07 ) $ (2.30 )

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.

Table of Contents

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

(In millions)
Issuances
Redemptions
Issuances
Redemptions
Allegheny Energy:                    
New AE Facility   $ --   $ 43.0   $ 225.0   $ 68.0  
Borrowing Facilities    --    --    --    257.0  




     --    43.0    225.0    325.0  




AE Supply:  
AE Supply Loans    --    3.1    1,250.0    3.1  
Borrowing Facilities    --    --    28.3    1,407.8  




     --    3.1    1,278.3    1,410.9  




Monongahela:  
First Mortgage Bonds    120.0    --    120.0    --  
Short-Term Debt    --    53.6    --    53.6  




     120.0    53.6    120.0    53.6  




West Penn:  
Medium-Term Notes    --    84.0    --    84.0  
Transition Bonds    --    18.9    --    38.7  




     --    102.9    --    122.7  




Total AE Consolidated:  
Borrowing Facilities              28.3    1,664.8  
First Mortgage Bonds    120.0    --    120.0    --  
Medium-Term Notes    --    84.0    --    84.0  
Short-Term Debt    --    53.6    --    53.6  
New AE Facility    --    43.0    225.0    68.0  
AE Supply Loans    --    3.1    1,250.0    3.1  
Transition Bonds    --    18.9    --    38.7  




Total   $ 120.0   $ 202.6   $ 1,623.3   $ 1,912.2  




Table of Contents

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   $ ---   $ ---   $ ---   $ ---   $ 300  
New AE Facility    --    --    --    157    --    --    157  
Convertible Preferred Securities    --    --    --    --    300    --    300  







    Total Allegheny Energy   $ ---   $ 300   $ ---   $ 157   $ 300   $ ---   $ 757  







AE Supply:  
Pollution Control Bonds   $ ---   $ ---   $ ---   $ 92   $ ---   $ 191   $ 283  
Other Notes    --    --    --    380    --    1,050    1,430  
Debentures-AGC    --    --    --    --    --    100    100  
AE Supply Loans    7    12    12    12    12    1,192    1,247  







    Total AE Supply   $ 7   $ 12   $ 12   $ 484   $ 12   $ 2,533   $ 3,060  







Monongahela:  
First Mortgage Bonds   $ 65   $ ---   $ 300   $ ---   $ ---   $ 190   $ 555  
Pollution Control Bonds    --    --    --    16    --    70    86  
Other Notes    3    3    3    3    4    74    90  
Medium-Term Notes    --    --    --    --    --    110    110  







    Total Monongahela   $ 68   $ 3   $ 303   $ 19   $ 4   $ 444   $ 841  







Potomac Edison:  
First Mortgage Bonds   $ ---   $ ---   $ ---   $ ---   $ ---   $ 320   $ 320  
Medium-Term Notes    --    --    100    --    --    --    100  







    Total Potomac Edison   $ ---   $ ---   $ 100   $ ---   $ ---   $ 320   $ 420  







West Penn:  
Transition Bonds   $ 35   $ 73   $ 76   $ 80   $ 44   $ ---   $ 308  
Medium-Term Notes    --    --    --    --    --    80    80  







    Total West Penn   $ 35   $ 73   $ 76   $ 80   $ 44   $ 80   $ 388  







AGC:  
Debentures   $ ---   $ ---   $ ---   $ ---   $ ---   $ 100   $ 100  







    Total AGC   $ ---   $ ---   $ ---   $ ---   $ ---   $ 100   $ 100  







Total AE Consolidated:  
First Mortgage Bonds   $ 65   $ ---   $ 300   $ ---   $ ---   $ 510   $ 875  
Transition Bonds    35    73    76    80    44    --    308  
Pollution Control Bonds    --    --    --    108    --    261    369  
Other Notes    3    3    3    383    4    1,124    1,520  
Medium-Term Notes    --    300    100    --    --    190    590  
Debentures    --    --    --    --    --    100    100  
New AE Facility    --    --    --    157    --    --    157  
AE Supply Loans    7    12    12    12    12    1,192    1,247  
Convertible Preferred Securities    --    --    --    --    300    --    300  
Unamortized debt expense,  
discount, premium and terminated  
interest rate swap    (3 )  (3 )  (1 )  (1 )  (1 )  (8 )  (17 )
Eliminations    --    --    --    (2 )  --    (11 )  (13 )







    Total AE Consolidated   $ 107   $ 385   $ 490   $ 737   $ 359   $ 3,358   $ 5,436  


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
(In millions)
Gross
Carrying
Amount

Accumulated
Amortization

Gross
Carrying
Amount

Accumulated
Amortization

Land easements, amortizable:                    
  AE Supply   $ 0.2   $ ---   $ 0.2   $ ---  
  Monongahela    2.0    0.8    2.0    0.8  
  Potomac Edison    54.8    14.6    54.7    14.1  
  West Penn    38.8    9.9    38.7    9.7  
  AGC    1.4    0.7    1.4    0.7  




    Total land easements, amortizable    97.2    26.0    97.0    25.3  

Land easements, unamortizable (Monongahela)
    31.6    --    31.4    --  
Natural gas rights (Monongahela)    6.6    3.9    6.6    3.8  




Total   $ 135.4   $ 29.9   $ 135.0   $ 29.1  




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,

(In millions)
2004
2003
2004
2003
Components of net periodic benefit cost:                    
Service cost   $ 5.9   $ 5.4   $ 1.1   $ 1.0  
Interest cost    15.6    15.5    3.9    4.3  
Expected return on plan assets    (17.3 )  (18.7 )  (1.6 )  (1.6 )
Amortization of unrecognized transition obligation    0.1    0.2    1.5    1.5  
Amortization of prior service cost    1.1    1.2    0.1    0.1  
Amortization of net loss    1.3    0.1    --    --  




     6.7    3.7    5.0    5.3  
Curtailments, settlements and special termination benefits    1.9    3.4    --    5.6  




  Net periodic benefit cost   $ 8.6   $ 7.1   $ 5.0   $ 10.9  




Allocation of net periodic benefit costs:  
  Monongahela   $ 2.1   $ 2.1   $ 1.5   $ 3.2  
  Potomac Edison    1.1    1.0    1.1    1.9  
  West Penn    1.5    1.4    1.3    2.4  
  AE Supply    3.8    2.5    1.1    3.3  
  AE    0.1    0.1    --    0.1  




    Net periodic benefit cost   $ 8.6   $ 7.1   $ 5.0   $ 10.9  




Table of Contents

37


Pension Benefits for the
Six Months Ended
June 30,

Postretirement Benefits other
than Pensions for the
Six Months Ended
June 30,

(In millions)
2004
2003
2004
2003
Components of net periodic benefit cost:                    
Service cost   $ 11.7   $ 10.9   $ 2.2   $ 1.9  
Interest cost    31.3    31.2    7.8    8.5  
Expected return on plan assets    (34.6 )  (37.4 )  (3.1 )  (3.1 )
Amortization of unrecognized transition obligation    0.3    0.3    2.9    3.0  
Amortization of prior service cost    2.1    2.4    0.2    0.2  
Amortization of net loss    2.5    0.1    --    --  




     13.3    7.5    10.0    10.5  
Curtailments, settlements and special termination benefits    3.3    10.5    --    5.6  




  Net periodic benefit cost   $ 16.6   $ 18.0   $ 10.0   $ 16.1  




Allocation of net periodic benefit costs:  
  Monongahela   $ 4.4   $ 5.1   $ 3.0   $ 5.0  
  Potomac Edison    2.3    2.6    2.1    3.0  
  West Penn    3.2    3.7    2.5    3.7  
  AE Supply    6.4    6.4    2.3    4.3  
  AE    0.3    0.2    0.1    0.1  




    Net periodic benefit cost   $ 16.6   $ 18.0   $ 10.0   $ 16.1  




Table of Contents

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,

(In millions)
2004
2003
2004
2003
Consolidated net loss     $ (39.5 ) $ (231. 5) $ (6.2 ) $ (290. 3)
Other comprehensive income (loss) net of tax:  
  Minimum pension liability adjustment    --    --    2.3    --  
  Other    0.1    --    0.1    (0.1 )




Consolidated comprehensive loss   $ (39.4 ) $ (231. 5) $ (3.8 ) $ (290. 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.

Table of Contents

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,

(In millions)
2004
2003
2004
2003
Total operating revenues:                    
      Delivery and Services   $ 699.7   $ 665.5   $ 1,569.8   $ 1,516.4  
      Generation and Marketing    326.4    33.3    759.2    314.1  
      Eliminations    (369.0 )  (339.6 )  (782.2 )  (755.6 )




      Total   $ 657.1   $ 359.2   $ 1,546.8   $ 1,074.9  




Operating income (loss):  
      Delivery and Services   $ 65.7   $ 39.6   $ 161.8   $ 133.6  
      Generation and Marketing    (40.9 )  (335.7 )  52.8    (472.6 )
      Eliminations    1.1    7.1    (3.9 )  (12.4 )




      Total   $ 25.9   $ (289.0 ) $ 210.7   $ (351.4 )




Interest expense:  
      Delivery and Services   $ 33.6   $ 32.7   $ 68.1   $ 63.8  
      Generation and Marketing    65.3    82.0    161.8    146.4  
      Eliminations    --    --    (0.1 )  --  




      Total   $ 98.9   $ 114.7   $ 229.8   $ 210.2  




Consolidated income (loss) before cumulative effect of  
    accounting changes:  
      Delivery and Services   $ 24.2   $ 4.3   $ 63.2   $ 53.7  
      Generation and Marketing    (64.4 )  (240.2 )  (67.0 )  (315.6 )
      Eliminations    0.7    4.4    (2.4 )  (7.6 )




      Total   $ (39.5 ) $ (231.5 ) $ (6.2 ) $ (269.5 )




Cumulative effect of accounting changes, net:  
      Delivery and Services   $ ---   $ ---   $ ---   $ (1.3 )
      Generation and Marketing    --    --    --    (19.5 )
      Eliminations    --    --    --    --  




      Total   $ ---   $ ---   $ ---   $ (20.8 )




Consolidated net income (loss):  
      Delivery and Services   $ 24.2   $ 4.3   $ 63.2   $ 52.4  
      Generation and Marketing    (64.4 )  (240.2 )  (67.0 )  (335.1 )
      Eliminations    0.7    4.4    (2.4 )  (7.6 )




      Total   $ (39.5 ) $ (231.5 ) $ (6.2 ) $ (290.3 )





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,

(In millions)
2004
2003
2004
2003
Total operating revenues:                    
      Delivery and Services   $ 201.2   $ 185.3   $ 523.8   $ 479.1  
      Generation and Marketing    71.2    79.9    157.4    177.5  
      Eliminations    (71.0 )  (67.0 )  (150.8 )  (141.5 )




      Total   $ 201.4   $ 198.2   $ 530.4   $ 515.1  




Operating income (loss):  
      Delivery and Services   $ 9.2   $ (3.7 ) $ 48.4   $ 28.2  
      Generation and Marketing    (20.3 )  1.7    (14.3 )  15.7  
      Eliminations    --    --    --    --  




      Total   $ (11.1 ) $ (2.0 ) $ 34.1   $ 43.9  




Interest expense:  
      Delivery and Services   $ 8.5   $ 8.8   $ 16.0   $ 15.8  
      Generation and Marketing    4.4    5.4    9.5    10.9  
      Eliminations    --    --    --    --  




      Total   $ 12.9   $ 14.2   $ 25.5   $ 26.7  




Consolidated income (loss) before cumulative effect of accounting  
   change:  
      Delivery and Services   $ 2.4   $ (6.9 ) $ 19.0   $ 8.3  
      Generation and Marketing    (14.2 )  (0.4 )  (12.1 )  54.4  
      Eliminations    --    --    --    --  




      Total   $ (11.8 ) $ (7.3 ) $ 6.9   $ 62.7  




Cumulative effect of accounting change, net:  
      Delivery and Services   $ ---   $ ---   $ ---   $ (0.4 )
      Generation and Marketing    --    --    --    --  
      Eliminations    --    --    --    --  




      Total   $ ---   $ ---   $ ---   $ (0.4 )




Consolidated net income (loss):  
      Delivery and Services   $ 2.4   $ (6.9 ) $ 19.0   $ 7.9  
      Generation and Marketing    (14.2 )  (0.4 )  (12.1 )  54.4  
      Eliminations    --    --    --    --  




      Total   $ (11.8 ) $ (7.3 ) $ 6.9   $ 62.3  




Table of Contents

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,

(In millions)
2004
2003
Decrease in adverse power purchase commitments     $ 9.0   $ 9.5  

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     $ 4,078.0   $ 4,052.4  
Amounts under construction included above    73.8    54.1  
Accumulated depreciation    (1,873.6 )  (1,823.9 )

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,

(In millions, except share data)
2004
2003
2004
2003
Basic and Diluted Earnings Per Share--Numerator         &nbs