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Investor Presentation August 16-18, 2006

Investor Presentation August 16-18, 2006. Allegheny Energy. Forward-Looking Statements.

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Investor Presentation August 16-18, 2006

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  1. Investor PresentationAugust 16-18, 2006 Allegheny Energy

  2. Forward-Looking Statements In addition to historical information, this presentation 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 include statements with respect to: regulation and the status of retail generation service supply competition in states served by Allegheny Energy's delivery business, Allegheny Power; the closing of various agreements; financing plans; demand for energy and the cost and availability of raw materials, including coal; provider-of-last resort and power supply contracts; results of litigation; results of operations; internal controls and procedures; capital expenditures; status and condition of plants and equipment; regulatory matters; 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. Factors that could cause actual results to differ materially include, among others, the following: changes in the price of power and fuel for electric generation; general economic and business conditions; changes in access to capital; complications or other factors that render it difficult or impossible to obtain necessary lender consents or regulatory authorizations on a timely basis; environmental regulations; the results of regulatory proceedings, including proceedings related to rates; changes in industry capacity, development, and other activities by Allegheny's competitors; changes in the weather and other natural phenomena; changes in the underlying inputs and assumptions, including market conditions used to estimate the fair values of commodity contracts; changes in laws and regulations applicable to Allegheny, its markets or its activities; the loss of any significant customers and suppliers; dependence on other electric transmission and gas transportation systems and their constraints on availability; changes in PJM, including changes to participants rules and tariffs; the effect of accounting policies issued periodically by accounting standard-setting bodies; and the continuing effects of global instability, terrorism and war. Additional risks and uncertainties are identified and discussed in Allegheny Energy's reports and registration statements filed with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this document. Allegheny Energy undertakes no obligation to update its forward-looking statements to reflect events or circumstances after the date of this document.

  3. Non-GAAP Financial Measures This presentation includes non-GAAP financial measures as defined in the Securities and Exchange Commission’s Regulation G. Where noted, the presentation shows certain financial information on an “as adjusted” basis, to exclude the effect of certain items as described herein. By presenting “as adjusted” results, management intends to provide investors with a better understanding of the core results and underlying trends from which to consider past performance and prospects for the future. Users of this financial information should consider the types of events and transactions for which adjustments have been made. “As adjusted” information should not be considered in isolation or viewed as a substitute for, or superior to, net income or other data prepared in accordance with GAAP as measures of our operating performance or liquidity. In addition, the “as adjusted” information is not necessarily comparable to similarly titled measures provided by other companies. Pursuant to the requirements of Regulation G, we have attached a table that reconciles the non-GAAP financial measures in this presentation to the most directly comparable GAAP measures. The table is also available at www.alleghenyenergy.com.

  4. Allegheny Energy AlleghenyEnergy Delivery 1.5 million customers, PA-MD-WV-VA Generation Coal-fired, PJM 48.1 million MWH* * 12 months ended December 31, 2005

  5. Entering a Growth Phase Turnaround • Restructured and • reduced debt • Strengthened financial reporting, internal controls • Refocused on core business • Launched high performance organization • Returned to profitability Growth

  6. Increase Pennsylvania POLR rates Transition to market-based rates Improve plant availability Decrease O&M expense Reduce interest expense Earnings Growth Drivers

  7. Growth Driver: Increase Pennsylvania POLR Rates Cumulative Increase in Pre-Tax Operating Income $ millions; estimates Generation Rate $ per MWH

  8. Assumption for 2006 Outlook Growth Driver:Transition to Market-Based Rates Generation Rates $ per MWH Market: Current* POLR: Maryland, Ohio * As of July 10, 2006

  9. Growth Driver:Transition to Market-Based Rates 20062009 State Maryland, Maryland Ohio MWH transitioning 4.8 million 3.5 million to market Increase in pre-tax income $90 million $60 million Total: $150 million

  10. Decreasing POLR Obligation % of Total Projected Output (existing contracts only) 2006 2010

  11. Growth Driver: Improve Plant Availability Supercritical units Proforma* Actual 2008 Goal 2006 Goal Each 1% improvement provides benefit >$10 million * Excludes extended unplanned outages at Hatfield, Pleasants

  12. Achieving 91% Availability by 2008 Outage Factor (supercritical units) 24% 22% 18% 17% 17% 15% 9% Reduce planned outages Reduce unplanned outages Goal

  13. Power Plant Investment Maintenance Spending (O&M and capital; $ millions)

  14. Coal Supply Under Contract % of POLR Requirements % of Total Requirements

  15. Coal Costs and Usage Average Delivered Cost/Ton (Existing contracts only) Usage (Tons) • 2005: 18 million • 2006: >19 million

  16. Growth Driver:Decrease O&M Expense ($ millions) Target $700-730 * 2005 = $775 after adjustment

  17. Growth Driver:Reduce Interest Expense • Reduced debt by $2.1 billion (Dec. 1, 2003 – June 30, 2006) • Refinanced $1.5 billion in 2006 • Projected reduction in interest expense: $65 million in 2006

  18. Strengthen financial condition; investment grade by year-end 2007 Strong earnings growth Improve environmental performance Expand transmission system 2006 Priorities

  19. Priority: Environmental Performance

  20. Exposure toSO2 Allowance Market SO2 Emissions in Excess of Allowances (tons; estimated as of July 28, 2006) 2006 -0- 2007 0 - 40,000 2008 40,000 - 80,000* * Approximately half of 2008 short position is at Allegheny Supply and half is at Monongahela Power.

  21. PJM approved ~210-mile line Cost: over $850 million (preliminary estimate) 80% of spending in 2009-2011 In service 2011 FERC approved incentive rate treatment Other approvals needed State regulatory commissions FERC (rate filing) Priority:Expand Transmission System

  22. Approved Transmission Line

  23. West Virginia Rate Case Filing • Requested $100 million net increase • Fuel, purchased power: $126 million increase • Base rates: $26 million decrease • 10% net increase (residential) • Requested reinstatement of fuel cost adjustment • Proposed ROE: 11.75% • Probable effective date: late May 2007

  24. Financial Review

  25. Improving Financial Results Earnings per Share As Adjusted As Reported $0.94 $0.90 $0.86 $0.47 $0.40 ($0.37) ($1.83) ($2.80) 2003 2004 2005 2006 6 mos.

  26. As reported As adjusted Increasing Free Cash Flow($ millions) Cash from Operations Free Cash Flow (adjusted cash from operations net of capital expenditures) * 2004 excludes OVEC proceeds and California contract escrow release. 2005 excludes costs for St. Joe’s notes redemption and convertible trust preferred securities tender offer. ** Assumes $115 million of spending for Hatfield scrubbers.

  27. Strengthening the Balance Sheet Debt Outstanding ($ billions) Equity Ratio

  28. Improving Credit Statistics Debt/EBITDA* EBITDA/Interest* * Based on adjusted EBITDA and adjusted interest for 12-month periods. Excludes securitized debt and interest.

  29. CONTRIBUTION TO PRE-TAX INCOME* ($ millions; estimates) Pennsylvania rates $55 Maryland contract expiration 55 Ohio territory sale 45 Market prices positive/negative December 2005 adjustment 27 Plant availability no impact Transmission contract (30) Higher coal costs (80) SO2 allowance costs no impact Lower O&M expense 50 Lower depreciation 30 Lower interest expense 65 Other factors positive/negative * 2006 vs. 2005 as adjusted 2006 Earnings Growth:Key Drivers

  30. Supplemental Information

  31. As ReportedAs Adjusted 2003: Q1 $ (0.46) $ (0.32) Q2 (1.82) (0.23) Q3 (0.40) 0.11 Q4 (0.11) (0.14) Year (2.80) (0.37) 2004: Q1 $ 0.25 $ (0.03) Q2 (0.31) (0.21) Q3 (2.40) 0.37 Q4 0.48 0.22 Year (1.83) 0.47 2005: Q1 $ 0.29 $ 0.39 Q2 (0.12) 0.08 Q3 0.21 0.45 Q4 0.02 0.02 Year 0.40 0.94 2006: Q1 $ 0.67 $ 0.68 Q2 0.18 0.22 Earnings (Loss) Per Share

  32. $ millionsAs ReportedAs Adjusted 2003: Q1 $ 77.6 $ 92.9 Q2 (203.5) 150.1 Q3 117.3 225.3 Q4 197.4 185.6 Year 156.8 634.9 2004: Q1 $ 247.8 $ 175.5 Q2 110.3 122.0 Q3 243.2 243.2 Q4 312.7 221.8 Year 914.0 762.5 2005: Q1 $ 261.3 $ 261.3 Q2 210.6 192.7 Q3 254.7 274.2 Q4 162.1 162.1 Year 888.6 890.2 2006: Q1 $ 322.1 $ 322.1 Q2 193.6 193.6 EBITDA

  33. The Road to Growth Stock Price Performance$100 Invested on July 1, 2003 AYE: $495 Dow Electrics: $155 S&P: $130 731/2006

  34. Enhance Operating Performance VISION: “To Be a Top Performing Utility by Year-End 2007” Operational Excellence Financial Performance Customer Satisfaction Environmental Stewardship Shareholder Value Engaged Employees

  35. Generation and Marketing:Overview • Capacity: over 9,600 MW* • Primarily base load coal-fired plants • Located in PJM (13 states) Capacity* MWH Output* Hydro 11% Gas 1% Gas 9% Hydro 3% Oil 1% Coal 96% Coal 79% * Excludes Gleason peaking unit (held for sale). Output for year ended December 31, 2005.

  36. Dispatch Cost Allegheny – Other Units Allegheny Supercritical Coal Units Low-Cost Generation Fleet Allegheny has an advantaged dispatch in PJM PJM Dispatch Cost (Ozone Season): $/MWh Assumptions: natural gas delivered at approximately $8.00/mmBTU; coal at approximately $2.75/mmBTU; SO2 at $670/ton; NOx at $1,750/ton.

  37. Generation and Marketing:PJM -- An Attractive Market • World’s largest competitive power market • Over 51 million people • 700 million MWH of energy annually • 163,500 MW of capacity • Nation’s most liquid spot power market • Model for FERC’s proposed Standard Market Design • Provides transactional flexibility: contracts not required

  38. Only 15% of Coal Delivered by Rail Coal Delivery Methods 2006 Rail 15% Barge 49% Truck 21% Conveyor 15% Note: Some barge coal originates on short line railroads.

  39. CLEVELAND PITTSBURGH OHIO PENNSYLVANIA HARRISBURG MARYLAND BALTIMORE WEST VIRGINIA WASHINGTON, DC CHARLESTON KENTUCKY VIRGINIA Delivery and Services:Overview Allegheny Power West PennPower Potomac Edison Monongahela Power • In 4 states (PA, WV, MD, VA) • 1.5 million electric customers • Load growth: 2.0% compounded annually (1995-2005; retail)

  40. Delivery and Services: Retail Revenue Mix, 2005 By State By Customer Class Other 1% Commercial 25% Residential 43% Industrial 31%

  41. Delivery and Services: Competitive Rates Residential Rates ¢/kWh as of January 1, 2006 National Average = 10.62 ¢/kWh

  42. Regulatory Timeline 1 Generation rate caps include rate increases in each year, 2006-2010. 2 One-time T&D increase can be requested through 2007. After 2007, can request recovery of purchased power and annual incremental T&D reliability and environmental costs, and one additional T&D cost increase.

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