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3rd Quarter Financial Results

3rd Quarter Financial Results. October 27, 2006. Forward-Looking Statements.

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3rd Quarter Financial Results

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  1. 3rd Quarter Financial Results October 27, 2006

  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 (“PLR”) and power supply contracts; results of litigation; results of operations; internal controls and procedures; capital expenditures; status and condition of plants and equipment; capacity purchase commitments; 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: plant performance and unplanned outages; 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 customer switching behavior and their resulting effects on existing and future PLR load requirements; 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 pronouncements 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 provide 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. Paul Evanson Chairman, President and CEO

  5. Third Quarter Results Earnings per Share 20062005 As reported $0.65 $0.21 As adjusted 0.56 0.45

  6. Higher generation rates in Pennsylvania Expiration of below-market power contract Lower costs Third Quarter Results:Key Drivers

  7. Year-To-Date Results Earnings per Share Nine Months Ended September 30 20062005 As reported $1.51 $0.38 As adjusted 1.46 0.90

  8. Power Plant Performance In Line with Last Year Supercritical Units; Third Quarter Unplanned Outage Factor Availability

  9. Pre-outage Post-outage Planned Outages:Results Unplanned Outage Factor Units Which Completed Extended Outages * Including transformer failure: Harrison 1 = 10%, average = 6%. Post-outage average is time weighted.

  10. Priority: Improve Environmental Performance • Fort Martin scrubbers: requested approval to securitize additional costs • Hatfield scrubbers: on track for 2009 completion

  11. Priority: Expand Transmission Facilities • 500 kv line: • State regulatory filings: mid-2007 • FERC rate filing: Q1 2007 • Most capital expenditures will occur in 2009-2011 • Additional $70 million investment in 2007

  12. Other Matters • West Virginia rate case: hearings set for February 2007 • Solid customer growth • Set new peak demand in August 2006 • Ranked No. 1 in customer satisfaction in Northeast region • New General Counsel

  13. Phil Goulding Senior Vice President and Chief Financial Officer

  14. Financial Results3 Months Ended September 30 20062005 Net income: $ millions $ 110 $36 Per share (diluted) 0.65 0.21 Income, continuing operations: $ millions 111 43 Per share (diluted) 0.65 0.26

  15. Adjustments3 Months Ended September 30 ($ millions) 20062005 Pennsylvania tax law change ($17)* Debt redemption costs $33 Ohio sale impairment charge 31 Insurance proceeds received (11) * After-tax

  16. Adjusted Income FromContinuing Operations3 Months Ended September 30 $ millions EPS

  17. ADJUSTED EPS: Q3 2005 $ 0.45 BETTER/(WORSE): Maryland contract expiration 0.09 Pennsylvania generation rates 0.07 Ohio territory sale 0.07 Market prices (0.16) Harrison transformer fire (0.04) T&D revenues (0.04) Coal prices (0.08) O&M expense 0.14 Interest 0.05 All other 0.01 ADJUSTED EPS: Q3 2006 $ 0.56 Adjusted EPS: Key Drivers3 Months Ended September 30

  18. ($ millions) GAAP ADJUSTED Better/ Better/ (Worse) (Worse) Revenues $ (28) $ (28) Purchased power 22 22 Fuel (12) (12) Impairment charge - Ohio 31 -0- O&M 24 35 Depreciation 8 8 Interest 47 14 All other (5) (4) PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35 Financial Results: Key Drivers 3 Months Ended September 30

  19. Key Drivers of Change in Revenues3 Months Ended September 30 ($ millions) Better/ (Worse) Maryland contract expiration $ 24 Pennsylvania rates 18 Ohio sale 11 Market prices (41) OVEC contract expiration (23) Construction contract completion (10) Transmission contract expiration (8) All other 1 TOTAL DECREASE IN REVENUES $ (28)

  20. ($ millions) GAAP ADJUSTED Better/ Better/ (Worse) (Worse) Revenues $ (28) $ (28) Purchased power 22 22 Fuel (12) (12) Impairment charge - Ohio 31 -0- O&M 24 35 Depreciation 8 8 Interest 47 14 All other (5) (4) PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35 Financial Results: Key Drivers 3 Months Ended September 30 Key factors: • OVEC contract expiration $10 • Maryland 7 • Other 5

  21. ($ millions) GAAP ADJUSTED Better/ Better/ (Worse) (Worse) Revenues $ (28) $ (28) Purchased power 22 22 Fuel (12) (12) Impairment charge - Ohio 31 -0- O&M 24 35 Depreciation 8 8 Interest 47 14 All other (5) (4) PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35 Financial Results: Key Drivers 3 Months Ended September 30 Key factors: • Higher coal price ($20) • Lower gas expense 8

  22. ($ millions) GAAP ADJUSTED Better/ Better/ (Worse) (Worse) Revenues $ (28) $ (28) Purchased power 22 22 Fuel (12) (12) Impairment charge - Ohio 31 -0- O&M 24 35 Depreciation 8 8 Interest 47 14 All other (5) (4) PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35 Financial Results: Key Drivers 3 Months Ended September 30 Adjustment: • Insurance proceeds (O&M offset in 2005) ($11)

  23. Adjusted O&M Expense 3rd Quarter 2006 Year-to-Year Better/(Worse) $ millions Reduced litigation settlement costs (net) $9 Completed construction services contract 10 Eliminated site remediation reserve 8 Uncollectibles, legal fees, IT services, other 8 TOTAL DECREASE $35

  24. ($ millions) GAAP ADJUSTED Better/ Better/ (Worse) (Worse) Revenues $ (28) $ (28) Purchased power 22 22 Fuel (12) (12) Impairment charge - Ohio 31 -0- O&M 24 35 Depreciation 8 8 Interest 47 14 All other (5) (4) PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35 Financial Results: Key Drivers 3 Months Ended September 30 Key factors: • Extended plant lives $9

  25. ($ millions) GAAP ADJUSTED Better/ Better/ (Worse) (Worse) Revenues $ (28) $ (28) Purchased power 22 22 Fuel (12) (12) Impairment charge - Ohio 31 -0- O&M 24 35 Depreciation 8 8 Interest 47 14 All other (5) (4) PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35 Financial Results: Key Drivers 3 Months Ended September 30 Adjustment: • Debt redemption costs (2005) $33

  26. ($ millions) GAAP ADJUSTED Better/ Better/ (Worse) (Worse) Revenues $ (28) $ (28) Purchased power 22 22 Fuel (12) (12) Impairment charge - Ohio 31 -0- O&M 24 35 Depreciation 8 8 Interest 47 14 All other (5) (4) PRE-TAX INCOME, CONTINUING OPERATIONS $ 87 $ 35 Financial Results: Key Drivers 3 Months Ended September 30

  27. Cash FlowThird Quarter 2006 ($ millions) From operations $ 297 Capital expenditures (114) FREE CASH FLOW $ 183

  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. Coal Supply Under Contract % of Fixed-Price Commitments* % of Total Requirements * Excludes West Virginia

  30. Coal:Average Delivered Cost/TonExisting Contracts Only

  31. Fourth Quarter 2006 • Consistent with 2006 growth drivers • On track to deliver earnings growth

  32. CONTRIBUTION TO PRE-TAX INCOME* ($ millions; estimates) Pennsylvania generation rates $50 West Virginia rate case 60 Virginia rates 20 Maryland customer credit 10 Market prices positive/negative Plant availability 10 O&M expense -- Higher coal prices (45) Higher SO2 allowance costs (30) Interest expense 10 Other factors positive/negative * 2007 vs. 2006 as adjusted 2007 Earnings Growth:Key Drivers

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