PageTable 1 of 32Contents

~~FORM~~UNITED ~~10-Q~~STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

~~Quarterly~~FORM ~~Report~~10-Q ~~under Section 13 or 15(d)~~

ofQUARTERLY ~~the~~REPORT ~~Securities~~PURSUANT ~~Exchange~~TO ~~Act~~SECTION of13 ~~1934~~OR 15 (d)

~~For~~OF ~~Quarter~~THE ~~Ended~~SECURITIES ~~June~~EXCHANGE ~~30,~~ACT ~~2002~~OF 1934

~~Commission~~For ~~File~~the ~~Number~~quarterly ~~1-5164~~period ended September 30, 2002

MONONGAHELA POWER COMPANY

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) 10435 Downsville Pike Hagerstown, Maryland 21740-1766 Telephone (301) 790-3400	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) 10435 Downsville Pike Hagerstown, Maryland 21740-1766 Telephone (301) 790-3400	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) 10435 Downsville Pike Hagerstown, Maryland 21740-1766 Telephone (301) 790-3400	13-3079675

(ExactTable name of registrant as specified in its charter)Contents

Ohio	13-5229392
(State of Incorporation)	(I.R.S. Employer Identification No.)

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.

~~1310~~Indicate ~~Fairmont~~by ~~Avenue,~~check ~~Fairmont~~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), ~~West~~and ~~Virginia 26554~~(2) have been subject to such filing requirements for the past 90 days. Yes ¨ No x

~~Telephone~~Indicate ~~Number~~by -check ~~304~~mark whether the registrants are accelerated filers (as defined in Rule 12b-~~366-3000~~2 of the Exchange Act).

~~The~~Allegheny ~~registrant~~Energy, ~~(1)~~Inc. ~~has~~Yes ~~filed~~x ~~all~~No ~~reports~~¨ ~~required~~Allegheny toEnergy beSupply ~~filed~~Company, byLLC ~~Section~~Yes 13¨ orNo ~~15(d)~~x ofMonongahela ~~the~~Power ~~Securities~~Company ~~Exchange~~Yes ~~Act~~¨ ofNo ~~1934~~x ~~during~~The ~~the~~Potomac ~~preceding~~Edison 12Company ~~months~~Yes ~~and~~¨ ~~(2)~~No ~~has~~x ~~been~~West ~~subject~~Penn toPower ~~such~~Company ~~filing~~Yes ~~requirements~~¨ ~~for~~No ~~the~~x ~~past~~Allegheny 90Generating ~~days.~~Company Yes ¨ No x

AtNumber ~~August~~of ~~14, 2002, 5,891,000~~ shares outstanding of ~~the~~each class ~~Common Stock ($50 par value)~~ of ~~the~~common ~~registrant~~stock ~~were~~as ~~outstanding, all~~ of ~~which~~December ~~are held by Allegheny Energy~~31, ~~Inc.,~~2003: ~~the Company's parent.~~

Allegheny Energy, Inc.	126,969,238	($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)

~~MONONGAHELA~~(a) ~~POWER~~The ~~COMPANY~~registrant ~~AND~~is ~~SUBSIDIARIES~~a limited liability company, the interests in which are not represented by shares.

~~Form~~2 ~~10-Q for Quarter Ended June 30, 2002~~

IndexTable of Contents

PART I - FINANCIAL INFORMATION	Page No.
Item 1. Financial Statements
Consolidated Statement of Operations - Three and six months ended June 30, 2002 and 2001	3
Consolidated Statement of Cash Flows - Six months ended June 30, 2002 and 2001	4
Consolidated Balance Sheet - June 30, 2002 and December 31, 2001	5-6
Notes to Consolidated Financial Statements	7-15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	16-29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	29-30
PART II- OTHER INFORMATION	31-32
Item 5. Other Information	31
Item 6. Exhibits and Reports on Form 8-K	31

TABLE OF CONTENTS

3
				Page
MONONGAHELA POWER COMPANY AND SUBSIDIARIES
PART I.		FINANCIAL INFORMATION
Consolidated Statement of Operations
Item 1.		Consolidated Financial Statements (Unaudited)
(Thousands of dollars)
		Allegheny Energy, Inc.:
	Unaudited
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001		7
	Three Months Ended				Six Months Ended
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001		8
	June 30				June 30
		Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001		9
	2002		2001*	2002		2001*
		Allegheny Energy Supply Company, LLC:
Operating Revenues
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001		11
Delivery and Services	$ 125,982		$ 114,808	$ 315,346		$ 303,615
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001		12
Generation and Marketing	70,871		93,147	147,551		201,749
		Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001		13
	196,853		207,955	462,897		505,364
		Monongahela Power Company:
Operating Expenses:
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001		15
Operation:
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001		16
Fuel consumed for electric generation	27,970		34,678	58,520		72,815
		Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001		17
Purchased energy and transmission	41,799		25,262	84,556		54,189
		The Potomac Edison Company:
Natural gas purchases	18,028		16,255	73,860		83,545
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001		19
Deferred power costs, net	2,703			9,804
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001		20
Other	61,475		57,914	117,796		121,788
		Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001		21
Depreciation and amortization	18,676		20,483	37,333		41,021
		West Penn Power Company:
Taxes other than income taxes	13,663		16,005	32,120		33,886
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001		23
Federal and state income taxes (benefit)	(134)		8,132	10,784		27,338
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001		24
Total Operating Expenses	184,180		178,729	424,773		434,582
		Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001		25
Operating Income	12,673		29,226	38,124		70,782
		Allegheny Generating Company:
Other Income and Deductions:
		Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001		27
Allowance for other than borrowed funds
		Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001		28
used during construction	205		126	360		241
		Balance Sheets as of September 30, 2002 and December 31, 2001		29
Other income, net	1,340		2,381	4,138		3,941
		Combined Notes to Consolidated Financial Statements		30
Total Other Income and Deductions	1,545		2,507	4,498		4,182
Consolidated Income Before Interest
Charges and Cumulative Effect of
Accounting Change, Net	14,218		31,733	42,622		74,964
Interest Charges:
Interest on long-term debt and other interest	13,275		13,005	26,567		26,531
Allowance for borrowed funds used during
construction	(852)		(609)	(1,673)		(993)
Total Interest Charges	12,423		12,396	24,894		25,538
Consolidated Income Before Cumulative
Effect of Accounting Change, Net	1,795		19,337	17,728		49,426
Cumulative Effect of Accounting Change, Net				(115,437)
Consolidated Net Income (Loss)	$ 1,795		$ 19,337	$ (97,709)		$ 49,426
See accompanying notes to consolidated financial statements.
* Certain amounts have been reclassified for comparative purposes.

4
MONONGAHELA POWER COMPANY AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Thousands of dollars)
	Unaudited
	Six Months Ended
	June 30
	2002	2001*
Cash Flows From (Used In) Operations:
Consolidated net (loss) income	$(97,709)	$ 49,426
Cumulative effect of accounting change, net	115,437
Consolidated income before cumulative effect of accounting
change, net	17,728	49,426
Depreciation and amortization	37,333	41,021
Deferred investment credit and income taxes, net	(4,230)	(724)
Deferred power costs, net	9,804
Unconsolidated subsidiaries' dividends in excess of earnings	(516)	1,344
Allowance for other than borrowed funds used during construction	(360)	(241)
Changes in certain assets and liabilities:
Accounts receivable, net	16,752	22,007
Materials and supplies	7,046	(4,728)
Prepayments	10,383	17,345
Taxes receivable	2,927
Accounts payable	(3,366)	(3,331)
Accounts payable to affiliates, net	(12,743)	(16,184)
Taxes accrued	7,010	(9,050)
Interest accrued	(460)	399
Other, net	2,347	2,718
	89,655	100,002
Cash Flows Used In Investing:
Construction expenditures (less allowance for other
than borrowed funds used during construction):
Delivery and Services	(23,708)	(28,340)
Generation and Marketing	(15,832)	(18,427)
	(39,540)	(46,767)
Cash Flows From (Used In) Financing:
Repayment of long-term debt	(1,760)
Short-term debt, net	(14,350)	(37,015)
Notes receivable from affiliates	3,150	17,151
Dividends on capital stock:
Preferred stock	(2,517)	(2,517)
Common stock to parent	(16,968)	(28,454)
	(32,445)	(50,835)
Net Change In Cash And Temporary Cash Investments	17,670	2,400
Cash and temporary cash investments at January 1	4,439	3,658
Cash and temporary cash investments at June 30	$ 22,109	$ 6,058
Supplemental Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$23,964	$25,550
Income taxes		25,077
Noncash investing and financing activities:
In January 2001, the Company transferred the pension and OPEB obligation of Mountaineer Gas Company in the amount of $16.6 million to its affiliate Allegheny Energy Service Corporation (AESC). This transfer was performed in conjunction with the transfer of Mountaineer Gas Company employees to AESC. The Company accrued a long-term liability to AESC to reflect the transfer of the pension and OPEB liability to AESC.
See accompanying notes to consolidated financial statements.
* Certain amounts have been reclassified for comparative purposes.

5
MONONGAHELA POWER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
(Thousands of dollars)
	Unaudited
	June 30,	December 31,
ASSETS:	2002	2001*
Property, Plant, and Equipment:
Delivery and Services	$1,585,278	$1,570,665
Generation and Marketing	867,803	849,973
Construction work in progress	69,725	70,103
	2,522,806	2,490,741
Accumulated depreciation	(1,169,633)	(1,139,904)
	1,353,173	1,350,837
Investments and Other Assets:
Investment in Allegheny Generating Company	30,992	30,476
Excess of cost over net assets acquired (Goodwill)		195,033
Other	3,327	3,381
	34,319	228,890
Current Assets:
Cash and temporary cash investments	22,109	4,439
Accounts receivable:
Billed:
Customer	62,499	62,043
Other	3,281	3,549
Unbilled	36,969	53,759
Allowance for uncollectible accounts	(6,450)	(6,300)
Notes receivable due from affiliates	88,353	91,503
Materials and supplies - at average cost:
Operating and construction	16,624	18,322
Fuel, including stored natural gas	35,801	41,149
Prepaid taxes	15,135	23,856
Taxes receivable	10,807	13,734
Prepaid natural gas	7,719	9,381
Other, including current portion of regulatory assets	10,267	7,829
	303,114	323,264
Deferred Charges:
Regulatory assets	101,682	100,750
Unamortized loss on reacquired debt	11,884	12,442
Other	11,333	9,164
	124,899	122,356
Total Assets	$1,815,505	$2,025,347
See accompanying notes to consolidated financial statements.
* Certain amounts have been reclassified for comparative purposes.

6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)	56
MONONGAHELA POWER COMPANY AND SUBSIDIARIES
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	93
Consolidated Balance Sheet (Continued)
Item 4.		Controls and Procedures	94
(Thousands of dollars)
PART II.		OTHER INFORMATION
	Unaudited
Item 1.		Legal Proceedings	97
	June 30,	December 31,
Item 2.		Changes in Securities and Use of Proceeds	97
CAPITALIZATION AND LIABILITIES:	2002	2001*
Item 3.		Default Upon Senior Securities	98
Capitalization:
Item 4.		Submission of Matters to Vote of Security Holders	98
Common stock	$ 294,550	$ 294,550
Item 5.		Other Information	99
Other paid-in capital	101,145	100,242
Item 6.		Exhibits and Reports on Form 8-K	100
Retained earnings	117,609	234,802
Signature			108
	513,304	629,594
Preferred stock	74,000	74,000
Long-term debt and QUIDS	765,292	784,261
	1,352,596	1,487,855
Current Liabilities:
Short-term debt		14,350
Long-term debt due within one year	47,448	30,408
Accounts payable	60,221	63,587
Accounts payable to affiliates, net	2,975	15,718
Taxes accrued:
Federal and state income	25,213	8,194
Other	29,076	39,085
Interest accrued	14,458	14,918
Deferred power costs	8,358	516
Other	10,695	8,310
	198,444	195,086
Deferred Credits and Other Liabilities:
Unamortized investment credit	7,960	9,034
Deferred income taxes	158,114	238,751
Obligations under capital lease	12,240	11,567
Deferred power costs	2,658
Regulatory liabilities	49,282	49,509
Notes payable to affiliates	15,753	15,812
Other	18,458	17,733
	264,465	342,406
Total Capitalization and Liabilities	$1,815,505	$2,025,347
See accompanying notes to consolidated financial statements.
* Certain amounts have been reclassified for comparative purposes.

MONONGAHELATable POWERof COMPANY AND SUBSIDIARIESContents

~~Notes~~GLOSSARY ~~to Consolidated Financial Statements~~

~~June~~I. 30The following abbreviations and terms are used in this report to identify Allegheny Energy, ~~2002~~Inc. and its subsidiaries:

~~(Unaudited)~~AE Allegheny Energy, Inc., a diversified utility holding company AE Supply Allegheny Energy Supply Company, LLC, an unregulated generation subsidiary of Allegheny Energy, Inc., also a holding company 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., a non-utility, unregulated subsidiary of Allegheny Energy, Inc. Alliance Energy Services Alliance Energy Services, LLC, a former indirect subsidiary of Allegheny Ventures, Inc. Distribution Companies Collectively, Monongahela Power Company, The Potomac Edison Company, and West Penn Power Company. The Distribution Companies do business as “Allegheny Power.” Fellon-McCord Fellon-McCord & Associates, Inc., a subsidiary of Allegheny Ventures, Inc. 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.

1II. ~~Basis~~The offollowing ~~Interim~~abbreviations ~~Presentation~~and acronyms are used in this report to identify entities and terms relevant to Allegheny’s business and operations:

Monongahela Power Company (the Company) is a wholly-owned subsidiary of Allegheny Energy, Inc. (Allegheny Energy). The Company's Notes to Consolidated Financial Statements in its Annual Report on Form 10-K, as amended, for the year ended December 31, 2001, should be read in conjunction with the accompanying consolidated financial statements and the following notes. The accompanying consolidated financial statements appearing on pages 3 through 6 and these notes to consolidated financial statements are unaudited. In the opinion of the Company, such consolidated financial statements together with these notes contain all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the Company's financial position as of June 30, 2002, results of operations for the three and six months ended June 30, 2002 and 2001, and cash flows for the six months ended June 30, 2002 and 2001. Certain prior period amounts in these consolidated financial statements and notes have been reclassified for comparative purposes.

ARO		Asset retirement obligation

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

CAAA		Clean Air Act Amendments of 1990

CDWR		California Department of Water Resources

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

FIN 45		FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others”

FIN 46		FIN 46, “Consolidation of Variable Interest Entities”

GAAP		Generally Accepted Accounting Principles in the United States of America

KWh		Kilowatt-hour

LV Cogen		Las Vegas Cogeneration II

2.5 ~~Goodwill and Other Intangible Assets~~

OnTable January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminated the pooling-of-interests method and requires all business combinations initiated after June 30, 2001, to be accounted for under the purchase method of accounting. SFAS No. 141 also sets forth guidelines for applying the purchase method of accounting in the determination of goodwill and other intangible assets. The application of SFAS No. 141 did not affect any of the Company's previously reported amounts for goodwill and other intangible assets.Contents

SFAS No. 142 eliminated amortization of goodwill and other intangible assets with indefinite lives effective January 1, 2002. Subsequent to the transitional provisions of SFAS No. 142 (see below), goodwill and other intangible assets with indefinite lives will be tested at least annually for impairment, with impairment losses recognized in operating income. Other intangible assets with finite lives will continue to be amortized over their useful lives and tested for impairment when events or circumstances warrant.


MW		Megawatt

MWh		Megawatt-hour

NSR		The New Source Performance Review Standards, or “New Source Review” applicable to facilities deemed “new” sources of emissions

PJM		PJM Interconnection, LLC, a regional transmission organization

PJM West		The commonly used name of the western extension of PJM Interconnection, LLC

PLR		Provider-of-last-resort

QUID		Quarterly Income Debenture

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,” and SFAS No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities – an amendment of FASB Statement No. 133”

SFAS No. 142		SFAS No. 142, “Goodwill and Other Intangible Assets”

SFAS No. 143		SFAS No. 143, “Accounting for Asset Retirement Obligations”

T&D		Transmission and Distribution

Williams		Williams Energy Marketing and Trading Company

As6 applied to the Company, SFAS No. 142 transitional provisions required the Company to test goodwill for impairment as of January 1, 2002, and recognize any transitional goodwill impairment loss as the effect of a change in accounting principle in the first quarter of 2002 irrespective of when the loss was measured and recorded in the Company's books. During the second quarter of 2002, the Company completed its transitional goodwill impairment test, using a discounted cash flow methodology to determine the fair value of its reporting units, and recorded an impairment loss of $195.0 million ($115.4 million, net of income taxes), all of which relates to the Delivery and Services operating segment. In accordance with SFAS No. 142, this impairment loss has been be recognized in the first quarter of 2002 through restatement of first quarter 2002 financial information in this Form 10-Q and subsequent Form 10-Q filings; no amendment or re-filing of the Company's first quarter 2002 Form 10-Q is required.

MonongahelaTable Powerof Contents

~~and~~ PART ~~Subsidiaries~~I. FINANCIAL INFORMATION

8 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

~~The~~ ALLEGHENY transitional goodwill impairment loss consists of $170.0 million related to the Company's acquisition of Mountaineer Gas Company (Mountaineer Gas) in 2000 and $25.0 million related to the Company's acquisition of West Virginia Power Company (West Virginia Power) in 1999. The impairment amounts result from factors that are unique to these rate regulated entities and the ratemaking processENERGY, ~~including the fact that none of the $195~~INC.0 ~~million of goodwill was being recovered in rates or included in rate base.~~

~~SFAS~~ Consolidated ~~No.~~Statements ~~142~~of ~~transitional~~Operations ~~provisions also have been completed with respect to the Company's other intangible assets resulting in no impairments or changes to amortizable lives.~~

The carrying amount of, and changes in, goodwill attributable to each reportable operating segment are as follows:

	Unaudited Three Months Ended September 30,						Unaudited Nine Months Ended September 30,
*(In thousands, except number of shares and per share data)*	2002			2001			2002			2001
Total operating revenues	$	537,136		$	947,286		$	2,326,834		$	2,592,433
Cost of revenues:
Fuel consumed for electric generation		166,095			162,016			436,266			438,062
Purchased energy and transmission		75,060			92,763			265,498			222,318
Natural gas purchases		128,572			7,555			432,099			99,084
Deferred energy costs, net		(3,675	)		1,959			10,908			(5,450	)
Other		37,287			7,582			77,267			26,397

Total cost of revenues		403,339			271,875			1,222,038			780,411

Net revenues		133,797			675,411			1,104,796			1,812,022

Other operating expenses:
Workforce reduction expenses		104,170			—			104,170			—
Operation expense		218,704			212,248			714,084			614,804
Depreciation and amortization		77,359			79,445			233,226			220,696
Taxes other than income taxes		52,381			51,081			168,570			162,871

Total other operating expenses		452,614			342,774			1,220,050			998,371

Operating (loss) income		(318,817	)		332,637			(115,254	)		813,651

Other (expenses) and income, net (Note 11)		(34,867	)		3,281			(27,844	)		7,061

Interest charges and preferred dividends:
Interest on debt		81,183			74,782			229,176			210,680
Allowance for borrowed funds used during construction and interest capitalized		(3,610	)		(2,816	)		(9,485	)		(6,684	)
Dividends on preferred stock of subsidiaries		1,260			1,260			3,778			3,780

Total interest charges and preferred dividends		78,833			73,226			223,469			207,776

Consolidated (loss) income before income taxes, minority interest, and cumulative effect of accounting changes		(432,517	)		262,692			(366,567	)		612,936

Federal and state income tax (benefit) expense		(164,883	)		94,691			(141,563	)		226,314

Minority interest		(4,618	)		2,267			(4,602	)		2,267

Consolidated (loss) income before cumulative effect of accounting changes		(263,016	)		165,734			(220,402	)		384,355
Cumulative effect of accounting changes, net of taxes of $ 79,596 and $ 21,139, respectively		—			—			(130,514	)		(31,147	)

Consolidated net (loss) income	$	(263,016	)	$	165,734		$	(350,916	)	$	353,208

Average basic common shares outstanding		125,691,877			124,866,568			125,460,716			118,434,527
Average diluted common shares outstanding		125,691,877			125,302,357			125,460,716			118,920,222

Basic (loss) earnings per share:
Consolidated (loss) income before cumulative effect of accounting changes	$	(2.09	)	$	1.33		$	(1.76	)	$	3.24
Cumulative effect of accounting changes, net		—			—			(1.04	)		(0.26	)

Consolidated net (loss) income	$	(2.09	)	$	1.33		$	(2.80	)	$	2.98

Diluted (loss) earnings per share:
Consolidated (loss) income before cumulative effect of accounting changes	$	(2.09	)	$	1.32		$	(1.76	)	$	3.23
Cumulative effect of accounting changes, net		—			—			(1.04	)		(0.26	)

Consolidated net (loss) income	$	(2.09	)	$	1.32		$	(2.80	)	$	2.97

(Thousands of dollars)	December 31, 2001	Impairment	June 30, 2002
Delivery and Services	$195,033	$(195,033)	$ -
Generation and Marketing
Total	$195,033	$(195,033)	$ -

See accompanying Combined Notes to Consolidated Financial Statements.

~~The~~7 Company has amortized contract-based other intangible assets (gas rights underlying land not owned or leased by the Company) included in Property, Plant, and Equipment with a gross carrying amount and accumulated amortization as follows: at June 30, 2002, $6.6 million and $3.4 million, respectively, and at December 31, 2001, $6.6 million and $3.2 million, respectively. Amortization expense is estimated to be $.3 million annually for 2002 through 2007.

IfTable the provisions of SFAS No. 142 had been applied for the three and six months ended June 30, 2001, consolidated net income would have been as follows:Contents

(Thousands of dollars)	Three months ended June 30, 2001	Six months ended June 30, 2001
Consolidated net income:
As reported	$19,337	$49,426
Add: Goodwill amortization, net of taxes	802	1,551
Adjusted consolidated net income	$20,139	$50,977

ALLEGHENY ENERGY, INC.

3.Condensed ~~Derivative~~Consolidated ~~Instruments~~Statements ~~and~~of ~~Hedging~~Cash ~~Activities~~Flows

During the three months ended June 30, 2002, the Company recorded a liability and an unrealized loss for derivative instruments of $.9 million in other current liabilities for three wholesale electricity contracts. These contracts previously qualified for the normal purchases and normal sales exception under SFAS No. 133. However, due to changes resulting from the April 2002 integration with the Pennsylvania - New Jersey - Maryland Interconnection, LLC (PJM) these contracts did not qualify for the normal purchases and normal sales exception from April 1, 2002 through June 30, 2002.

	Unaudited Nine Months Ended September 30,
*(In thousands)*	2002			2001
Cash flows from operations	$	371,904		$	194,265

Cash flows (used in) investing:
Acquisition of electric generating assets		—			(1,626,810	)
Construction expenditures		(330,300	)		(310,736	)
Proceeds from sale of businesses and assets		16,556			—

		(313,744	)		(1,937,546	)
Cash flows from financing:
Proceeds from credit facilities, notes and bonds		735,960			407,094
Proceeds from issuance of common stock		—			669,381
Payments on credit facilities, notes and bonds		(352,399	)		(86,260	)
Cash dividends paid on common stock		(145,044	)		(144,930	)
Short-term debt, net		(100,582	)		908,867
Other		1,252			—

		139,187			1,754,152

Net change in cash and temporary cash investments		197,347			10,871
Cash and temporary cash investments at January 1		37,980			18,021

Cash and temporary cash investments at September 30	$	235,327		$	28,892

~~Monongahela~~See ~~Power~~accompanying Combined Notes to Consolidated Financial Statements.

~~and~~8 ~~Subsidiaries~~

9Table of Contents

4. ALLEGHENY ~~Allegheny~~ENERGY, ~~Generating~~INC. ~~Company (AGC)~~

~~The~~Consolidated ~~Company's~~Balance ~~interest~~Sheets in the common stock of AGC decreased to 22.97 percent from 27 percent effective June 1, 2001. The decrease resulted from a transfer of a portion of the Company's Ohio and Federal Energy Regulatory Commission (FERC) jurisdictional generating assets to Allegheny Energy Supply Company, LLC (Allegheny Energy Supply). Allegheny Energy Supply owns the remaining shares. The Company reports AGC in its financial statements using the equity method of accounting. AGC owns an undivided 40 percent interest, 960 megawatts (MW), in the 2,400-MW pumped-storage hydroelectric station in Bath County, Virginia, operated by the 60 percent owner, Virginia Electric and Power Company, a nonaffiliated utility.

AGC recovers from the Company and Allegheny Energy Supply all of its operation expense, depreciation, taxes, and a return on its investment under a wholesale rate schedule approved by the FERC. AGC's rates are set by a formula filed with and previously accepted by the FERC. The only component that changes is the return on equity (ROE). Pursuant to a settlement agreement filed with the FERC on April 4, 1996, AGC's ROE was set at 11 percent for 1996 and will continue until the time any affected party seeks renegotiation of the ROE.

	Unaudited
*(In thousands)*	September 30, 2002			December 31, 2001
ASSETS
Current assets:
Cash and temporary cash investments	$	235,327		$	37,980
Accounts receivable:
Billed:
Customer		355,799			344,539
Energy trading and other		114,532			44,611
Unbilled		123,741			169,612
Allowance for uncollectible accounts		(33,856	)		(32,796	)
Materials and supplies (at average cost):
Operating and construction		112,829			104,965
Fuel		115,013			82,390
Taxes receivable		155,628			103,105
Deferred income taxes		94,948			118,405
Commodity contracts		180,676			153,749
Prepaid taxes		66,292			56,107
Other, including current portion of regulatory assets		71,276			77,095

		1,592,205			1,259,762

Property, plant, and equipment:
In service, at original cost		10,908,356			10,660,177
Construction work in progress		423,031			426,706

		11,331,387			11,086,883
Accumulated depreciation		(4,421,391	)		(4,233,868	)

		6,909,996			6,853,015
Investments and other assets:
Excess of cost over net assets acquired (Goodwill)		397,984			603,615
Benefit plans’ investments		71,495			102,078
Unregulated investments		58,497			66,422
Intangible assets		11,509			43,045
Other		4,315			4,135

		543,800			819,295
Deferred charges:
Commodity contracts		1,263,761			1,375,561
Regulatory assets		558,605			594,182
Other		111,065			130,647

		1,933,431			2,100,390

Total assets	$	10,979,432		$	11,032,462

~~Following~~See isaccompanying aCombined ~~summary~~Notes ofto Consolidated ~~statement~~Financial ofStatements. ~~operations information for AGC:~~

	Three Months Ended		Six Months Ended
(Thousands of dollars)	June 30		June 30
	2002	2001	2002	2001
Electric operating revenues:	$16,445	$16,738	$32,019	$34,510
Operating expense	1,153	1,442	2,445	3,067
Depreciation	4,247	4,242	8,494	8,485
Taxes other than income taxes	906	866	1,813	1,757
Interest charges	2,897	3,177	5,750	6,466
Other income, net	(1)	(2)	(1)	(4)
Federal and state income taxes	2,369	2,340	4,276	4,556
Net income	$ 4,874	$ 4,673	$ 9,242	$10,183

TheTable Company's share of the equity in earnings above was $1.1 and $1.2 million for the three month periods ended June 30, 2002 and 2001, respectively, and $2.1 million and $2.7 million for the six months ended June 30, 2002 and 2001, respectively, and is included in other income, net on the Company's Consolidated Statement of Operations.Contents

~~Monongahela~~ALLEGHENY ~~Power~~ENERGY, INC.

~~and~~Consolidated ~~Subsidiaries~~Balance Sheets (Continued)

	Unaudited
*(In thousands)*	September 30, 2002			December 31, 2001
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	1,138,146		$	1,238,728
Long-term debt due within one year		425,643			353,054
Debentures, notes, and bonds reclassified to current		3,397,820			—
Accounts payable		438,949			368,148
Taxes accrued:
Federal and state		90,215			—
Other		82,733			99,393
Adverse power purchase commitments		20,080			24,839
Commodity contracts		335,064			370,252
Interest accrued		79,119			53,466
Other, including current portion of regulatory liabilities		165,577			187,982

		6,173,346			2,695,862

Long-term debt and QUIDS		115,960			3,200,421

Deferred credits and other liabilities:
Commodity contracts		509,425			398,689
Unamortized investment credit		97,785			102,589
Deferred income taxes		1,126,130			1,278,248
Obligation under capital leases		35,931			35,309
Regulatory liabilities		107,272			108,055
Adverse power purchase commitments		240,913			253,499
Other		217,688			145,830

		2,335,144			2,322,219

Minority interest		33,367			29,991

Preferred stock of subsidiary		74,000			74,000

Stockholders’ equity:
Common stock		157,890			156,596
Other paid-in capital		1,444,310			1,421,117
Retained earnings		639,661			1,152,487
Treasury stock		(243	)		—
Accumulated other comprehensive loss		5,997			(20,231	)

		2,247,615			2,709,969

Commitments and contingencies (Note 12)

Total liabilities and stockholders’ equity	$	10,979,432		$	11,032,462

5.See ~~Accounting~~accompanying ~~for~~Combined ~~the~~Notes ~~Effects~~to Consolidated ofFinancial ~~Price~~Statements. ~~Deregulation~~

~~The~~10 ~~consolidated balance sheet includes the amounts listed below for generation assets not subject to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation."~~

	June 30,	December 31,
(Millions of dollars)	2002	2001
Property, plant, and equipment	$907.0	$893.6
Amounts under construction included above	48.8	50.3
Accumulated depreciation	(508.5)	(493.7)

6. ALLEGHENY ~~Capitalization~~ENERGY SUPPLY COMPANY, LLC, AND SUBSIDIARIES

In Consolidated ~~February~~Statements ~~2002, the Company redeemed $2.1 million~~ of ~~4.35~~Operations ~~percent unsecured notes as per the original terms.~~

	Unaudited Three Months Ended September 30,						Unaudited Nine Months Ended September 30,
*(In thousands)*	2002			2001			2002			2001
Total operating revenues	$	(18,074	)	$	569,479		$	670,229		$	1,341,651

Cost of revenues:
Fuel consumed for electric generation		130,560			127,968			342,004			327,211
Purchased energy and transmission		28,500			76,313			127,035			190,764

Total cost of revenues		159,060			204,281			469,039			517,975

Net revenues		(177,134	)		365,198			201,190			823,676

Other operating expenses:
Workforce reduction expenses		40,880			—			40,880			—
Operation expense		92,443			97,632			315,903			259,247
Depreciation and amortization		29,167			34,491			90,911			80,737
Taxes other than income taxes		13,802			16,389			49,075			50,681

Total other operating expenses		176,292			148,512			496,769			390,665

Operating (loss) income		(353,426	)		216,686			(295,579	)		433,011

Other (expenses) and income, net (Note 11)		(4,098	)		702			(5,291	)		4,938

Interest charges:
Interest on debt		40,111			35,001			115,421			78,593
Interest capitalized		(2,818	)		(2,094	)		(6,841	)		(4,545	)

Total interest charges		37,293			32,907			108,580			74,048

Consolidated (loss) income before income taxes, minority interest, and cumulative effect of accounting change		(394,817	)		184,481			(409,450	)		363,901
Federal and state income tax (benefit) expense		(150,517	)		65,872			(157,978	)		129,044

Minority interest		1,062			962			3,117			3,646

Consolidated (loss) income before cumulative effect of accounting change		(245,362	)		117,647			(254,589	)		231,211
Cumulative effect of accounting change, net of tax of $ 21,139		—			—			—			(31,147	)

Consolidated net (loss) income	$	(245,362	)	$	117,647		$	(254,589	)	$	200,064

~~Substantially~~See ~~all~~accompanying ofCombined ~~the~~Notes employees of Allegheny Energy are employed by Allegheny Energy Service Corporation (AESC), which performs services at cost for the Company and its affiliates in accordance with the Public Utility Holding Company Act of 1935 (PUHCA). Through AESC, the Company is responsible for its proportionate share of services provided by AESC. The total billings by AESC (including capital) to Consolidated ~~the~~Financial ~~Company for the three months ended June 30, 2002 and 2001 were $41~~Statements.3 ~~million and $43.9 million, respectively, and $88.4 million and $92.7 million for the six months ended June 30, 2002 and 2001, respectively.~~

~~The~~11 Company purchases power, primarily to meet its retail load requirements as the default provider during the transition period for the deregulation plan approved in Ohio, from its unregulated generation company affiliate, Allegheny Energy Supply, in accordance with agreements approved by the FERC. The expense from these purchases is reflected in "Purchased energy and transmission" on the Consolidated Statement of Operations. Total power purchased by the Company from Allegheny Energy Supply amounted to $4.8 million and $1.2 million for the three months ended June 30, 2002 and 2001, respectively, and $7.5 million and $2.2 million for the six months ended June 30, 2002 and 2001, respectively. If the Company purchases or generates more energy than is needed to serve its customers, the excess energy is sold to Allegheny Energy Supply and is reflected as operating revenues in "Wholesale and other, including affiliates" on the Consolidated Statement of Operations. For the three months ended June 30, 2002 and 2001, the Company sold excess energy to Allegheny Energy Supply of $6.1 million and $21.0 million, respectively. For the six months ended June 30, 2002 and 2001, the sale of excess energy amounted to $18.0 million and $44.1 million, respectively.

MonongahelaTable Powerof Contents

~~and~~ ALLEGHENY ~~Subsidiaries~~ENERGY SUPPLY COMPANY, LLC, AND SUBSIDIARIES

11Condensed Consolidated Statements of Cash Flows

The Ohio and FERC jurisdictional generation assets transferred to Allegheny Energy Supply on June 1, 2001, have been leased back by the Company. The lease was effective on June 1, 2001 for a term of one year and renews automatically. The Company and Allegheny Energy Supply have mutually agreed to continue the lease. For the three months ended June 30, 2002 and 2001, the rental expense from this arrangement totaled $9.9 million and $3.3 million, respectively. Total rental expense for the six months ended June 30, 2002 and 2001 was $19.7 million and $3.3 million, respectively. The rental expense for all periods is reported as "Purchased energy and transmission" on the Consolidated Statement of Operations.

	Unaudited Nine Months Ended September 30,
*(In thousands)*	2002			2001
Cash flows (used in) operations	$	(12,750	)	$	(120,058	)

Cash flows (used in) investing:
Acquisition of generation assets		—			(1,548,612	)
Construction expenditures		(177,166	)		(132,573	)

		(177,166	)		(1,681,185	)

Cash flows from financing:
Notes payable to parent and affiliates		(194,850	)		399,300
Proceeds from credit facilities		644,618			396,580
Payments on credit facilities, notes and bonds		(158,095	)		—
Short-term debt, net		117,251			747,737
Parent company contribution		1,950			271,850
Dividends paid to minority shareholder		(98,033	)		(5,835	)

		312,841			1,809,632

Net change in cash and temporary cash investments		122,925			8,389
Cash and temporary cash investments at January 1		20,909			420

Cash and temporary cash investments at September 30	$	143,834		$	8,809

~~The~~See ~~Company~~accompanying ~~and~~Combined ~~its~~Notes ~~affiliates use an Allegheny Energy internal money pool as a facility~~ to Consolidated ~~accommodate~~Financial ~~intercompany short-term borrowing needs, to the extent that certain companies have funds available~~Statements. ~~As of June 30, 2002 and December 31, 2001, the Company had $88.4 million and $91.5 million invested in the money pool, respectively.~~

~~The~~12 Company joins with Allegheny Energy and its subsidiaries in filing a consolidated federal income tax return. The consolidated income tax liability is allocated among the participants generally in proportion to the taxable income of each participant, except that no subsidiary pays income tax in excess of its separate return income tax liability. In the first six months of 2002 and 2001, the Company paid income tax allocations to Allegheny Energy of $2.2 million and $19.4 million, respectively.

Table 8of Contents

~~The~~ ALLEGHENY ~~Company~~ENERGY ~~manages~~SUPPLY ~~and~~COMPANY, ~~evaluates its operations in two business segments: 1) Delivery and Services and 2) Generation and Marketing. Prior to the second quarter of 2002~~LLC, ~~the~~AND ~~Company~~SUBSIDIARIES ~~reported a single segment for all of its~~

~~regulated~~Consolidated ~~utility~~Balance ~~operations.~~Sheets ~~Business segments have been changed to reflect current internal management reporting. Prior period segment information has been restated for comparability.~~

The Delivery and Services segment operates regulated electric and natural gas transmission and distributions systems.

	Unaudited
*(In thousands)*	September 30, 2002			December 31, 2001
ASSETS

Current assets:
Cash and temporary cash investments	$	143,834		$	20,909
Accounts receivable:
Billed:
Customer		147,476			98,522
Energy trading and other		32,374			16,175
Unbilled		3,541			1,264
Allowance for uncollectible accounts		(1,935	)		(2,400	)
Accounts receivable due from affiliates, net		23,661			53,239
Materials and supplies (at average cost):
Operating and construction		55,968			52,757
Fuel		57,604			41,240
Taxes receivable		245,670			93,782
Deferred income taxes		75,503			95,389
Prepaid taxes		24,051			16,740
Commodity contracts		180,676			153,749
Other		7,767			4,770

		996,190			646,136

Property, plant, and equipment:
In service, at original cost		5,215,519			5,090,190
Construction work in progress		265,973			261,400

		5,481,492			5,351,590
Accumulated depreciation		(2,052,200	)		(1,958,613	)

		3,429,292			3,392,977

Investments and other assets:
Excess of cost over net assets acquired (Goodwill)		367,287			367,287
Unregulated investments		28,658			7,104
Other		—			1

		395,945			374,392

Deferred charges:
Commodity contracts		1,263,761			1,375,562
Other		66,576			49,117

		1,330,337			1,424,679

Total assets	$	6,151,764		$	5,838,184

~~The~~See ~~Generation~~accompanying ~~and~~Combined ~~Marketing~~Notes ~~segment~~to Consolidated ~~develops,~~Financial ~~owns, operates, and manages electric generating capacity~~Statements.

~~The~~13 ~~Company accounts for intersegment sales based on cost or regulatory commission approved tariffs or contracts.~~

MonongahelaTable Powerof Contents

~~and~~ALLEGHENY ~~Subsidiaries~~ENERGY SUPPLY COMPANY, LLC, AND SUBSIDIARIES

12Consolidated Balance Sheets (Continued)

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

	Unaudited
*(In thousands)*	September 30, 2002		December 31, 2001
LIABILITIES AND MEMBERS’ EQUITY:
Current liabilities:
Short-term debt	$	803,146	$	685,895
Long-term debt due within one year		287,693		219,108
Debentures, notes and bonds reclassified to current		1,456,906		—
Notes payable to affiliates		—		387,850
Accounts payable		248,281		178,299
Taxes accrued:
Federal and state		115,601		—
Other		28,285		24,120
Commodity contracts		336,960		372,646
Interest accrued		43,527		23,055
Other		39,743		39,695

		3,360,142		1,930,668

Long-term debt		91,713		1,130,041

Deferred credits and other liabilities:
Commodity contracts		514,000		406,414
Unamortized investment credit		62,291		64,035
Deferred income taxes		677,682		718,045
Other		38,297		33,819

		1,292,270		1,222,313

Minority interest		31,182		30,476

Members’ equity		1,376,457		1,524,686

Commitments and contingencies (Note 12)

Total liabilities and members’ equity	$	6,151,764	$	5,838,184

	Three Months Ended		Six Months Ended
(Thousands of dollars)	June 30		June 30
	2002	2001	2002	2001
Operating Revenues:
Delivery and Services	$191,935	$188,942	$449,622	$ 464,367
Generation and Marketing	70,871	93,147	147,550	201,749
Eliminations	(65,953)	(74,134)	(134,275)	(160,752)
Total	$196,853	$207,955	$462,897	$ 505,364
Depreciation and Amortization:
Delivery and Services	$ 10,530	$ 11,098	$ 21,045	$ 22,211
Generation and Marketing	8,146	9,385	16,288	18,810
Total	$ 18,676	$ 20,483	$ 37,333	$ 41,021
Federal and State Income
Taxes (Benefits):
Delivery and Services	$ 5,786	$ 2,491	$ 15,533	$ 13,513
Generation and Marketing	(5,920)	5,641	(4,749)	13,825
Total	$ (134)	$ 8,132	$ 10,784	$ 27,338
Operating Income (Loss):
Delivery and Services	$ 15,122	$ 21,499	$ 35,299	$ 51,969
Generation and Marketing	(2,449)	7,727	2,825	18,813
Total	$ 12,673	$ 29,226	$ 38,124	$ 70,782
Interest Charges:
Delivery and Services	$ 8,238	$ 8,938	$ 16,510	$ 18,209
Generation and Marketing	4,185	3,458	8,384	7,329
Total	$ 12,423	$ 12,396	$ 24,894	$ 25,538
Consolidated Income (Loss)
Before Cumulative Effect of
Accounting Change:
Delivery and Services	7,547	13,618	21,131	34,852
Generation and Marketing	(5,752)	5,719	(3,403)	14,574
Total	$ 1,795	$ 19,337	$ 17,728	$ 49,426
Capital Expenditures:
Delivery and Services	15,155	14,407	24,068	28,581
Generation and Marketing	10,793	14,281	15,832	18,427

See accompanying Combined Notes to Consolidated Financial Statements.

	June 30,	December 31,
	2002	2001
Identifiable Assets:
Delivery and Services	$1,040,955	$1,267,780
Generation and Marketing	518,040	529,316
Other	256,510	228,251
Total	$1,815,505	$2,025,347

MonongahelaTable Powerof Contents

~~and~~ MONONGAHELA ~~Subsidiaries~~POWER COMPANY, AND SUBSIDIARIES

13 Consolidated Statements of Operations

9. Other Income, Net

	Unaudited Three Months Ended September 30,						Unaudited Nine Months Ended September 30,
*(In thousands)*	2002			2001			2002			2001
Total operating revenues	$	202,085		$	202,426		$	664,280		$	707,790

Cost of revenues:
Fuel consumed for electric generation		35,534			34,048			94,262			106,863
Purchased energy and transmission		39,024			36,430			120,285			90,619
Natural gas purchases		11,799			7,555			85,740			91,100
Deferred energy costs, net		(4,403	)		—			7,824			—

Total cost of revenues		81,954			78,033			308,111			288,582

Net revenues		120,131			124,393			356,169			419,208

Other operating expenses:
Workforce reduction expenses		28,566			—			28,566			—
Operation expense		63,576			55,299			187,427			177,087
Depreciation and amortization		18,682			18,957			56,016			59,978
Taxes other than income taxes		14,553			13,753			46,837			47,639

Total other operating expenses		125,377			88,009			318,846			284,704

Operating (loss) income		(5,246	)		36,384			37,323			134,504

Other income, net (Note 11)		737			1,459			5,481			5,120

Interest charges:
Interest on debt		12,861			13,185			39,427			39,716
Allowance for borrowed funds used during construction and interest capitalized		(700	)		(524	)		(2,356	)		(1,517	)

Total interest charges		12,161			12,661			37,071			38,199

Consolidated (loss) income before income taxes and cumulative effect of accounting change		(16,670	)		25,182			5,733			101,425
Federal and state income tax (benefit) expense		(7,513	)		7,150			1,828			33,967

Consolidated (loss) income before cumulative effect of accounting change		(9,157	)		18,032			3,905			67,458
Cumulative effect of accounting change, net of taxes of $79,596		—			—			(115,437	)		—

Consolidated net (loss) income	$	(9,157	)	$	18,032		$	(111,532	)	$	67,458

~~"Other~~See ~~income,~~accompanying ~~net"~~Combined onNotes ~~the~~ to Consolidated ~~Statement~~Financial ~~of Operations represents nonoperating revenues and expenses, net of related income taxes~~Statements. ~~The following table summarizes the Company's other income, net for the three and six months ended June 30, 2002 and 2001:~~

	Three Months Ended		Six Months Ended
(Thousands of dollars)	June 30		June 30
	2002	2001	2002	2001
Equity in earnings of AGC	$1,120	$1,196	$2,123	$2,684
Gain on Canaan Valley land sale			1,518
Other	220	1,185	497	1,257
Total Other Income, Net	$1,340	$2,381	$4,138	$3,941

OtherTable income includes the Company's portion of equity earnings in AGC, which is not subject to income taxes. See Note 4 to the consolidated financial statements for further details regarding the Company's investment in AGC.Contents

In MONONGAHELA ~~February~~POWER ~~2002~~COMPANY, ~~the~~AND ~~Allegheny~~SUBSIDIARIES Energy companies completed the sale of 12,000 acres of land in the Canaan Valley of West Virginia to the U.S. Fish and Wildlife Service, which will use the land to expand the Canaan Valley National Wildlife Refuge. As a result, the Company recorded a gain of approximately $1.8 million, before income taxes ($1.5 million, after income taxes) in other income, net on the Consolidated Statement of Operations.

~~10.~~Condensed ~~Contingencies~~Consolidated Statements of Cash Flows

Environmental Matters and Litigation

	Unaudited Nine Months Ended September 30,
*(In thousands)*	2002			2001
Cash flows from operations	$	128,591		$	152,267

Cash flows (used in) investing:
Construction expenditures (less allowance for other than borrowed funds used during construction)		(70,155	)		(71,447	)
Proceeds from sale of businesses and assets		3,126			—

		(67,029	)		(71,447	)

Cash flows (used in) financing:
Payments on credit facilities, notes, and bonds		(26,764	)		(40,000	)
Short-term debt, net		(14,350	)		(1,871	)
Notes receivable from affiliates		47,750			22,001
Dividends paid on:
Preferred stock		(3,777	)		(3,778	)
Common stock		(21,797	)		(52,783	)

		(18,938	)		(76,431	)

Net change in cash and temporary cash investments		42,624			4,389
Cash and temporary cash investments at January 1		4,439			3,658

Cash and temporary cash investments at September 30	$	47,063		$	8,047

~~The~~See ~~Company~~accompanying isCombined ~~subject~~Notes to Consolidated ~~various~~Financial ~~laws, regulations, and uncertainties as to environmental matters~~Statements. ~~Compliance may require the Company to incur substantial additional costs to modify or replace existing and proposed equipment and facilities and may adversely affect the cost of future operations.~~

~~The~~16 Environmental Protection Agency's (EPA) nitrogen oxides (NOX) State Implementation Plan (SIP) call regulation has been under litigation and, on March 3, 2000, the United States Court of Appeals issued a decision that upheld the regulation. However, state and industry litigants filed an appeal of that decision in April 2000. On June 23, 2000, the Court denied the request for the appeal. Although the Court did issue an order to delay the compliance date from May 1, 2003, until May 31, 2004, both the Maryland and Pennsylvania state rules to implement the EPA NOX SIP call regulation still require compliance by May 1, 2003. West Virginia has issued a final rule that would require compliance by May 1, 2004. The EPA Section 126 petition regulation also requires the same level of NOX reductions as the EPA NOX SIP call regulation and was also under litigation in the United States Court of Appeals. A Court decision in May 2001 upheld the rule. In August 2001, the Court issued an order that suspended the Section 126 petition rule May 1,

2003,Table compliance date pending EPA review of the growth factors used to calculate the state NOX budgets. In January 2002, the EPA announced its intention to revise the Section 126 petition rule compliance date from May 1, 2003, to May 31, 2004. The Company's compliance with such stringent regulations will require the installation of post-combustion controlContents

~~Monongahela~~ MONONGAHELA ~~Power~~POWER COMPANY, AND SUBSIDIARIES

~~and~~Consolidated ~~Subsidiaries~~Balance Sheets

	Unaudited
*(In thousands)*	September 30, 2002			December 31, 2001
ASSETS
Current assets:
Cash and temporary cash investments	$	47,063		$	4,439
Accounts receivable:
Billed:
Customer		50,970			62,043
Other		4,043			3,549
Unbilled		34,241			53,759
Allowance for uncollectible accounts		(5,681	)		(6,300	)
Notes receivable due from affiliates		43,753			91,503
Materials and supplies (at average cost):
Operating and construction		19,452			18,322
Fuel, including stored gas		54,428			41,149
Taxes receivable		14,987			5,540
Prepaid taxes		27,416			23,856
Other, including current portion of regulatory assets		15,836			17,210

		306,508			315,070
Property, plant, and equipment:
In service, at original cost		2,466,170			2,420,638
Construction work in progress		79,681			70,103

		2,545,851			2,490,741
Accumulated depreciation		(1,181,462	)		(1,139,904	)

		1,364,389			1,350,837
Investments and other assets:
Investment in Allegheny Generating Company		31,226			30,476
Excess of cost over net assets acquired (Goodwill)		—			195,033
Other		3,483			3,381

		34,709			228,890
Deferred charges:
Regulatory assets		87,621			100,750
Unamortized loss on reacquired debt		11,616			12,442
Other		8,819			9,164

		108,056			122,356

Total assets	$	1,813,662		$	2,017,153

~~technologies~~See onaccompanying ~~most~~Combined ofNotes ~~its power stations. The Company's construction forecast includes the expenditure of $52.4 million of capital costs during the 2002 through 2003 period~~ to Consolidated ~~comply~~Financial ~~with these regulations~~Statements.

On17 August 2, 2000, the Company received a letter from the EPA requiring it to provide certain information on the following ten electric generating stations: Albright, Armstrong, Fort Martin, Harrison, Hatfield's Ferry, Mitchell, Pleasants, Rivesville, R. Paul Smith, and Willow Island. Allegheny Energy Supply and the Company, either individually or together, now own these electric generating stations. The letter requested information under Section 114 of the federal Clean Air Act (Act) to determine compliance with the Act and state implementation plan requirements, including potential application of federal New Source Review (NSR). In June 2002, Allegheny Energy received a request from the EPA to provide additional information concerning three of its electric generating stations. The information will be provided to the EPA by the end of the fourth quarter of 2002. In general, these standards can require the installation of additional air pollution control equipment upon the major modification of an existing facility. The Company submitted these records in January 2001. The eventual outcome of the EPA investigation is unknown.

SimilarTable inquiries have been made of other electric utilities and have resulted in enforcement proceedings being brought in many cases. The Company believes its generating facilities have been operating in accordance with the Clean Air Act and the rules implementing the Act. The experience of other utilities, however, suggests that, in recent years, the EPA may well have revised its interpretation of the rules regarding the determination of whether an action at a facility constitutes routine maintenance, which would not trigger the requirements of NSR, or a major modification of the facility, which would require compliance with NSR. If federal NSR were to be applied to these generating stations, in addition to the possible imposition of fines, compliance would entail significant expenditures. In connection with the deregulation of generation, the Company has agreed to rate caps in each of its jurisdictions, and there are no provisions under those arrangements to increase rates to cover such expenditures.Contents

InMONONGAHELA ~~December~~POWER ~~2000~~COMPANY, ~~the~~AND ~~EPA~~SUBSIDIARIES issued a decision to regulate coal- and oil-fired electric utility mercury emissions under Title III, Section 112 of the Clean Air Act Amendments of 1990 (CAAA). The EPA plans to issue a proposed regulation by December 2003 and a final regulation by December 2004. The timing and level of required mercury emission reductions are unknown at this time.

OnConsolidated ~~March~~Balance 4,Sheets ~~1994, The Potomac Edison Company~~ (~~Potomac Edison~~Continued), West Penn Power Company (West Penn), and the Company received notice that the EPA had identified them as potentially responsible parties (PRPs) under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, with respect to a Superfund Site. There are approximately 175 other PRPs involved. A final determination has not been made for the Company's share of the remediation costs based on the amount of materials sent to the site. However, the Company estimates that its share of the cleanup liability will not exceed $.6 million, which has been accrued as a liability at June 30, 2002.

Monongahela Power

	Unaudited
*(In thousands)*	September 30, 2002		December 31, 2001
LIABILITIES AND STOCKHOLDER’S EQUITY:
Current liabilities:
Short-term debt	$	—	$	14,350
Long-term debt due within one year		65,923		30,408
Notes, and bonds reclassified to current		693,398		—
Accounts payable		78,532		63,587
Accounts payable to affiliates, net		26,249		15,718
Taxes accrued:
Federal and state		14,503		—
Other		36,866		39,085
Interest accrued		16,706		14,918
Other		21,451		9,980

		953,628		188,046

Long-term debt and QUIDS		28,479		784,261

Deferred credits and other liabilities:
Unamortized investment credit		7,423		9,034
Deferred income taxes		158,571		238,751
Obligations under capital leases		11,988		11,567
Regulatory liabilities		48,314		49,509
Notes payable to affiliates		15,725		15,812
Other		17,528		16,579

		259,549		341,252

Preferred stock		74,000		74,000

Stockholder’s equity:
Common stock		294,550		294,550
Other paid-in capital		105,760		100,242
Retained earnings		97,696		234,802

		498,006		629,594

Commitments and contingencies (Note 12)

Total liabilities and stockholder’s equity	$	1,813,662	$	2,017,153

~~and~~See ~~Subsidiaries~~accompanying Combined Notes to Consolidated Financial Statements.

1518

PotomacTable Edison, West Penn, and the Company have also been named as defendants along with multiple other defendants in pending asbestos cases involving multiple plaintiffs. While the Company believes that all of the cases are without merit, the Company cannot predict the outcome of the litigation. The Company has accrued a reserve of $1.5 million as of June 30, 2002, related to the asbestos cases as the potential cost to settle the cases to avoid the anticipated cost of defense. For the three and six months ended June 30, 2002, the Company received $.7 million of insurance recoveries (net of $.2 million of legal fees) related to these asbestos cases. For the three and six months ended June 30, 2001, the Company received $.01 million of insurance recoveries related to these asbestos cases.Contents

~~The~~ THE ~~Attorney~~POTOMAC ~~General~~EDISON ~~of the State of New York and the Attorney General of the State of Connecticut in their letters dated September 15~~COMPANY, ~~1999,~~AND ~~and~~SUBSIDIARIES November 3, 1999, respectively, notified the Company of their intent to commence civil actions against Allegheny Energy or certain of its subsidiaries alleging violations at the Fort Martin Power Station under the federal Clean Air Act, including the new source performance standards, which requires existing generating facilities that make major modifications to comply with the same emission standards applicable to new generating facilities. Other governmental authorities may commence similar actions in the future. Fort Martin is a station located in West Virginia and is now jointly owned by Allegheny Energy Supply and the Company. Both Attorney Generals stated their intent to seek injunctive relief and penalties. In addition, the Attorney General of the State of New York in his letter indicated that he may assert claims under the state common law of public nuisance seeking to recover, among other things, compensation for alleged environmental damage caused in New York by the operation of the Fort Martin Power Station. At this time, Allegheny Energy and its subsidiaries are not able to determine what effect, if any, these actions threatened by the Attorney Generals of New York and Connecticut may have on them.

In Consolidated ~~the~~Statements ~~normal course~~ of ~~business,~~Operations the Company becomes involved in various legal proceedings. The Company does not believe that the ultimate outcome of these proceedings will have a material effect on its results of operations, cash flows, or financial position.

11. Subsequent Event

	Unaudited Three Months Ended September 30,						Unaudited Nine Months Ended September 30,
*(In thousands)*	2002			2001			2002		2001
Total operating revenues	$	218,846		$	221,682		$	640,924	$	654,761

Cost of revenues:
Purchased energy and transmission		156,529			145,804			447,087		446,435
Deferred energy costs, net		727			1,959			3,084		(5,450	)

Total cost of revenues		157,256			147,763			450,171		440,985

Net revenues		61,590			73,919			190,753		213,776

Other operating expenses:
Workforce reduction expenses		12,793			—			12,793		—
Operation expense		25,527			24,783			77,283		72,894
Depreciation and amortization		9,341			8,270			26,999		24,874
Taxes other than income taxes		5,319			8,523			23,279		26,322

Total other operating expenses		52,980			41,576			140,354		124,090

Operating income		8,610			32,343			50,399		89,686

Other (expenses) and income, net (Note 11)		(160	)		114			478		(275	)

Interest charges:
Interest on debt		8,916			8,785			25,249		26,408
Allowance for borrowed funds used during construction and interest capitalized		(25	)		(54	)		24		(202	)

Total interest charges		8,891			8,731			25,273		26,206

Consolidated (loss) income before income taxes		(441	)		23,726			25,604		63,205

Federal and state income tax (benefit) expense		(142	)		9,107			8,250		20,286

Consolidated net (loss) income	$	(299	)	$	14,619		$	17,354	$	42,919

InSee ~~July~~accompanying ~~2002,~~Combined ~~Allegheny~~Notes ~~Energy announced plans~~ to Consolidated ~~reduce~~Financial ~~its workforce of approximately 6,000 employees by approximately 10 percent~~Statements. The workforce reductions will occur mostly this year through the combination of an early retirement option, normal attrition, and other selected staff reductions. At this time, the Company cannot estimate the cost of the workforce reduction since the results of the early retirement offer to employees is not known. The Company expects to record a charge in conjunction with the early retirement offer in the third quarter of 2002 based on the window for employees to accept the offer. The timing for recording charges for involuntary termination benefits related to selective staff reductions is being evaluated, including the potential impact of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which was issued in June 2002.

1619

MONONGAHELATable POWERof COMPANY AND SUBSIDIARIESContents

~~Management's~~ THE ~~Discussion~~POTOMAC ~~and~~EDISON ~~Analysis~~COMPANY, ofAND ~~Financial~~SUBSIDIARIES ~~Condition~~

~~and~~Condensed ~~Results~~Consolidated Statements of ~~Operations~~Cash Flows

COMPARISON OF SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 2002,

	Unaudited Nine Months Ended September 30,
*(In thousands)*	2002			2001
Cash flows from operations	$	84,175		$	86,540

Cash flows (used in) investing:
Construction expenditures		(33,942	)		(38,000	)

Cash flows (used in) financing:
Short-term debt, net		(24,197	)		8,453
Notes payable to affiliates		(5,300	)		—
Dividends on common stock to parent		(18,356	)		(60,216	)

		(47,853	)		(51,763	)

Net change in cash and temporary cash investments		2,380			(3,223	)
Cash and temporary cash investments at January 1		1,608			4,685

Cash and temporary cash investments at September 30	$	3,988		$	1,462

~~WITH~~See ~~SECOND~~accompanying ~~QUARTER~~Combined ~~AND~~Notes ~~SIX~~to Consolidated ~~MONTHS~~Financial ~~ENDED~~Statements. ~~JUNE 30, 2001~~

~~The~~20 Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in Monongahela Power Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001, should be read in conjunction with the following Management's Discussion and Analysis information.

FACTORSTable THATof MAY AFFECT FUTURE RESULTSContents

~~Certain~~ THE ~~statements~~POTOMAC ~~within~~EDISON ~~constitute forward-looking statements with respect to Monongahela Power Company and its subsidiaries (collectively~~COMPANY, ~~the~~AND ~~Company).~~SUBSIDIARIES Such forward-looking statements include statements with respect to deregulated activities and movements towards competition in the states served by the Company, markets, products, services, prices, capacity purchase commitments, results of operations, capital expenditures, regulatory matters, liquidity and capital resources, the effect of litigation, and accounting matters. All such forward-looking information is necessarily only estimated. There can be no assurance that actual results of the Company will not materially differ from expectations. Actual results have varied materially and unpredictably from past expectations.

~~Factors~~Consolidated ~~that~~Balance ~~could~~Sheets cause actual results of the Company to differ materially include, among others, the following: general economic and business conditions; changes in industry capacity, development, and other activities by the Company's competitors; changes in the weather and other natural phenomena; changes in technology; changes in the price of purchased power and fuel for electric generation; changes in laws and regulations applicable to the Company, its markets, or its activities; litigation involving the Company; environmental regulations; the loss of any significant customers and suppliers; the effect of accounting policies issued periodically by accounting standard-setting bodies; and changes in business strategy, operations, or development plans.

SIGNIFICANT EVENTS IN 2002

	Unaudited
*(In thousands)*	September 30, 2002			December 31, 2001
ASSETS
Current assets:
Cash and temporary cash investments	$	3,988		$	1,608
Accounts receivable:
Billed:
Customer		57,810			52,969
Other		7,590			3,084
Unbilled		29,556			37,071
Allowance for uncollectible accounts		(5,340	)		(4,731	)
Materials and supplies (at average cost)		13,511			11,407
Taxes receivable		3,038			7,834
Deferred income taxes		4,612			4,791
Prepaid taxes		10,016			15,435
Other		1,414			1,151

		126,195			130,619
Property, plant, and equipment:
In service, at original cost		1,459,303			1,428,952
Construction work in progress		13,801			18,075

		1,473,104			1,447,027
Accumulated depreciation		(559,770	)		(538,301	)

		913,334			908,726

Investments and other assets		273			303

Deferred charges:
Regulatory assets		41,902			54,081
Unamortized loss on reacquired debt		11,155			11,756
Other		5,144			4,959

		58,201			70,796

Total assets	$	1,098,003		$	1,110,444

~~Allegheny~~See ~~Energy,~~accompanying ~~Inc.~~Combined ~~(Allegheny~~Notes ~~Energy) Initiatives~~ to Consolidated ~~Improve~~ Financial ~~Performance and Respond to Current Energy Marketplace~~Statements.

In21 July and August 2002, Allegheny Energy, the Company's parent, announced a series of initiatives to improve financial performance and respond to the challenges it faces in the current energy marketplace. The combination of the challenges to various electricity sales contracts and markets, the Enron bankruptcy, accounting scandals, energy trading improprieties, and other matters has significantly affected the merchant energy market. As a result, trading and origination opportunities have not occurred as Allegheny Energy expected and are not expected to occur in the near future. In addition, additional generating capacity resources, lower than expected demand, and a relatively weak economy have led to reduced wholesale energy prices in several markets in which Allegheny Energy owns, operates, or contractually controls generation capacity.

MonongahelaTable Powerof Contents

~~and~~THE ~~Subsidiaries~~POTOMAC EDISON COMPANY, AND SUBSIDIARIES

17Consolidated Balance Sheets (Continued)

Allegheny Energy's long-term strategy will be to focus on improving and maximizing the performance of its two business segments: Generation and Marketing, and Delivery and Services. In this context, Allegheny Energy completed a thorough re-examination of its businesses, operations, and strategic plans and has developed the following objectives:

	Unaudited
*(In thousands)*	September 30, 2002		December 31, 2001
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Short-term debt	$	—	$	24,197
Notes and bonds reclassified to current		415,969		—
Notes payable to affiliates		28,100		33,400
Accounts payable		15,565		16,066
Accounts payable to affiliates, net		55,812		38,609
Taxes accrued:
Federal and state income		6,277		—
Other		13,392		23,768
Deferred energy costs		2,229		6,687
Interest accrued		10,772		5,011
Other		8,924		6,595

		557,040		154,333

Long-term debt		—		415,797

Deferred credits and other liabilities:
Unamortized investment credit		8,831		9,570
Deferred income taxes		112,519		109,748
Obligations under capital leases		9,955		9,218
Regulatory liabilities		21,574		20,377
Other		7,792		8,144

		160,671		157,057

Stockholder’s equity:
Common stock		224		224
Other paid-in capital		220,698		222,661
Retained earnings		159,370		160,372

		380,292		383,257

Commitments and contingencies (Note 12)

Total liabilities and stockholder’s equity	$	1,098,003	$	1,110,444

-See ~~Allegheny~~accompanying ~~Energy~~Combined ~~will~~Notes ~~focus on identifying ways~~ to Consolidated ~~improve,~~Financial ~~grow, and build on the earnings and cash flows from its core delivery and generation businesses~~Statements. ~~Furthermore, Allegheny Energy's asset-backed strategy will refocus on the regions in which it owns generating facilities and serves customers such as the Mid-Atlantic and Midwest.~~

-22 Allegheny Energy will reduce its reliance on energy marketing and trading. Allegheny Energy has modified its energy marketing and trading activities to focus on reducing risk, optimizing its generating facilities, reducing the effect and amount of mark-to-market earnings, and prudently managing and protecting the value associated with the existing positions in Allegheny Energy's energy marketing and trading portfolio.

-Table Alleghenyof Energy is pursuing ways to bolster its balance sheet, improve its liquidity, and reduce capital and operations and maintenance expenses.Contents

~~Allegheny~~ WEST ~~Energy~~PENN ~~also~~POWER isCOMPANY, ~~implementing~~AND anSUBSIDIARIES ~~aggressive cost reduction program which includes:~~

- Consolidated ~~Reducing~~Statements ~~pre-tax~~of ~~operating~~Operations ~~expenses by $45 million for the remainder of 2002;~~

- Canceling 1,080 megawatts (MW) of generation planned for La Paz, Arizona, and 88 MW of combustion turbine generation planned for St. Joseph, Indiana, reducing capital expenditures by approximately $700 million over the next several years; and

	Unaudited Three Months Ended September 30,						Unaudited Nine Months Ended September 30,
*(In thousands)*	2002			2001			2002			2001
Total operating revenues	$	296,988		$	272,801		$	858,916		$	833,958

Cost of revenues:
Purchased energy and transmission		172,300			158,466			505,567			475,363

Net revenues		124,688			114,335			353,349			358,595

Other operating expenses:
Workforce reduction expenses		19,975			—			19,975			—
Operation expense		33,212			35,222			120,424			103,173
Depreciation and amortization		19,146			17,473			56,237			52,434
Taxes other than income taxes		18,193			12,331			48,050			37,709

Total other operating expenses		90,526			65,026			244,686			193,316

Operating income		34,162			49,309			108,663			165,279

Other (expenses) and income, net (Note 11)		(964	)		831			15,199			2,531

Interest charges:
Interest on debt		11,658			12,652			35,993			39,126
Allowance for borrowed funds used during construction		(68	)		(143	)		(311	)		(423	)

Total interest charges		11,590			12,509			35,682			38,703

Consolidated income before income taxes		21,608			37,631			88,180			129,107

Federal and state income tax expense		6,300			12,185			28,504			44,559

Consolidated net income	$	15,308		$	25,446		$	59,676		$	84,548

-See ~~Reducing~~accompanying ~~Allegheny~~Combined ~~Energy's~~Notes ~~workforce of approximately 6,000 employees by roughly 10 percent~~ to Consolidated ~~reflect~~Financial ~~current market conditions~~Statements. The workforce reductions will occur mostly this year through the combination of an early retirement option, normal attrition, and other selected staff reductions, resulting in approximately $5 million, before income taxes, of expense reductions this year and an ongoing annualized savings of $40 to $50 million, before income taxes.

~~Allegheny~~23 Energy has modified its energy marketing and trading and origination activities to focus on short-term trading, asset optimization, and hedging its generating capacity. These activities are more appropriately aligned with Allegheny Energy's existing portfolio of physical assets.

MonongahelaTable Powerof Contents

~~and~~ WEST ~~Subsidiaries~~PENN POWER COMPANY, AND SUBSIDIARIES

18Condensed Consolidated Statements of Cash Flows

At this time, the Company cannot estimate the cost of the workforce reduction since the results of the early retirement offer to employees are not known. The Company expects to record a charge for the early retirement offer in the third or fourth quarter of 2002. The timing for recording charges for involuntary termination benefits related to selective staff reductions is being evaluated, including the potential impact of Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which was issued in June 2002. See the discussion of "Accounting Standards" below for additional information concerning SFAS No. 146.

	Unaudited Nine Months Ended September 30,
*(In thousands)*	2002			2001
Cash flows from operations	$	133,222		$	143,230

Cash flows (used in) investing:
Construction expenditures		(46,663	)		(47,549	)
Proceeds from sale of land		13,429			—

		(33,234	)		(47,549	)

Cash flows (used in) financing:
Payments of notes and bonds		(156,409	)		(46,248	)
Proceeds from long-term debt		79,690			—
Notes receivable from affiliates		4,750			38,600
Notes payable to affiliates		15,650			—
Dividends paid on common stock to parent		(40,440	)		(90,138	)

		(96,759	)		(97,786	)

Net change in cash and temporary cash investments		3,229			(2,105	)
Cash and temporary cash investments at January 1		6,257			6,116

Cash and temporary cash investments at September 30	$	9,486		$	4,011

~~Regional~~See ~~Transmission~~accompanying ~~Organization~~Combined ~~(RTO)~~Notes to Consolidated Financial Statements.

On24 April 1, 2002, the Company and its regulated affiliates - The Potomac Edison Company (Potomac Edison) and West Penn Company (West Penn) - collectively doing business as Allegheny Power, and the Pennsylvania-New Jersey-Maryland Interconnection, LLC (PJM), the electric grid operator for the mid-Atlantic region, announced that PJM's wholesale electricity market had begun operating in Allegheny Power's service territory. The collaboration between Allegheny Power and PJM, which is known as PJM West, brings Allegheny Power's transmission system under PJM's functional control. This creates an integrated energy market and congestion management system operating under a single governance structure in two separate control areas and across multiple North American Electric Reliability Councils. The larger energy market provides one market with a common transmission tariff, business practices, and market tools, thus eliminating interface issues between Allegheny Power and PJM.

PJMTable West provides transmission service to all market participants in accordance with the requirements of the Federal Energy Regulatory Commission (FERC) Order 2000. Transmission ties between PJM and PJM West are dynamically scheduled to support the integrated energy market.Contents

~~Union~~ WEST ~~Contract~~PENN ~~Negotiations~~POWER COMPANY, AND SUBSIDIARIES

OnConsolidated ~~April~~Balance ~~28,~~Sheets 2002, the negotiating teams for Allegheny Energy Service Corporation (AESC), an affiliate that employs all of the employees who work on behalf of the Company, and the Utility Workers Union of America (UWUA) System Local 102 reached a tentative agreement on a five-year contract. On June 8, 2002, AESC and the UWUA System Local 102 announced that the union's 1,165 members had ratified the agreement.

Accounting Standards

	Unaudited
*(In thousands)*	September 30, 2002			December 31, 2001
ASSETS
Current assets:
Cash and temporary cash investments	$	9,486		$	6,257
Accounts receivable:
Billed:
Customer		82,424			75,415
Other		5,646			5,748
Unbilled		56,402			66,542
Allowance for uncollectible accounts		(17,085	)		(16,540	)
Notes receivable due from affiliates		—			4,750
Materials and supplies (at average cost)		17,409			16,346
Taxes receivable		8,859			—
Deferred income taxes		10,956			16,792
Prepaid taxes		4,694			—
Regulatory assets		28,343			27,418
Other		3,082			2,790

		210,216			205,518
Property, plant, and equipment:
In service, at original cost		1,714,433			1,670,821
Construction work in progress		27,819			42,569

		1,742,252			1,713,390
Accumulated depreciation		(612,838	)		(585,417	)

		1,129,414			1,127,973
Investments and other assets		199			259

Deferred charges:
Regulatory assets		419,232			429,502
Unamortized loss on reacquired debt		4,149			2,723
Other		8,690			9,249

		432,071			441,474

Total assets	$	1,771,900		$	1,775,224

OnSee ~~January~~accompanying 1,Combined ~~2002,~~Notes the Company adopted SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminated the pooling-of-interests method and requires all business combinations initiated after June 30, 2001, to Consolidated beFinancial ~~accounted for under the purchase method of accounting~~Statements. SFAS No. 141 also sets forth guidelines for applying the purchase method of accounting in the determination of goodwill and other intangible assets. The application of SFAS No. 141 did not affect any of the Company's previously reported amounts for goodwill and other intangible assets.

~~Monongahela~~25 ~~Power~~

andTable Subsidiariesof Contents

19WEST PENN POWER COMPANY, AND SUBSIDIARIES

~~SFAS~~Consolidated ~~No.~~Balance ~~142~~Sheets ~~eliminated amortization of goodwill and other intangible assets with indefinite lives effective January 1, 2002. Subsequent to the transitional provisions of SFAS No. 142~~ (~~see below~~Continued), goodwill and other intangible assets with indefinite lives will be tested at least annually for impairment, with impairment losses recognized in operating income. Other intangible assets with finite lives will continue to be amortized over their useful lives and tested for impairment when events or circumstances warrant.

As applied to the Company, SFAS No. 142 transitional provisions required the Company to test goodwill for impairment as of January 1, 2002, and recognize any transitional goodwill impairment loss as the effect of a change in accounting principle in the first quarter of 2002 irrespective of when the loss was measured and recorded in the Company's books. During the second quarter of 2002, the Company completed its transitional goodwill impairment test, using a discounted cash flow methodology to determine the fair value of its reporting units, and recorded an impairment loss of $195.0 million ($115.4 million, net of income taxes), all of which relates to the Delivery and Services operating segment. In accordance with SFAS No. 142, this impairment loss has been recognized in the first quarter of 2002 through restatement of first quarter 2002 financial information in this Form 10-Q and subsequent Form 10-Q filings; no amendment or re-filing of the Company's first quarter 2002 Form 10-Q is required.

	Unaudited
*(In thousands)*	September 30, 2002		December 31, 2001
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Long-term debt due within one year	$	74,877	$	103,845
Notes and bonds reclassified to current		528,751		—
Notes payable to affiliates		15,650		—
Accounts payable		27,375		32,267
Accounts payable to affiliates, net		80,306		36,348
Taxes accrued:
Federal and state income		11,317		2,010
Other		3,681		11,340
Interest accrued		4,627		1,705
Adverse power purchase commitments		20,080		24,839
Other		14,176		10,202

		780,840		222,556

Long-term debt and QUIDS		—		574,647

Deferred credits and other liabilities:
Unamortized investment credit		19,240		19,951
Deferred income taxes		249,844		243,456
Obligations under capital leases		11,739		12,260
Regulatory liabilities		14,471		15,255
Adverse power purchase commitments		240,913		253,499
Other		8,769		10,287

		544,976		554,708
Stockholder’s equity:
Common stock		65,842		65,842
Other paid-in-capital		247,774		244,239
Retained earnings		132,468		113,232

		446,084		423,313

Commitments and contingencies (Note 12)

Total liabilities and stockholder’s equity	$	1,771,900	$	1,775,224

~~The~~See ~~transitional~~accompanying ~~goodwill~~Combined ~~impairment~~Notes ~~loss consists of $170.0 million related~~ to Consolidated ~~the~~Financial ~~Company's acquisition of Mountaineer Gas Company (Mountaineer Gas) in 2000 and $25~~Statements.0 million related to the Company's acquisition of West Virginia Power Company (West Virginia Power) in 1999. The impairment amounts result from factors that are unique to these rate regulated entities and the ratemaking process, including the fact that none of the $195.0 million of goodwill was being recovered in rates or included in rate base.

~~SFAS~~26 ~~No. 142 transitional provisions also have been completed with respect to the Company's other intangible assets resulting in no impairments or changes to amortizable lives.~~

SeeTable Noteof 2 to the consolidated financial statements for additional information regarding SFAS No. 142.Contents

On ALLEGHENY ~~January~~GENERATING 1,COMPANY 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement establishes one accounting model for long-lived assets to be disposed of by sale, including discontinued operations, and carries forward the general impairment provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The adoption of SFAS No. 144 did not have a material effect on the Company's results of operations, cash flows, or financial position.

In Statements ~~April 2002, the FASB issued SFAS No. 145, "Rescission~~ of ~~FASB~~Operations Statement Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." SFAS No. 145 amends SFAS No. 13,

Monongahela Power

	Unaudited Three Months Ended September 30,				Unaudited Nine Months Ended September 30,
*(In thousands)*	2002		2001		2002		2001
Affiliated operating revenues	$	16,222	$	15,451	$	47,748	$	49,961

Operating expenses:
Workforce reduction expenses		17		—		17		—
Operation expense		1,504		764		3,941		3,831
Depreciation		4,247		4,242		12,741		12,727
Taxes other than income taxes		904		885		2,717		2,642

Total operating expenses		6,672		5,891		19,416		19,200

Operating income		9,550		9,560		28,332		30,761

Other income, net		4		—		5		6

Interest on debt		3,057		3,120		8,807		9,586

Income before income taxes		6,497		6,440		19,530		21,181

Federal and state income tax expense		1,890		2,428		5,978		6,986

Net income	$	4,607	$	4,012	$	13,552	$	14,195

~~and~~See ~~Subsidiaries~~accompanying Combined Notes to Consolidated Financial Statements.

2027

"AccountingTable for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement are effective over various dates beginning May 15, 2002. SFAS No. 145 is not expected to have a material effect on the Company's results of operations, cash flows, or financial position.Contents

In ALLEGHENY ~~June~~GENERATING ~~2002,~~COMPANY the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Costs associated with exit or disposal activities include termination benefits provided to employees that are involuntarily terminated, costs to terminate an operating lease or other contract, and incremental direct costs associated with, for example, facility closures and restructuring plans. The principal difference between this Statement and EITF Issue No. 94-3 involves the timing of recognition of a liability. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with earlier application encouraged. The Company is currently evaluating the effect of applying SFAS No. 146 on its results of operations and financial position. The Company has not determined whether it will adopt the Statement early or what effect, if any, SFAS No. 146 may have on the accounting for the 10 percent workforce reduction announced in July 2002.

~~REVIEW~~Condensed OFStatements ~~OPERATIONS~~of Cash Flows

Earnings Summary

	Unaudited Nine Months Ended September 30,
*(In thousands)*	2002			2001
Cash flows from operations	$	24,736		$	29,749

Cash flows (used in) investing:
Construction expenditures		(1,395	)		(1,106	)

Cash flows (used in) financing:
Notes payable to affiliate		(62,850	)		(38,600	)
Notes payable to parent		—			(12,250	)
Proceeds from notes payable		—			46,194
Short-term debt, net		55,000			—
Cash dividends paid on common stock		(10,500	)		(24,000	)

		(18,350	)		(28,656	)
Net change in cash and temporary cash investments		4,991			(13	)
Cash and temporary cash investments at January 1		11			50

Cash and temporary cash investments at September 30	$	5,002		$	37

~~Consolidated~~See ~~income,~~accompanying ~~before~~Combined ~~cumulative~~Notes ~~effect of an accounting change, for the three and six months ended June 30, 2002, were $1.8 million and $17.7 million, respectively, compared~~ to Consolidated ~~$19.3~~Financial ~~million and $49~~Statements.4 million for the corresponding 2001 periods. The decrease in earnings was the result of a decrease in operating revenues coupled with an increase in purchased energy and transmission. The decrease in operating revenues is the result of decreases in energy sales to affiliates and natural gas sales. The increase in purchased energy and transmission is a result of the Company transferring its Ohio and FERC jurisdictional generation assets to Allegheny Energy Supply on June 1, 2001.

~~Monongahela~~28 ~~Power~~

andTable Subsidiariesof Contents

21 ALLEGHENY GENERATING COMPANY

~~Operating~~Balance ~~Revenues~~Sheets

Total operating revenues for the three and six months ended June 30, 2002 and 2001 were as follows:

	Unaudited
*(In thousands)*	September 30, 2002			December 31, 2001
ASSETS
Current assets:
Cash and temporary cash investments	$	5,002		$	11
Accounts receivable from parents/affiliates, net		—			2,160
Materials and supplies (at average cost)		2,223			2,214
Other		455			328

		7,680			4,713

Property, plant, and equipment:
In service, at original cost		829,428			829,438
Construction work in progress		4,036			2,639

		833,464			832,077
Accumulated depreciation		(273,844	)		(261,111	)

		559,620			570,966

Deferred charges:
Regulatory assets		9,849			9,849
Unamortized loss on reacquired debt		5,518			5,968
Other		331			136

		15,698			15,953

Total assets	$	582,998		$	591,632

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	55,000		$	—
Long-term debt due within one year		50,000			—
Debentures reclassified as current		99,245			—
Notes payable to affiliates		—			62,850
Accounts payable		473			7
Accounts payable to affiliates		2,371			—
Taxes accrued:
Federal and state		1,262			982
Other		1,019			—
Interest accrued		871			3,229
Other		2			—

		210,243			67,068

Long-term debt		—			149,159

Deferred credits and other liabilities:
Unamortized investment credit		41,563			42,553
Deferred income taxes		172,556			177,268
Regulatory liabilities		22,914			22,914

		237,033			242,735

Stockholders’ equity:
Common stock		1			1
Other paid-in capital		132,669			132,669
Retained earnings		3,052			—

		135,722			132,670

Total liabilities and stockholders’ equity	$	582,998		$	591,632

	Three Months Ended		Six Months Ended
(Millions of dollars)	June 30		June 30
	2002	2001	2002	2001
Operating revenues:
Delivery and Services:
Electric	$ 155.7	$ 151.1	$ 320.9	$ 317.2
Natural gas	36.3	37.9	128.7	147.2
Total Delivery and
Services revenues	192.0	189.0	449.6	464.4
Generation and Marketing	70.9	93.1	147.6	201.7
Eliminations	(66.0)	(74.1)	(134.3)	(160.7)
Total operating revenues	$ 196.9	$ 208.0	$ 462.9	$ 505.4

See accompanying Combined Notes to Consolidated Financial Statements.

~~Delivery~~29 and Services electric revenues increased $4.6 million for the three months ended June 30, 2002 as a result of an increase in the average number of customers served and an increase in customer usage due to warmer weather conditions in the latter part of the quarter. Delivery and Services electric revenue increased $3.7 million for the six months ended June 30, 2002 as a result of an increase in the average number of customers served offset, in part, by a decrease in customer usage due to milder weather conditions.

DeliveryTable and Services natural gas revenues decreased $1.6 million and $18.5 million for the three and six months ended June 30, 2002, respectively. The decreases are primarily the result of a decrease in customer usage due to milder weather conditions in the first quarter of 2002 and movement of some commercial natural gas customers to alternate suppliers and becoming transportation customers only. As a significant portion of the natural gas sold by the Company is ultimately used for space heating, both revenues and earnings are subject to seasonal fluctuations. The Purchased Gas Adjustment (PGA) mechanism continues to exist for West Virginia Power and came into effect for Mountaineer Gas following a three-year moratorium, which ended on October 31, 2001. Under the PGA mechanism, differences between revenues received for energy costs and actual energy costs are deferred until the next rate proceeding, when energy rates are adjusted to return or recover previous overrecoveries or underrecoveries, respectively.Contents

~~Generation~~ Combined ~~and~~Notes ~~Marketing represents energy and ancillary services sales~~ to ~~the~~Consolidated ~~Company's~~Financial ~~Delivery~~Statements and Services segment and excess energy sales to Allegheny Energy Supply, the Company's unregulated generation affiliate. Generation and Marketing decreased $22.2 million and $54.1 million for the three and six months ended June 30, 2002, respectively, primarily due to the transfer of the Company's Ohio and FERC jurisdictional generation assets to Allegheny Energy Supply on June 1, 2001 and generation outages in the second quarter of 2002 limiting the Company's ability to generate and sell excess energy.

~~Monongahela~~September ~~Power~~30, 2002

~~and~~(UNAUDITED) ~~Subsidiaries~~

22The notes to the consolidated financial statements that follow are a combined presentation for Allegheny and its subsidiary registrants. The following chart indicates the registrants to which the footnotes apply:

OPERATING EXPENSES

Note

Allegheny

AE Supply

Monongahela

Potomac Edison

West Penn

AGC

1. Basis of Interim Presentation

2. Debt Covenants and Liquidity Strategy

3. Energy Trading Activities

4. Goodwill and Other Intangible Assets

5. Workforce Reduction Expenses

6. Derivative Instruments and Hedging Activities

7. Other Comprehensive Income

8. Business Segments

9. Accounting for the Effects of Price Deregulation

10. Earnings per Share

11. Other Income and Expenses, Net

12. Commitments and Contingencies

13. Subsequent Events

~~Fuel consumed for electric generation for the three and six months ended June~~ 30, ~~2002 and 2001 was as follows:~~

FuelTable Consumedof for Electric GenerationContents

	Three Months Ended		Six Months Ended
(Millions of dollars)	June 30		June 30
	2002	2001	2002	2001
Generation and Marketing	$28.0	$34.7	$58.5	$72.8

ALLEGHENY ENERGY, INC.

~~Fuel~~COMBINED ~~consumed~~NOTES ~~for~~TO ~~electric~~CONSOLIDATED ~~generation~~FINANCIAL ~~for~~STATEMENTS the three months ended June 30, 2002 decreased $6.7 million primarily due to a 25.4 percent decrease in kilowatt hours (kWhs) generated offset, in part, by a 5.5 percent increase in average fuel prices. For the six months ended June 30, 2002, fuel consumed for electric generation decreased $14.3 million primarily due to a 23.3 percent decrease in kWhs generated offset, in part, by a 3.8 percent increase related to average fuel prices. The decrease in kWhs generated is the result of the Company transferring its Ohio and FERC jurisdictional generation assets to Allegheny Energy Supply on June 1, 2001.

~~Purchased energy and transmission represents power purchases primarily from Allegheny Energy Supply and qualified facilities under the Public Utility Regulatory Policies Act of 1978~~ (~~PURPA~~UNAUDITED), ~~and capacity charges paid to Allegheny Generating Company (AGC), an affiliate partially owned by the Company, and for the three and six months ended June 30, 2002 and 2001 were as follows:~~

~~Purchased~~NOTE ~~Energy~~1: ~~and~~BASIS ~~Transmission~~OF PRESENTATION

	Three Months Ended		Six Months Ended
(Millions of dollars)	June 30		June 30
	2002	2001	2002	2001
Delivery and Services	$96.1	$89.8	$199.3	$194.7
Generation and Marketing	11.7	9.6	19.6	20.2
Eliminations	(66.0)	(74.1)	(134.3)	(160.7)
Total purchased energy
and transmission	$41.8	$25.3	$ 84.6	$ 54.2
PURPA cost (cents per kWh)	5.7	5.1	5.4	5.4

Allegheny Energy, Inc. (AE), together with its consolidated subsidiaries (Allegheny) delayed the filing of its various reports including the annual report on Form 10-K for 2002 and quarterly reports on Form 10-Q for the third quarter of 2002 and the first, second and third quarters of 2003, with the United States Securities and Exchange Commission (SEC), as the result of a comprehensive accounting review of its financial processes, records, and internal controls. As discussed in greater detail in Part I, Item 4, Controls and Procedures, below, this quarterly report on Form 10-Q for the periods ended September 30, 2002 is being filed subsequent to the 2002 Annual Report on Form 10-K (filed with the SEC on September 25, 2003) as well as Forms 10-Q for the periods ended March 31, 2003 and June 30, 2003 (filed with the SEC on December 19, 2003). This document should be read in conjunction with the Annual Reports on Form 10-K for both 2002 and 2001.

~~Delivery~~The ~~and~~interim ~~Services~~financial ~~purchased~~statements ~~energy~~included ~~and~~herein ~~transmission~~have ~~consists~~been ofprepared ~~energy~~by ~~purchases from~~ Allegheny ~~Energy Supply~~, ~~PURPA~~without ~~generators~~audit, ~~and~~pursuant ~~nonaffiliated~~to ~~energy~~the ~~providers~~rules and ~~increased~~regulations byof ~~$6.7~~the ~~million and $4~~SEC.6 ~~million for the three and six months ended June 30~~Accordingly, ~~2002,~~certain information ~~respectively. The increase for the three~~ and ~~six~~footnote ~~months~~disclosures ~~ended~~normally ~~June~~included ~~30,~~in ~~2002~~financial ~~was~~statements ~~primarily~~prepared ~~due~~in toaccordance ~~the~~with ~~Company~~Generally ~~purchasing~~Accepted ~~energy~~Accounting ~~from~~Principles ~~Allegheny Energy Supply~~ in ~~order~~the toUnited ~~meet~~States ~~its~~of ~~Ohio~~America ~~load~~(GAAP) ~~requirements.~~have ~~Effective~~been ~~January~~condensed 1,or ~~2001~~omitted, aand ~~portion~~management ofbelieves that the ~~electricity~~disclosures ~~purchased~~are byadequate ~~the Company from Allegheny Energy Supply is now subject~~ to ~~pricing~~make atthe ~~market-based~~information ~~rates.~~presented ~~See~~not ~~"Item 3 - Quantitative and Qualitative Disclosures About Market Risk" for additional details~~misleading.

In the opinion of management, the unaudited interim financial statements reflect all normal recurring adjustments which are necessary for a fair presentation of the consolidated results of operations for the three and nine months ended September 30, 2002, and 2001; cash flows for the nine months ended September 30, 2002, and 2001; and financial position at September 30, 2002, and December 31, 2001. Because of the seasonal nature of Allegheny’s utility operations at Monongahela, ~~Power~~Potomac Edison, and West Penn, results for the three and nine months ended September 30, 2002, are not necessarily indicative of results that may be expected for the year ending December 31, 2002. For more information on the seasonal nature, see Part I, Item 1, Risk Factors, Other Risk Factors Associated with Our Business, in Allegheny’s 2002 Annual Report on Form 10-K.

Certain amounts in the December 31, 2001, consolidated balance sheets for Allegheny, AE Supply, and ~~Subsidiaries~~West Penn have been reclassified for comparative purposes. Additionally, certain amounts in the consolidated statements of operations for the three and nine month periods ended September 30, 2001, for Allegheny have been reclassified for comparative purposes.

23As discussed in Item 8, Note 2, Comprehensive Financial Review and Note 24, Quarterly Financial Information, to the consolidated financial statements in the 2002 Annual Report on Form 10-K for Allegheny, and Note 2, Comprehensive Financial Review and Note 21, Quarterly Financial Information, for AE Supply and Monongahela, Note 2, Comprehensive Financial Review and Note 16, Quarterly Financial Information, for Potomac Edison, and Note 2, Comprehensive Financial Review and Note 14, Quarterly Financial Information for West Penn, Allegheny conducted a comprehensive financial review, and as a result identified accounting adjustments that were recorded in the first and second quarters of 2002. Accordingly, the first and second quarters of 2002 have been restated and all adjustments are reflected in the nine month period included herein.

~~Generation~~Federal and ~~Marketing~~State ~~purchased~~Income ~~energy and transmission consists of energy purchases from AGC and nonaffiliated energy providers~~Taxes. ~~Generation~~The ~~and~~provisions ~~Marketing~~for ~~purchased~~income ~~energy~~tax (benefit) ~~and~~expense ~~transmission increased by $1.7 million~~ for ~~the~~(loss) ~~three~~earnings ~~months~~from ~~ended~~operations ~~June~~result ~~30,~~in ~~2002,~~an ~~and~~effective ~~remained~~income ~~relatively~~tax ~~flat for the six months ended June 30~~rate, ~~2002.~~which ~~The~~differs ~~increase~~from ~~for~~ the ~~three~~federal ~~months~~statutory ~~ended~~rate ~~June~~of ~~30,~~35 ~~2002~~percent isprincipally ~~primarily~~ due to anstate ~~increase~~income ~~in energy purchases from nonaffiliated providers offset~~taxes, intax ~~part~~credits, byeffects aof ~~decrease~~utility inrate ~~AGC~~making ~~capacity~~and ~~charges~~certain non-deductible expenses.

~~The~~31 ~~elimination between Delivery and Services and Generation and Marketing purchased energy and transmission is necessary to remove the effect of affiliated purchased energy and transmission expenses.~~

NaturalTable gasof purchases and production expenses for the three and six months ended June 30, 2002 and 2001 were as follows:Contents

~~Natural~~NOTE ~~Gas~~2: ~~Purchases~~DEBT COVENANTS AND LIQUIDITY STRATEGY

	Three Months Ended		Six Months Ended
(Millions of dollars)	June 30		June 30
	2002	2001	2002	2001
Delivery and Services	$18.0	$16.3	$73.9	$83.5

Debt Covenants

~~Natural~~In ~~gas~~October ~~purchases~~2002, ~~for~~Allegheny ~~the~~announced ~~three~~that ~~months~~AE, ~~ended~~AE ~~June 30~~Supply, ~~2002~~and ~~increased~~AGC ~~$1.7~~were ~~million~~in ~~primarily~~default ~~due~~under atheir ~~benefit~~principal ~~received~~credit agreements after AE Supply declined to post additional collateral in ~~accounting~~favor ~~for~~of ~~unaccounted~~several ~~natural~~trading ~~gas~~counterparties. The request for additional collateral resulted from a downgrade in Allegheny’s credit rating below investment grade by Moody’s Investors Services, Inc. During the ~~three~~period ~~months~~November ~~ended~~2002 through ~~June~~February 302003, ~~2001~~AE, AE Supply, and AGC obtained waivers of, and amended, certain covenants to these principal credit facilities. ~~Natural~~The ~~gas~~total ~~purchases~~debt ~~for~~classified ~~the~~as ~~six~~current, ~~months~~in ~~ended~~accordance ~~June~~with EITF Issue No. 86-30, ~~2002~~“Classification ~~decreased~~of Obligations When a Violation is Waived by the Creditor,” in the accompanying consolidated balance sheets related to such defaults was approximately $93,397.68 million ~~due~~at ~~primarily~~September to30, a2002. ~~decrease~~See inthe ~~gas~~discussion ~~sales~~below ~~due~~concerning toother ~~weather~~defaults ~~conditions~~on additional ~~coupled~~long-term ~~with~~debt ~~lower~~that ~~average~~also ~~natural~~resulted ~~gas~~in ~~costs~~the classification of that debt as current.

~~Other~~Allegheny ~~operation~~refinanced ~~expenses~~existing ~~for~~debt ~~the~~and ~~three~~issued new debt, on February 25, 2003 and ~~six~~March ~~months~~13, ~~ended~~2003 ~~June~~as 30the result of its entry into the Borrowing Facilities, as described below. See Item 8, Note 3, Debt Covenants and Liquidity Strategy, to the consolidated financial statements in the 2002 Annual Report on Form 10-K for both Allegheny and ~~2001~~AE ~~were~~Supply asfor ~~follows:~~additional information regarding the Borrowing Facilities. Issuance costs associated with the Borrowing Facilities totaled $46.6 million, of which $46.3 million has been deferred and will be amortized using the effective interest rate method over the life of the Borrowing Facilities.

~~Other~~AE, ~~Operation~~AE ~~Expenses~~Supply, Monongahela, and West Penn entered into agreements (Borrowing Facilities) totaling $2,447.8 million with various credit providers to refinance and restructure the bulk of AE and AE Supply’s short-term debt.

	Three Months Ended		Six Months Ended
(Millions of dollars)	June 30		June 30
	2002	2001	2002	2001
Delivery and Services	$36.2	$38.6	$ 75.0	$ 77.9
Generation and Marketing	25.3	19.3	42.8	43.9
Total other operation
expenses	$61.5	$57.9	$117.8	$121.8

The following is a summary of the terms of the Borrowing Facilities:

~~Total other operation expenses increased $3~~1.6 ~~million~~Facilities ~~and~~at ~~decreased $4.0 million for the three and six months ended June 30~~AE, ~~2002,~~Monongahela ~~respectively. The changes in total other operating expenses for the second quarter of 2002 are primarily due to increased maintenance costs~~ and ~~materials~~West ~~and supplies. The decrease for the six months ended June 30, 2002 were primarily the result of changes in materials and supplies, contract work, and uncollectible expense.~~Penn:

• A $305.0 million unsecured facility with AE, Monongahela, ~~Power~~and West Penn as the designated borrowers, and under which AE has utilized the full facility amount. Borrowings under this facility bear interest at a London Interbank Offering Rate (LIBOR) based rate plus a margin of five percent or a designated money center bank’s base rate plus four percent. This facility requires quarterly amortization payments of $7.5 million;

• A $25.0 million unsecured credit facility at AE. This facility had an interest rate of a designated money center bank’s base rate plus four percent and ~~Subsidiaries~~was retired in July 2003; and

24• A $10.0 million unsecured credit facility at Monongahela. This facility was subsequently renegotiated as part of a $55 million revolving facility of which $53.6 million was drawn. See Note 13, Subsequent Events, below, for additional information.

~~Depreciation~~32 ~~and amortization for the three and six months ended June 30, 2002 and 2001 were as follows:~~

DepreciationTable andof AmortizationContents

	Three Months Ended		Six Months Ended
(Millions of dollars)	June 30		June 30
	2002	2001	2002	2001
Delivery and Services	$10.6	$11.1	$21.0	$22.2
Generation and Marketing	8.1	9.4	16.3	18.8
Total depreciation and
amortization	$18.7	$20.5	$37.3	$41.0

2.	Facilities at AE Supply:

~~Total~~• ~~depreciation~~A ~~and~~$987.7 ~~amortization~~million ~~for~~credit facility (the ~~three~~Refinancing ~~and~~Credit ~~six~~Facility) ~~months~~at ~~ended~~AE ~~June 30~~Supply, ~~2002,~~of ~~decreased~~which $1893.84 million ~~and~~is ~~$3.7~~secured ~~million,~~by ~~respectively,~~substantially ~~due~~all ~~primarily~~of to the ~~discontinuation~~assets of ~~amortization~~AE ofSupply. ~~goodwill~~Borrowings ~~effective~~under ~~January~~the 1,facility ~~2002,~~bear ~~and~~initial ainterest ~~decrease~~at ina ~~depreciation~~LIBOR-based ~~due~~rate toplus ~~the~~a ~~transfer~~margin of ~~the~~six ~~Company'~~percent or a designated money center bank’s ~~Ohio~~base ~~and~~rate ~~FERC~~plus ~~jurisdictional~~a ~~generation~~margin ~~assets~~of five percent on ~~June~~the 1,secured ~~2001~~portion. ~~See~~The ~~Note~~interest 2rate margin applicable to unsecured borrowings under the ~~Consolidated~~facility ~~Financial~~is ~~Statements~~10.5 ~~for~~percent. ~~details~~This ~~regarding~~facility ~~goodwill~~requires amortization payments of approximately $23.6 million in September 2004 and $117.8 million in December 2004, and matures in April 2005;

~~Taxes~~• ~~other~~A ~~than~~$470.0 ~~income~~million ~~taxes~~credit ~~for~~facility, ~~the~~of ~~three~~which $420.0 million was drawn down and $50.0 million is no longer committed. The facility is secured by substantially all of AE Supply’s assets. Borrowings under the facility bear interest at a LIBOR-based rate plus six ~~months~~percent ~~ended~~or ~~June~~a 30designated money center bank’s base rate plus a margin of five percent. This facility requires an amortization payment of $250.0 million in December 2003, ~~2002~~which was paid, and ~~2001~~payment ~~were~~of asthe ~~follows:~~balance of $170.0 million in September 2004; and

~~Taxes~~• ~~Other~~A ~~than~~$270.1 ~~Income~~million ~~Taxes~~credit facility (the Springdale Credit Facility) associated with the financing of the construction of AE Supply’s new generating facility in Springdale, Pennsylvania, and which is secured by a combination of that facility and substantially all of AE Supply’s assets. Borrowings under the facility bear interest at a LIBOR-based rate plus a margin of six percent or a designated money center bank’s base rate plus a margin of five percent on the portion secured by substantially all of AE Supply’s assets. The interest rate margin applicable to the remainder of the borrowings under the facility is 10.5 percent. This facility requires amortization payments of $6.4 million in September 2004, $32.2 million in December 2004, and matures in April 2005.

	Three Months Ended		Six Months Ended
(Millions of dollars)	June 30		June 30
	2002	2001	2002	2001
Delivery and Services	$ 7.5	$ 9.2	$19.8	$20.5
Generation and Marketing	6.2	6.8	12.3	13.4
Total taxes other than
income taxes	$13.7	$16.0	$32.1	$33.9

In addition, $380.0 million of indebtedness related to the discontinued St. Joseph, Indiana generating project, in the form of A-Notes, was restructured and assumed by AE Supply. Of this debt, $343.7 million is secured by substantially all of the assets of AE Supply, other than its new generating facility in Springdale, Pennsylvania. The secured portion of this debt bears an interest rate of 10.25 percent, and the unsecured portion bears interest at 13.0 percent. This debt matures in November 2007.

~~Total~~The ~~taxes~~$420.0 ~~other~~million ~~than~~borrowed ~~income~~by ~~taxes~~AE ~~primarily~~Supply ~~include~~under ~~gross~~the ~~receipts~~$470.0 ~~taxes~~million facility represents new liquidity. The Borrowing Facilities at AE Supply also refinanced $1,637.8 ~~payroll~~million ~~taxes~~of existing debt and letters of credit, ~~property~~including ~~taxes~~$894.9 million outstanding under various credit agreements, and ~~capital~~$270.1 ~~stock/franchise~~million ~~taxes~~outstanding related to the construction of AE Supply’s generating facility in Springdale, Pennsylvania, which went into commercial operation in July 2003. ~~Taxes~~The ~~other~~Borrowing Facilities at AE, Monongahela, and West Penn refinanced $340.0 million of existing debt and letters of credit.

~~than~~Until ~~income~~August ~~taxes~~1, ~~decreased~~2003, ~~$2.3~~after ~~million~~certain ~~and~~conditions ~~$1.8~~associated ~~million~~with insecuring the ~~three~~collateral ~~and~~under ~~six~~the ~~months~~Borrowing ~~ended~~Facilities ~~June~~were ~~30,~~met ~~2002~~on July 19, ~~respectively~~2003, asthe LIBOR component charged AE Supply under the Borrowing Facilities with respect to secured borrowings had a ~~result~~two percent floor. Also, since AE Supply was unable to secure all of athe ~~decrease~~Borrowing inFacilities and the ~~West~~restructured ~~Virginia~~A-Note ~~Gross~~debt ~~Receipts~~before ~~Tax~~July ~~due~~31, 2003, the interest rates charged on the amounts not so secured increased to a ~~decline~~spread inof ~~taxable revenues~~10.5 ~~The~~percent ~~decrease~~over ~~was~~the ~~offset~~applicable LIBOR-based rate, inwhich ~~part~~contains a two percent floor for unsecured borrowings, byor anthe ~~increase~~designated inmoney ~~property~~center ~~taxes~~bank’s asbase arate ~~result~~for ofthe Refinancing Credit Facility and the Springdale Credit Facility, and the interest rate increased ~~assessments~~to 13.0

~~Federal~~33 ~~and state income taxes for the three and six months ended June 30, 2002 and 2001 were as follows:~~

FederalTable andof State Income TaxesContents

	Three Months Ended		Six Months Ended
(Millions of dollars)	June 30		June 30
	2002	2001	2002	2001
Delivery and Services	$5.8	$2.5	$15.5	$13.5
Generation and Marketing	(5.9)	5.6	(4.7)	13.8
Total federal and state
income taxes	$(.1)	$8.1	$10.8	$27.3

percent for the unsecured portion of the $380.0 million A-Note debt retroactively to February 25, 2003, the closing date of the Borrowing Facilities. The total amounts unsecured under the Refinancing Credit Facility, the Springdale Credit Facility and the A-Note debt are approximately $94.3 million, $175.8 million, and $36.3 million, respectively.

~~Monongahela~~AE ~~Power~~Supply utilized $2,057.8 million under the Borrowing Facilities and the restructured A-Notes. Of the total, either AE Supply’s new generating facility in Springdale, Pennsylvania or substantially all of AE Supply’s assets secured $1,927.2 million. A covenant in AE Supply’s public debt places limitations, with certain exceptions, upon the issuance of secured debt. This limitation will constrain AE Supply’s ability to borrow additional funds until outstanding secured debt is reduced.

The interest rates payable by AE Supply under certain parts of the Borrowing Facilities are tied to AE Supply’s credit ratings. Should AE Supply’s credit ratings improve from its current ratings to certain specified higher ratings, the rate of interest AE Supply would be required to pay under the Refinanced Credit Facility and ~~Subsidiaries~~the Springdale Credit Facility could decrease by 0.5 percent to 1.0 percent for the secured portion of those credit facilities.

25Allegheny is required to meet certain financial tests, as defined in the Borrowing Facilities agreements, including:

~~Total~~• ~~federal~~fixed-charge ~~and~~coverage ~~state~~ratio ~~income~~of ~~taxes decreased $8~~1.210 ~~million~~through ~~and $16.5 million for~~ the ~~three~~first ~~and~~quarter ~~six months ended June 30, 2002 and is primarily the result~~ of a2005; ~~decrease in taxable income.~~and

~~Other~~• ~~Income~~maximum debt-to-capital ratio of 75 percent in 2003 and ~~Deductions~~72 percent in 2004 and the first quarter of 2005.

~~Other~~AE ~~income,~~Supply ~~net~~also ~~represents~~is ~~nonoperating~~required ~~revenues~~to ~~and~~meet ~~expenses,~~certain ~~net~~financial ~~of related income taxes. Total other income~~tests, ~~net~~as ~~decreased~~defined ~~$1.0~~in ~~million for~~ the ~~three~~Borrowing ~~months~~Facilities ~~ended June 30~~agreements, ~~2002~~including: ~~due to an decrease in other non-operating income. Total other income, net for the six months ended remained relatively flat. See Note 9 to the consolidated financial statements for additional details.~~

~~Cumulative~~• ~~Effect~~minimum earnings before interest, taxes, depreciation, and amortization (EBITDA), as defined in the agreements, of ~~Accounting~~$100.0 ~~Change~~million by June 30, ~~Net~~2003, increasing to $304 million by December 31, 2003, to $430.0 million in increments for the 12 months ending each quarter through the first quarter of 2005;

~~The~~• ~~cumulative~~interest ~~effect~~coverage ratio of annot ~~accounting~~less ~~change,~~than ~~net reflects a charge of $115~~0.475 ~~million~~through ~~for~~June ~~the~~30, ~~impairment~~2003, ofincreasing ~~goodwill~~to in1.10 ~~accordance~~by ~~with~~December ~~SFAS~~31, ~~142~~2003, 1.50 ~~See~~by ~~Note~~December 231, to2004, through the ~~Consolidated~~first ~~Financial~~quarter ~~Statements~~of ~~for~~2005; ~~further details regarding goodwill impairment.~~and

~~FINANCIAL~~• ~~CONDITION,~~minimum ~~REQUIREMENTS,~~net ~~AND~~worth ~~RESOURCES~~of $800.0 million (subject to downward adjustment under specific circumstances).

~~The~~Effective ~~Company's~~July ~~discussion~~22, 2003, Allegheny and AE Supply were granted waivers from compliance with all of ~~Financial~~the ~~Condition,~~above ~~Requirements,~~financial ~~and~~tests ~~Resources~~for the first and ~~Significant~~second ~~Continuing~~quarters ~~Issues~~of in2003. ~~its~~Effective ~~Annual~~August ~~Report~~22, on2003, ~~Form~~Allegheny ~~10-K,~~and asAE ~~amended,~~Supply received additional waivers of the financial tests for the ~~year~~third ~~ended~~quarter of 2003. Effective December 3122, ~~2001~~2003, ~~should~~Allegheny beand ~~read~~AE inSupply ~~conjunction~~received ~~with~~additional waivers of financial tests for the ~~following~~fourth ~~information~~quarter of 2003.

~~Liquidity~~The Borrowing Facilities also have provisions requiring prepayments out of the proceeds of asset sales and ~~Capital~~debt ~~Requirements~~and equity issuances, as follows:

To• ~~meet~~75 ~~cash~~percent ~~needs for operating expenses, the payment~~ of ~~interest,~~ the ~~retirement of debt, and its construction program, the Company has used internally generated funds (~~net ~~cash~~proceeds ~~provided~~of bysales ~~operating activities less common dividends) and external financings, such as the sale~~ of ~~common~~assets ~~and preferred stock, debt instruments, and lease arrangements. The timing and amount~~ of ~~external~~Allegheny ~~financings~~(excluding ~~depend~~AE ~~primarily~~Supply ~~upon economic~~ and ~~financial~~its ~~market~~subsidiaries) ~~conditions,~~up ~~the~~to ~~Company's~~$400.0 ~~cash needs~~million, and ~~capital~~100 ~~structure~~percent ~~objectives of the Company. The availability and cost of external financings depend upon the financial condition of the Company and market conditions.~~thereafter;

~~The~~• ~~Company's~~75 ~~ability~~percent toof ~~meet~~the ~~its~~net ~~payment~~proceeds ~~obligations~~of ~~under~~sales ~~its~~of ~~indebtedness~~assets ~~and~~of toAE ~~fund~~Supply ~~capital~~and ~~expenditures will depend on~~ its ~~future~~subsidiaries ~~operations.~~up ~~The Company's future performance is subject~~ to ~~regulatory,~~$800.0 ~~economic~~million, ~~financial, competitive, legislative,~~ and ~~other~~100 ~~factors~~percent ~~that are beyond its control~~thereafter, asexcluding ~~discussed~~AE ~~in "Factors That May Affect Future Results" on page 15. The Company'~~Supply’s ~~future~~new ~~performance~~facility ~~could~~in ~~affect~~Springdale, ~~its ability to maintain its investment grade credit rating.~~Pennsylvania;

To• ~~enhance~~100 ~~liquidity~~percent ~~and~~of ~~meet short-term borrowing needs,~~ the ~~Company~~net ~~issues~~proceeds ~~commercial~~of ~~paper~~any ~~and~~sale ~~has access to lines~~ of ~~credit~~AE ~~and~~Supply’s annew ~~Allegheny~~facility ~~Energy internal money pool. The Company is a participant, along with Allegheny Energy and various affiliates,~~ in ~~bank lines of credit totaling $380 million at June 30~~Springdale, 2002 for general corporate purposes and as a backstop to their commercial paper programs. At June 30, 2002, the entire $380 million in bank lines of credit was supporting commercial paper and thus unavailable to the Company. Pennsylvania;

~~Monongahela~~34 ~~Power~~

andTable Subsidiariesof Contents

26• 100 percent of the net proceeds of debt issuances (excluding specified exemptions, including an exemption of up to $50 million for the Distribution Companies and refinancings meeting certain criteria);

~~Effective~~• ~~July~~100 1,percent ~~2002, the lines~~ of ~~credit~~net ~~declined~~proceeds to $360 million. In addition, an Allegheny Energy internal money pool accommodates intercompany short-term borrowing needs, to the extent that Allegheny Energy and its regulated subsidiaries have funds available. The Company has SEC authorization for total short-term borrowings, from ~~all~~equity ~~sources, of $206 million. See "Financings" below for additional information on short-term debt outstanding at June 30, 2002, and December 31, 2001.~~issuances;

At• ~~June~~50 ~~30,~~percent ~~2002, due to the loss created by the adoption~~ of ~~SFAS~~Allegheny’s ~~No.~~(excluding ~~142~~AE ~~recorded~~Supply byand aits ~~subsidiary~~subsidiaries) ofexcess ~~the~~cash ~~Company,~~flow ~~certain restrictions related to the subsidiary issuing or guaranteeing additional long-term indebtedness and making Restricted Payments,~~ (as defined in the ~~agreements~~Borrowing ~~related~~Facilities); to certain outstanding debt obligations of the subsidiary, exist. Management does not believe that these restrictions will have an adverse effect on the Company's results of operations or financial position.and

On• ~~August~~50 8,percent ~~2002, Moody's Investors Service (Moody's) announced that it has placed its ratings~~ of ~~Allegheny~~AE ~~Energy and all of its subsidiaries on review. Allegheny Energy continues to work with Moody'~~Supply’s toexcess ensure that it understands the Allegheny Energy's business and strategy and to provide it with all the information needed for its review. Moody's will determine whether to change Allegheny Energy's credit ratings following completion of its review. Moody's also indicated in its press release its review will focus on a number of factors, including Allegheny Energy's weaker-than-expected operating cash ~~flows~~flow ~~and earnings, currently unfavorable power purchase and hedging arrangements, challenges to a key power sales agreement, and a deteriorating outlook for wholesale power markets,~~ (as ~~well~~defined asin ~~Allegheny~~the ~~Energy's~~Borrowing ~~management's plans for mitigating actions~~Facilities).

OnThe ~~April~~Borrowing ~~16,~~Facilities ~~2002,~~also ~~Fitch,~~contain ~~Inc.~~restrictive ~~(Fitch)~~covenants ~~changed~~that ~~the~~limit ~~rating of~~ Allegheny ~~Energy'~~’s ~~senior~~ability ~~unsecured debt~~ to: ~~BBB+~~borrow ~~from~~funds; A-incur ~~and~~liens; ~~the~~enter ~~rating~~into ~~for~~a merger ~~commercial~~or ~~paper~~other tochange F2of ~~from~~control ~~F1.~~transaction; Insell ~~addition,~~assets; ~~the~~make ~~ratings~~investments; onprepay ~~West~~indebtedness; ~~Penn's~~amend ~~and~~contracts; ~~Potomac~~pay ~~Edison's~~dividends ~~senior unsecured debt were changed to A from A+. The commercial paper ratings of both West Penn~~ and ~~Potomac~~other ~~Edison~~distributions ~~were~~on ~~affirmed at F1. Fitch'~~Allegheny’s ~~Rating~~equity; ~~Outlook is stable for Allegheny Energy, Potomac Edison,~~ and ~~West~~operate ~~Penn. On May 31, 2002, Fitch lowered the debt and preferred stock ratings of the Company. The Company'~~Allegheny’s ~~senior unsecured debt rating was changed to A- from A~~business, ~~the~~by ~~preferred~~requiring ~~stock~~it ~~rating was changed~~ to ~~BBB+~~adhere ~~from A-, and their commercial paper rating was affirmed at F1. The Company's Rating Outlook was changed~~ to an ~~negative~~agreed ~~from~~business ~~stable~~plan.

OnSubstantially ~~August~~all ~~12,~~of ~~2002, Fitch placed~~ the ~~ratings~~debt of ~~Allegheny Energy~~AE, ~~Allegheny~~AE ~~Energy~~ Supply, Monongahela, Potomac Edison, West Penn, and AGC remains classified as current, ~~Allegheny~~in ~~Energy~~accordance ~~Supply's~~with ~~special~~EITF ~~purpose~~Issue ~~entity~~No. ~~Allegheny~~86-30, ~~Energy~~“Classification ~~Supply~~of ~~Statutory~~Obligations ~~Trust~~When ~~2001~~a ~~(Allegheny~~Violation ~~Energy~~is ~~Supply~~Waived ~~Statutory~~by ~~Trust)~~the Creditor,” ~~and~~as the ~~Company~~result onof ~~"Rating~~noncompliance ~~Watch~~with ~~Negative~~certain financial reporting covenants." ~~Fitch~~Allegheny ~~indicated~~and ~~that~~AE ~~the~~Supply ~~"Rating~~have ~~Watch~~obtained ~~Negative"~~waivers ~~affecting~~of ~~Allegheny~~these ~~Energy~~covenants for each of the quarterly reporting periods through, and ~~Allegheny~~including, ~~Energy~~September ~~Supply~~30, ~~reflects~~2003. ~~its~~For ~~concern~~the ~~over~~debt obligations at Monongahela, Potomac Edison, West Penn, and AGC, the ~~tight~~classification ~~liquidity~~as ~~position~~current is the result of ~~both~~noncompliance ~~companies~~with certain reporting requirements in ~~2002~~their ~~and~~various ~~weakening~~indenture ~~credit~~agreements. ~~protection~~See ~~measures~~Item ~~resulting~~8, ~~from~~Note ~~unfavorable~~3, ~~developments~~Debt Covenants, to the consolidated financial statements in the ~~power~~2002 ~~markets.~~Annual Report ~~Ratings~~on Form 10-K for Monongahela, Potomac Edison, and West Penn, ~~AGC,~~and ~~Allegheny~~Item ~~Energy~~8, ~~Supply~~Note ~~Statutory~~2, ~~Trust~~Debt Covenants, ~~and~~to the ~~Company~~consolidated ~~were~~financial ~~placed~~statements in the 2002 Annual Report on ~~"Rating~~Form ~~Watch~~10-K ~~Negative"~~for ~~due~~AGC tofor ~~Fitch's~~additional ~~policy~~information regarding the ~~notching~~nature of ~~subsidiaries~~these financial ~~within~~reporting acovenant ~~holding company group~~violations.

The debt holders have not provided Monongahela, ~~Power~~Potomac Edison, West Penn, and AGC with any notices of default under the agreements. Such notices, if received, would allow Monongahela, Potomac Edison, West Penn, and AGC either 30 or 60 days to cure their respective noncompliance before the debt holders could accelerate the due dates of the debt obligations.

On September 29, 2003, Mountaineer obtained waivers with respect to its Note Purchase Agreements extending the respective agreements’ covenant due dates for its 2002 annual audited financial statements until October 31, 2003. Also, Mountaineer has obtained waivers from its obligation to deliver unaudited financial statements to the noteholders for the first, second, and ~~Subsidiaries~~third quarters of 2003. Mountaineer provided its 2002 annual audited financial statements to noteholders on October 31, 2003. Mountaineer provided its first quarter 2003 financial statements to the noteholders on December 30, 2003. Mountaineer is required to deliver the second and third quarter 2003 unaudited financial statements to the noteholders by January 29, 2004.

27Liquidity Strategy

OnAllegheny ~~April~~has 4,prepared ~~2002,~~its ~~Standard~~financial &statements ~~Poor's~~assuming ~~announced~~ that it ~~has~~will ~~equalized~~continue ~~the~~as ~~corporate~~a ~~credit~~going concern. ~~ratings~~However, Allegheny’s noncompliance with certain of ~~all~~its ~~rated~~reporting ~~Allegheny~~obligations ~~Energy~~under ~~companies~~its atdebt ~~BBB+.~~covenants ~~This~~(described ~~rating~~above) ~~equalizes~~and ~~Allegheny~~the ~~Energy~~resultant ~~Supply~~classification of certain debt as current has caused its independent auditors, PricewaterhouseCoopers ~~AGC~~LLP, ~~Potomac~~to ~~Edison,~~issue ~~West~~a ~~Penn~~modified opinion on its 2002 financial statements, ~~and~~contained within the ~~Company.~~2002 ~~Standard~~Annual &Report ~~Poor's~~on ~~unsecured~~Form ~~debt~~10-K, ~~ratings~~that ~~for~~indicates ~~the~~there ~~companies~~is ~~are~~substantial ~~now~~doubt asabout ~~follows:~~ Allegheny’s ~~Energy,~~ability ~~BBB;~~to ~~Allegheny~~continue ~~Energy~~as ~~Supply,~~a ~~BBB+;~~going ~~AGC,~~concern (a ~~BBB+;~~“Going ~~West~~Concern” ~~Penn,~~opinion). ~~BBB+;~~The ~~Potomac~~2002 ~~Edison,~~financial ~~BBB;~~statements ~~and~~do ~~the~~not ~~Company,~~include ~~BBB.~~any ~~Standard~~adjustments &that ~~Poor's~~might ~~outlooks~~result ~~for~~from ~~all~~the ~~companies~~resolution ~~are~~of ~~stable~~this uncertainty.

~~Cash~~Allegheny ~~Flow~~is in the process of preparing its Quarterly Report on Form 10-Q for the period ended September 30, 2003, and will file such report as soon as it is available. Thereafter, Allegheny plans to file its subsequent public financial reports on a timely basis.

~~Cash~~Allegheny ~~flows~~has ~~from~~adopted ~~operations~~a ~~decreased~~long-term ~~$10.3~~strategy ~~million~~of ~~for~~focusing on the ~~six~~core ~~months~~generation ~~ended~~and ~~June~~T&D ~~30,~~businesses ~~2002~~in which it has been historically engaged. Allegheny will seek, asconsistent ~~compared~~with regulatory constraints, to ~~the~~manage its ~~same~~business ~~period~~lines inas ~~2001~~an ~~primarily~~integrated ~~due~~whole. Implementing this strategy will be a ~~decrease~~significant challenge, in ~~operating~~part, ~~income~~because of the continuing legacy of past transactions that have negatively affected Allegheny’s operations and financial condition.

~~Cash~~35 ~~flows used in investing activities decreased $7.2 million for the six months ended June 30, 2002, as compared to the same period in 2001 due to lower construction expenditures.~~

CashTable flows used in financing activities decreased $18.4 million for the six months ended June 30, 2002, as compared to the same period in 2001 primarily due to decreased payment of dividends on common stock, decreased repayments of short-term debt, and partially offset by a reduction in repayments of notes receivable from affiliates.Contents

~~Financing~~Allegheny has taken a number of recent actions to improve its financial condition. These steps include substantial senior management changes; completion of key financing transactions, including the refinancing of principal credit facilities (as discussed above); exiting from Western United States energy markets; refocusing trading activities; asset sales; restructuring and cost reduction initiatives; and improving internal controls and reporting.

InPrivate ~~February~~Placement: ~~2002~~On July 24, 2003, Allegheny obtained $291 million ($275 million after deducting various fees and placement agents’ commissions) from the ~~Company~~issuance ~~redeemed~~to a wholly-owned special purpose finance subsidiary of AE, Allegheny Capital Trust I (Capital Trust), of units consisting of $~~2.1~~300 million principal amount of 411 7/8 percent Notes due 2008 and warrants for the purchase of up to 25 million shares of AE’s common stock, exercisable at $12 per share.35 ~~percent~~The ~~unsecured~~warrants are mandatorily exercisable if AE’s common stock price equals or exceeds $15 per share over a specified averaging period occurring after June 15, 2006. The warrants are stapled to the notes and may be exercised only through the tender of the notes. ~~Short~~The finance subsidiary obtained proceeds required to purchase the units by issuing $300 million liquidation amount of its 11 7/8 percent Mandatorily-~~term~~Convertible ~~debt~~Trust isPreferred ~~used~~Securities to ~~meet~~investors in ~~temporary~~a ~~cash~~private ~~needs~~placement. The ~~Company~~holder ~~had~~of noa ~~short-term~~preferred ~~borrowings~~security atis ~~June~~entitled ~~30,~~to ~~2002~~distributions on a corresponding principal amount of notes and ~~had~~may ~~short~~direct the exercise of warrants stapled to the notes in order to convert the preferred securities into AE common stock. AE fully and unconditionally guarantees Capital Trust’s payment obligations under the preferred securities. Allegheny’s consolidated balance sheets will reflect the Notes as long-term ~~borrowings~~debt. The Notes and AE’s guarantee of ~~$14.4~~Capital ~~million~~Trust’s atpayment ~~December~~obligations ~~31,~~are ~~2001~~subordinated ~~from~~only ~~bank~~to ~~lines~~indebtedness arising under the agreements governing certain of ~~credit~~AE’s indebtedness under the Borrowing Facilities.

~~Impact~~Exiting from Western United States Energy Markets: Allegheny worked throughout 2003 to accomplish AE Supply’s effective exit from the Western United States energy markets. Its positions based in the Western United States had been a substantial source of ~~Change~~earnings and cash flow volatility and risk, and trading in ~~Short-term~~these markets ~~Interest~~does ~~Rate~~not fit with Allegheny’s new business model.

ARenegotiation and ~~one~~Sale of CDWR Contract. In June 2003, AE Supply entered into a settlement agreement with the State of California to resolve the state’s litigation regarding its power supply contracts with the CDWR. The terms of the settlement reduced the volume of power to be delivered from 2005-~~percent~~2011 ~~change~~and inreduced the ~~short~~sale price of off-~~term~~peak ~~borrowing~~power ~~interest~~to ~~rate~~be ~~would~~delivered ~~not~~from ~~have~~2004-2011, anwhich ~~impact~~in asturn substantially reduced the ~~Company~~value ~~had~~of nothe ~~short-term~~contract. ~~debt~~(See ~~outstanding~~Item at8, ~~June~~Notes 3026 and 23, Commitments and Contingencies, of AE’s and AE Supply’s 2002 ~~nor~~Annual isReport ~~expected~~on toForm ~~incur~~10-K, ~~substantial~~respectively, ~~short~~under “Other Litigation-~~term~~Settlement ~~debt~~of Litigation Related to Power Supply Contracts with the CDWR” and Item 8, Notes T and P, Subsequent Events, for AE and AE Supply, respectively, in their 2001 Annual Report on Form 10-K, for additional information.) On September 15, 2003, Allegheny completed the ~~remainder~~sale of the ~~year~~CDWR contract and associated hedge transactions, to J. Aron & Company, a subsidiary of The Goldman Sachs Group, Inc., for approximately $354 million. Allegheny has applied $214 million of the sale proceeds to required payments under agreements entered into to terminate tolling agreements with Williams Energy Marketing and Trading Company (Williams) and Las Vegas Cogeneration II (LV Cogen), a unit of Black Hills Corporation, as described below. Allegheny will apply an additional $28 million of the proceeds to make required payments in

~~SIGNIFICANT~~36 ~~CONTINUING ISSUES~~

ElectricTable Energyof CompetitionContents

~~The~~ March ~~electricity~~and ~~supply~~September ~~segment~~ of 2004 under the ~~energy~~agreement ~~industry~~with inWilliams. ~~the~~Approximately ~~United~~$26 ~~States~~million is ~~becoming~~being ~~increasingly~~held ~~competitive.~~in ~~The~~a ~~national~~pledged ~~Energy~~account ~~Policy~~for ~~Act~~the benefit of ~~1992~~AE Supply’s ~~led~~creditors. This arrangement is intended to ~~market-based~~enhance ~~regulation~~AE Supply’s ability to refinance certain unsecured borrowings. Approximately $71 million of the ~~wholesale~~sale ~~exchange~~proceeds ofwere ~~power~~placed ~~within~~in escrow for the ~~electric~~benefit ~~industry~~of byJ. ~~permitting~~Aron ~~the~~& ~~FERC~~Company, pending toAllegheny’s ~~compel~~fulfillment ~~electric~~of ~~utilities~~certain topost-closing ~~allow~~requirements. ~~third~~When ~~parties~~the toescrowed ~~sell~~funds ~~electricity~~are toreleased, ~~wholesale~~approximately ~~customers~~$50 ~~over~~million ~~their~~will ~~transmission~~be ~~systems.~~added ~~The~~to ~~Company~~the pledged account and ~~its~~AE ~~parent,~~Supply ~~Allegheny~~will ~~Energy,~~receive ~~continue~~the tobalance. beThe ~~advocates~~remaining $15 million of ~~federal~~sale proceeds ~~legislation~~have been used to ~~remove~~partially ~~artificial~~offset ~~barriers~~certain of the hedges related to ~~competition~~the inCDWR ~~electricity~~contract ~~markets,~~and ~~avoid~~to ~~regional~~pay ~~dislocations,~~fees and ~~ensure~~expenses aassociated ~~level~~with ~~playing~~the ~~field~~transaction.

~~Monongahela~~Agreement ~~Power~~to Terminate Williams Toll. In July 2003, AE Supply entered into a conditional agreement with Williams to terminate its 1,000 MW tolling agreement with Williams. Under the agreement, AE Supply made an initial payment to Williams of approximately $2.4 million to satisfy certain amounts under a related hedge agreement. Allegheny made a $100 million payment to Williams after the close of the sale of the CDWR contract. Allegheny will make two payments of $14 million to Williams in March and September of 2004. The tolling agreement will terminate when the final $14 million payment is made.

~~and~~Termination ~~Subsidiaries~~of LV Cogen Toll. In mid-September, 2003, AE Supply terminated its 222 MW tolling agreement with LV Cogen. Allegheny made a $114 million termination payment to LV Cogen after the closing of the sale of the CDWR contract.

28In September 2003, AE Supply exited the Western United States energy trading markets. As a result, Allegheny recorded a net loss of approximately $101.6 million and $520 million for the three and nine months ended September 30, 2003, respectively. This loss is recorded as a component of net revenues in the consolidated statements of operations for the three and nine months ended September 30, 2003. This loss was determined without including the approximately $71 million of sale proceeds that were placed in escrow pending Allegheny’s fulfillment of certain post-closing requirements.

Refocusing Trading Activities: atAdoption ~~the~~of ~~Federal~~Asset-Based ~~Level~~Trading Strategy. AE Supply is reorienting its trading operations from high-volume financial trading in national markets to asset optimization and hedging within its

~~The~~37 U.S. House and Senate each have passed energy bills and a conference representing the two chambers is in the initial stages of reconciling the two pieces of legislation. A final conference report is expected to be one of the last matters to be dealt with by this Congress prior to adjournment, probably in September or October of 2002. Included in energy legislation passed by the Senate and favorably considered by the House are restructuring provisions including the repeal or significant revision of the Public Utility Holding Company Act of 1935 (PUHCA), which is an issue of primary importance to the Company. Among other issues that will be considered by the conference are revisions of Section 210 (Mandatory Purchase Provisions) of the PURPA and the possibility of a renewable portfolio standard mandate, resolution of transmission issues and possibly RTOs.

CongressionalTable interest has increased concerning the replacement of the piecemeal federal approach to improving air quality with a more comprehensive strategy to regulate Clean Air Act pollutants - sulfur dioxide (SO2), nitrogen oxides (NOX), and mercury. The current Administration has drafted and sent to Congress the Clear Skies legislation, which is its attempt at accomplishing this strategy. While its introduction so late in the session in all likelihood prevents meaningful action in this Congress, it is drawing serious debate and is expected to be reintroduced in 2003. Another pending proposal in the current Congress would require carbon dioxide (CO2) emission reductions. Legislation to regulate SO2, NOX, mercury, and CO2 was approved by the Senate Environment and Public Works Committee. However, a number of both political and technical impediments will likely prevent any further action before Congress adjourns this year.Contents

~~West~~ region. ~~Virginia~~AE ~~Activities~~Supply implemented this rebalancing by exiting the Western United States energy markets, together with unwinding substantial non-core trading positions which has enabled AE Supply to reduce long-term trading-related cash outflows and collateral obligations. In the future, AE Supply will seek to concentrate its efforts in the PJM, Midwest, and Mid-Atlantic markets where it has a physical presence and greater market knowledge. Ultimately, AE Supply intends to conduct asset optimization and hedging activities with the primary objective of locking in cash flows associated with AE Supply’s portfolio of core physical generating and load positions.

OnAs ~~March~~part ~~11,~~of ~~2000,~~refocusing ~~the~~its ~~West~~activities, ~~Virginia~~AE ~~Legislature~~Supply ~~approved~~moved anits energy ~~electric~~marketing ~~restructuring~~operations ~~plan~~from ~~that~~New ~~would~~York ~~open~~to ~~the~~Monroeville, ~~State~~Pennsylvania toin ~~full~~May ~~retail~~2003. ~~competition,~~This ~~but~~transition ~~assigned~~resulted ~~tax~~in ~~issues~~ongoing ~~surrounding~~cost ~~the~~savings ~~plan~~and toimproved aintegration ~~legislative~~with ~~subcommittee~~AE ~~for~~Supply’s ~~further~~generation ~~study~~activity. The ~~start~~reduced ~~date~~staffing oflevels ~~competition~~reflect ~~was~~the ~~made~~newly revised ~~contingent~~focus ~~upon~~of the ~~necessary~~trading ~~tax~~function. ~~changes~~Management ~~being~~believes ~~made~~that ~~and~~both ~~implementation~~trading ~~being~~and ~~approved~~marketing byand ~~the~~generation ~~Legislature.~~operations ~~The~~can ~~Company~~be ~~worked~~enhanced ~~with~~by ~~the~~locating ~~West~~trading ~~Virginia~~personnel ~~Public~~closer ~~Utility~~to ~~Commission~~personnel ~~(West~~managing ~~Virginia~~AE ~~PSC)~~Supply’s ~~to transfer its~~ generating assets. toPersonnel ~~Allegheny~~involved ~~Energy Supply pending implementation of~~ in the ~~restructuring~~separate ~~plan.~~functions Nocan ~~final~~be ~~legislative~~cross-trained ~~action~~and ~~was~~will ~~taken~~be inbetter ~~2001~~positioned orto ~~during~~enhance ~~this~~the ~~year's~~relationship ~~legislative~~between ~~session, and~~ the ~~current~~two ~~climate~~functions. ~~regarding restructuring makes it unlikely~~

~~that~~Asset ~~the~~Sales: ~~existing~~In ~~plan will be advanced. Accordingly~~2002, Allegheny ~~Energy~~announced ~~Supply~~that noit ~~longer~~was ~~anticipates~~considering ~~receiving~~asset ~~the~~sales ~~Company's~~as ~~jurisdictional~~part ~~generating~~of ~~assets~~an ~~pursuant~~overall strategy to ~~the~~address ~~previously~~its ~~approved~~liquidity ~~restructuring plan~~requirements. Allegheny Onhas ~~June~~achieved ~~28, 2002,~~ the ~~West~~sale ~~Virginia~~of ~~PSC dismissed~~ its ~~electric~~most ~~restructuring~~significant ~~case~~assets ~~from~~with ~~its~~a ~~docket,~~nexus ~~and~~to the ~~Company~~Western ~~cannot~~United ~~predict~~States. ~~when~~Allegheny ~~the~~has ~~State~~also ~~may~~completed ~~revisit~~the ~~electric~~sale ~~deregulation.~~of ~~The~~its ~~Company~~interest ~~is,~~in ~~however,~~the ~~currently~~Conemaugh ~~negotiating~~Generating Station (Conemaugh), ~~among~~as ~~other~~described ~~things,~~below. Allegheny continues to ~~transfer~~consider ~~certain~~the ~~generating~~sale ~~capacity~~of toadditional ~~Allegheny~~assets, ~~Energy~~especially ~~Supply~~non-core assets, including Mountaineer.

~~Monongahela~~Land Sales. Effective February 14, 2002, West Penn, through its subsidiary The West Virginia Power & Transmission Company, sold 12,000 acres of land in Canaan Valley, West Virginia to the U.S. Fish & Wildlife Service for $16 million. Effective December 18, 2002, it also sold a 2,468 acre tract of land for $6.9 million and made a charitable contribution of a 740 acre tract in Canaan Valley, West Virginia to Canaan Valley Institute.

Fellon-McCord and ~~Subsidiaries~~Alliance Energy Services, LLC. Effective December 31, 2002, AE sold Fellon-McCord, its natural gas and electricity consulting and management services firm, and Alliance Energy Services, LLC (Alliance Energy Services), a provider of natural gas supply and transportation services, to Constellation Energy Group for approximately $21.8 million. The sale of these entities resulted in a loss of $18.8 million, net of income taxes, which was recorded in December 2002.

29Conemaugh Generating Station. On June 27, 2003, AE Supply completed the sale of its 83 MW share of the coal-fired Conemaugh Generating Station, located near Johnstown, Pennsylvania, to a subsidiary of UGI Development Corporation (UGI) for approximately $46.3 million, which does not include a contingent amount of $5 million. This contingent amount could be received in full, in part, or not at all, depending upon AE Supply’s performance of certain post-closing obligations.

~~Environmental~~Restructuring ~~Issues~~and Cost Reduction Initiatives: Allegheny has taken several actions to align its operations with its strategy and reduce its cost structure.

~~The~~Termination ~~Environmental~~of ~~Protection~~Non-Core ~~Agency's~~Construction ~~(EPA)~~Activity. ~~nitrogen~~In ~~oxides (NOX) State Implementation Plan (SIP) call regulation has been under litigation and~~2002, onAE ~~March~~Supply 3,ceased ~~2000,~~construction ~~the United States Court of Appeals issued a decision that upheld the regulation. However, state~~ and ~~industry~~planning ~~litigants filed an appeal~~ of ~~that~~various ~~decision~~merchant ingeneration ~~April~~projects to ~~2000.~~attempt ~~On June 23, 2000, the Court denied the request for the appeal. Although the Court did issue an order~~ to ~~delay~~conserve ~~the~~cash ~~compliance date from May 1, 2003, until May 31, 2004, both the Maryland~~ and ~~Pennsylvania~~other ~~state~~resources rules to implement the EPA NOX SIP call regulation still require compliance by May 1, 2003. West Virginia has issued a final rule that would require compliance by May 1, 2004. The EPA Section 126 petition regulation also requires the same level of NOX reductions as the EPA NOX SIP call regulation and ~~was~~focus also under litigation in the United States Court of Appeals. A Court decision in May 2001 upheld the rule. In August 2001, the Court issued an order that suspended the Section 126 petition rule May 1, 2003, compliance date pending EPA review of the growth factors used to calculate the state NOX budgets. In January 2002, the EPA announced its ~~intention~~resources to revise the Section 126 petition rule compliance date from May 1, 2003, to May 31, 2004. The Company's compliance with such stringent regulations will require the installation of post-combustion control technologies on ~~most of~~ its ~~power~~core ~~stations.~~generating ~~The Company's construction forecast includes the expenditure of $52~~assets.4 ~~million of capital costs during the 2002 through 2003 period to comply with these regulations.~~

~~Other~~38 ~~Litigation~~

InTable the normal course of business, the Company becomes involved in various legal proceedings. The Company does not believe that the ultimate outcome of these proceedings will have a material effect on its results of operations, cash flows, or financial position. See Note 10 to the Consolidated Financial Statements for additional information regarding environmental matters and litigation, including asbestos litigation.Contents

~~Item~~Restructuring 3of Operations. ~~Quantitative~~In July 2002, Allegheny announced a restructuring plan intended to strengthen its financial performance by, among other things, reducing its workforce. Allegheny has achieved workforce reductions of more than ten percent through a voluntary Early Retirement Option (ERO) program and ~~Qualitative~~selected ~~Disclosure~~staff ~~About~~reductions. ~~Market~~In ~~Risk~~the 2002 calendar year, approximately 600 eligible employees accepted the ERO program resulting in a charge of $82.6 million, before income taxes. Allegheny will continue to take actions intended to reduce costs and improve productivity in all of its operations.

~~The~~Suspension ~~Company~~of isDividends. ~~exposed~~The toBoard ~~market~~of ~~risks~~Directors ~~associated~~of ~~with~~AE ~~commodity~~determined ~~prices~~not ~~and~~to declare ~~interest~~a ~~rates.~~dividend ~~The~~on ~~commodity~~AE’s ~~price~~common ~~risk~~stock ~~exposure~~for ~~results from market fluctuations in~~ the ~~price~~fourth ~~and~~quarter ~~transportation costs~~ of ~~electricity and natural gas as discussed below~~2002. ~~The~~Covenants ~~interest~~contained ~~rate risk exposure results from changes~~ in ~~interest rates related to commercial paper and fixed-rate debt. The Company is mandated by~~ Allegheny ~~Energy'~~’s ~~Board~~new ofBorrowing ~~Directors~~Facilities toentered ~~engage~~into in aFebruary ~~program that systematically identifies~~2003, ~~measures, evaluates,~~ and ~~actively~~in ~~manages~~the ~~and~~indenture ~~reports~~entered oninto ~~market-driven~~in ~~risks.~~connection ~~Allegheny~~with ~~Energy~~the ~~has~~issuance ~~a Corporate Energy Risk Policy adopted by Allegheny Energy's Board~~ of ~~Directors~~the convertible ~~and~~trust ~~monitored~~preferred bysecurities ain ~~Risk~~July ~~Management~~2003, ~~Committee~~as ~~chaired~~well byas ~~Allegheny~~regulatory ~~Energy's~~limitations ~~Chief~~under ~~Executive~~PUHCA, ~~Officer~~are ~~and~~expected ~~composed~~to ofpreclude ~~members~~AE offrom ~~senior~~declaring ~~management.~~or Anpaying ~~independent~~cash ~~risk~~dividends ~~management~~for ~~group within Allegheny Energy actively measures and monitors~~ the ~~risk~~foreseeable ~~exposures to ensure compliance with the policy and it is periodically reviewed~~future.

AsElimination ~~part~~ of ~~the~~Preemptive ~~Company's~~Rights. ~~efforts~~On toMarch ~~spur~~14, ~~electric~~2003, ~~deregulation~~AE’s incommon ~~West~~stockholders ~~Virginia,~~approved an ~~the~~amendment ~~Company agreed~~ to ~~terminate~~AE’s ~~its~~articles ~~expanded~~of ~~net~~incorporation ~~energy~~eliminating ~~cost~~common ~~(fuel~~stockholders’ ~~clause)~~preemptive ~~effective July 1, 2000~~rights. ~~However,~~The ~~the~~elimination ~~West~~of ~~Virginia~~preemptive ~~deregulation~~rights ~~process~~removes ~~has~~an ~~stalled~~obstacle ~~with~~to ~~advancement~~AE’s ofability ~~the~~to ~~current~~privately ~~plan~~place ~~unlikely.~~equity Asor aconvertible securities.

~~Monongahela~~Improving ~~Power~~Internal Controls and Reporting: Commencing in the third quarter of 2002, Allegheny undertook a comprehensive and extended review of its financial information and internal controls and procedures. This review included extensive involvement by top management and directors, independent auditors and other outside professional services firms. Allegheny continues to address its controls environment and reporting procedures, as well as its SEC filing and other outstanding reporting obligations. See Part I, Item 4, “Controls and Procedures,” below, for a detailed discussion.

Associated Risks: There are many attendant risks, both with Allegheny’s current liquidity situation and ~~Subsidiaries~~the measures that have been undertaken to remedy the situation in the short-term. These risks can be viewed as liquidity risks associated with the Borrowing Facilities, asset sales risks, and restructuring risks.

30Liquidity Risks Associated with the Borrowing Facilities: These risks would include increased interest rate risk and additional borrowing costs. Also, required prepayments under the Borrowing Facilities will absorb a large portion of future estimated cash flows and will limit Allegheny’s ability to raise capital for purposes other than debt repayment.

~~result,~~Asset ~~the~~Sales ~~Company~~Risks: isIf ~~subject~~asset tosales ~~capped~~do ~~rates~~occur, ~~from~~it ais ~~revenue~~likely ~~standpoint~~that ~~without~~they ~~the~~would ~~existence~~not ofbe aat ~~fuel~~terms ~~clause~~as tofavorable ~~offset~~as ~~fluctuations in~~ the market ~~price~~conditions ofexisting ~~fuel.~~when ~~In order to manage~~ the ~~Company's~~assets ~~financial~~were originally ~~exposure~~acquired. toThis ~~these~~situation ~~price~~could ~~fluctuations,~~expose ~~the~~Allegheny ~~Company~~to ~~routinely~~a ~~enters~~loss ~~into contracts, such as fuel and natural gas purchase commitments~~ in ~~order~~value toon ~~reduce~~those ~~its risk exposure~~assets. ~~To the extent that the Company purchases fuel and natural gas at significantly higher prices, the Company's results of operations could be adversely affected.~~

AsRestructuring aRisks: ~~result~~In ofassociation with the ~~Company's~~workforce ~~restructuring plan in Ohio~~reductions, ~~the Company unbundled its rates in Ohio to reflect three separate charges~~winding-adown ~~generation~~and ~~(or~~relocation ~~supply)~~of ~~charge,~~the aenergy ~~Restructuring~~trading ~~Transition Charge~~operations, and ~~transmission~~the ~~and~~cancellation ~~distribution~~of ~~(T&D)~~construction ~~charges.~~projects, ~~The~~Allegheny ~~generation~~is ~~rates~~faced ~~applied~~with tothe risk ~~customers~~of ~~not~~losing ~~choosing~~experienced anpersonnel, ~~alternate~~diverting ~~generation~~management ~~supplier~~resources ~~are~~away ~~capped~~from ~~through~~continuing aoperations, ~~transition~~and ~~period~~failing ~~that~~to ~~ends~~realize ~~December~~anticipated ~~31,~~cost ~~2005~~reductions.

~~Pursuant~~39 to agreements, Allegheny Energy Supply provides the Company with the amount of electricity needed for those Ohio customers not choosing an alternate generation supplier during the transition period. Under the rate schedule approved by the FERC effective January 1, 2001, a portion of the electricity purchased from Allegheny Energy Supply has a market-based pricing component that could result in higher electricity prices when market prices exceed the fixed prices (corresponding to the capped generation rates). Purchased electricity prices would never be set below the established fixed prices. The amount of electricity purchased under this rate schedule that is subject to market prices escalates each year through 2005. To the extent that the Company purchases electricity from Allegheny Energy Supply at market prices that exceed the established fixed prices, the Company's results of operations could be adversely affected. For the three and six months ended June 30, 2002, the Company incurred $.5 million and $1.1 million, respectively, of additional purchased electricity costs due to the market-based pricing component of the revised rate schedule. The Company incurred no such costs in the three and six months ended June 30, 2001.

31Table of Contents

~~MONONGAHELA~~ There ~~POWER~~is ~~COMPANY~~no ~~AND~~guarantee ~~SUBSIDIARIES~~that Allegheny will be able to complete its plan to strengthen its liquidity in the short-term and move to its long-term strategy of remaining an integrated energy company with a focus on its fundamental power generation and delivery businesses.

~~Part~~Other IIMatters -Concerning ~~Other~~Liquidity ~~Information~~and toCapital ~~Form~~Requirements: 10Allegheny’s wholesale marketing, energy trading, fuel procurement, and risk management activities require direct and indirect credit support. The amount of credit support required is affected by market price changes for electricity, natural gas, and other energy-Qrelated commodities and Allegheny’s credit rating. Such credit support might be in the form of letters of credit, cash deposits, or liquid securities.

~~for~~For ~~Quarter~~2002 ~~Ended~~and ~~June~~2003, 30Allegheny’s cash flows were adequate to meet all of its payment obligations and to fund capital expenditures. Allegheny expects that cash flows from operations will not be sufficient in 2004 to cover future obligations, ~~2002~~including capital expenditure requirements. Allegheny expects that it will need to arrange for alternative financing or sell certain assets in order to repay the principal amounts under the Borrowing Facilities scheduled for the third and fourth quarters of 2004.

~~ITEM~~Allegheny 5continues to seek to refinance the outstanding debt of AE and AE Supply with banks and other financial institutions and has filed an application with the SEC for approval for the refinancing. There is no assurance that SEC approval will be obtained or, if the approval is obtained, that AE and AE Supply will be able to refinance their indebtedness on satisfactory terms or at all.

~~Exhibit~~NOTE ~~99.1~~3: -ENERGY ~~Sarbanes-Oxley~~TRADING ~~Act~~ACTIVITIES ~~CEO/CFO Certification~~

~~ITEM~~The net 6fair value of AE Supply’s commodity contracts decreased by $156.9 million for the nine months ended September 30, 2002 as a result of $181.0 million of unrealized losses recorded during the first nine months of 2002 primarily due to changes in market conditions, and $24.1 million of net options paid and received during the first nine months of 2002. Included as part of the decrease for the nine months ended September 30, 2002 are $356.2 million of net unrealized losses recorded in the three month period ended September 30, 2002. These net unrealized losses are the result of a change in valuation techniques and assumptions and market related assumptions. There has been, and may continue to be, significant volatility in the market prices for electricity and natural gas at the wholesale level, which will affect AE Supply’s operating results.

(In June 2002, the EITF reached a consensus on Issue No. 02-3 that mark-to-market gains and losses on energy trading contracts (whether realized or unrealized) ~~Exhibit~~ ~~12 Computation~~should ofbe shown ~~ratio~~net in the consolidated statement of ~~earnings~~operations. This consensus was applicable to ~~fixed~~financial ~~charges~~statements for periods ending after July 15, 2002. During 2002, Allegheny modified its reporting as a result of the EITF consensus to reflect the ~~(b) No~~revenues ~~reports~~from onenergy ~~Form~~trading ~~8-K~~activities net of the cost of purchased energy and transmission related to contracts that require physical delivery. In addition, amounts for the three and nine months ended September 30, 2001 were ~~filed~~adjusted onfor comparability ~~behalf~~to reflect the adoption of the ~~Company~~EITF consensus. As a result, Allegheny’s operating revenues and cost of revenues for the ~~quarter~~ three and nine months ended ~~June~~September 30, ~~2002~~2001 are lower than previously reported, with no effect on consolidated net revenues or net income.

32In accordance with EITF 02-3, energy trading revenues are reported net of purchased energy, which has resulted in negative revenue amounts for the three and nine months ended September 30, 2002 of $318.9 million and $207.2 million respectively.

~~Signature~~40

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

~~MONONGAHELA~~NOTE ~~POWER~~4: ~~COMPANY /s/ R.~~GOODWILL K.AND ~~Clark . R.~~OTHER K.INTANGIBLE ~~Clark,~~ASSETS ~~Controller (Chief Accounting Officer)~~

~~August~~Effective 14January 1, 2002, Allegheny, AE Supply, Monongahela, Potomac Edison, West Penn, and AGC adopted SFAS No. 142, “Goodwill and Other Intangible Assets.”

If the provisions of SFAS 142 had been applied for 2001, reported consolidated net (loss) income and (loss) earnings per share adjusted to exclude amortization expense for the three and nine months ended September 30, 2002, and 2001, would have been as follows for Allegheny:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2002			2001		2002			2001
Net consolidated (loss) income:
As reported	$	(263.0	)	$	165.7	$	(350.9	)	$	353.2
Add: Goodwill amortization, net of income tax		—			3.8		—			11.5

As adjusted	$	(263.0	)	$	169.5	$	(350.9	)	$	364.7

Basic (loss) earnings per share:
As reported	$	(2.09	)	$	1.33	$	(2.80	)	$	2.98
Add: Goodwill amortization, net of income tax		—			0.03		—			0.10

As adjusted	$	(2.09	)	$	1.36	$	(2.80	)	$	3.08

Diluted (loss) earnings per share:
As reported	$	(2.09	)	$	1.32	$	(2.80	)	$	2.97
Add: Goodwill amortization, net of income tax		—			0.03		—			0.10

As adjusted	$	(2.09	)	$	1.35	$	(2.80	)	$	3.07

Of the $3.8 million and $11.5 million stated above for the three and nine months ended September 30, 2001, approximately $3.0 million and $9.0 million, respectively, represent the goodwill amortization included in AE Supply’s results of operations and the remaining $0.8 million and $2.5 million, respectively, represent goodwill amortization included in Monongahela’s results of operations.

The carrying amount of, and changes in, goodwill attributable to each reportable operating segment are as follows:

*(In millions)*	Dec 31, 2001		Acquisition		Impairment			Disposal		Sep 30, 2002
Delivery and Services	$	236.3	$	4.5	$	(210.1	)	$	—	$	30.7
Generation and Marketing		367.3		—		—			—		367.3

Total	$	603.6	$	4.5	$	(210.1	)	$	—	$	398.0

The components of other intangible assets are as follows:

	As of September 30, 2002				As of December 31, 2001
*(In millions)*	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Reported as intangible assets on the consolidated balance sheets:
Natural gas retail contracts, amortized	$	47.5	$	36.0	$	51.8	$	10.2
Other, unamortized		—		—		1.4		—

		47.5		36.0		53.2		10.2
Included in property, plant, and equipment on the consolidated balance sheets:
Land easements, amortizable		96.8		23.8		96.3		22.6
Land easements, unamortizable		31.6		—		31.6		—
Natural gas rights		6.6		3.5		6.6		3.2

Total	$	182.5	$	63.3	$	187.7	$	36.0

Amortization of intangible assets was $5.4 million and $0.3 million for the three months ended September 30, 2002, and 2001, respectively, and $27.3 million and $1.2 million for the nine months ended September 30, 2002, and 2001, respectively. For the nine months ended September 30, 2002, approximately $25.8 million of amortization was related to Alliance Energy Services.

Amortization expense is estimated to be $1.5 million annually for 2003 through 2007.

NOTE 5: WORKFORCE REDUCTION EXPENSES

In July 2002, Allegheny announced a restructuring plan to strengthen its financial performance. The restructuring activities included a company-wide workforce reduction and a reorganization of Allegheny’s energy trading division.

Allegheny has achieved workforce reductions of approximately ten percent, most of which occurred in 2002, primarily through a voluntary early retirement option (ERO) program and selected staff reductions. The ERO program offered enhanced pension and medical benefits and required eligible employees to make an election by September 16, 2002. The costs for the workforce reduction under the ERO program were determined in accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” For the year ended December 31, 2002, approximately 600 eligible employees accepted the ERO program, resulting in a charge of $82.6 million, before income taxes ($49.5 million, net of income taxes). Allegheny also offered a Staffing Reduction Separation Program (SRSP) for employees whose positions were being eliminated as part of the workforce reductions and severance for certain energy trading employees. The severance and other employee-related costs have been accounted for in accordance with EITF 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” For the year ended December 31, 2002, Allegheny recorded a charge of $25.0 million, before income taxes ($15.3 million, net of income taxes) related to approximately 80 employees whose positions have been eliminated. Workforce reduction costs have been recorded in “Workforce reduction expenses” on the consolidated statements of operations.

Of the total 2002 pre-tax workforce reduction expense of $107.6 million, $104.2 million, before income taxes, was recorded during the three and nine months ended September 30, 2002. Of the $104.2 million in charges incurred, approximately $10 million was paid out during the three month period ended September 30, 2002, approximately $82.6 million is recorded as a pension and post-retirement benefit in Allegheny’s consolidated balance sheet and approximately $8.0 million is recorded as a current liability in Allegheny’s consolidated balance sheet. A majority of the $8.0 million is owed by AE Supply. For additional information see the Restructuring Charges and Workforce Reduction Expenses notes to the consolidated financial statements in the 2002 Annual Report on Form 10-K (Item 8, Note 8 for AE and AE Supply) and the Workforce Reduction Expenses notes to the consolidated financial statements in the 2002 Annual Report on Form 10-K (Item 8, Note 6 for Monongahela, Note 4 for Potomac Edison and West Penn, and Note 3 for AGC.)

NOTE 6: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Allegheny utilizes derivative instruments to manage its exposures to various market risks as described in its 2002 and 2001 Annual Reports 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, to the consolidated financial statements in Allegheny’s 2002 Annual Report on Form 10-K and Item 8, Notes I and E, Energy Trading Activities, and Item 8, Notes J and F, Derivative Instruments and Hedging Activities, in Allegheny’s 2001 Annual Report on Form 10-K.

For the nine months ended September 30, 2002, Allegheny owned Alliance Energy Services, which was subsequently sold in December 2002. Alliance Energy Services, on behalf of its customers, used both physical and financial derivative contracts, including forwards, NYMEX futures, options and swaps, in order to minimize market risk associated with its energy purchase and sales activities. These derivative contracts were accounted for as cash flow hedges. These hedges were highly effective for the three and nine months ended September 30, 2002.

NOTE 7: OTHER COMPREHENSIVE INCOME

Allegheny’s comprehensive income, and the components of other comprehensive income, net of income taxes, for the three and nine months ended September 30, 2002, and 2001, were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
Consolidated net (loss) income	$	(263.0	)	$	165.7		$	(350.9	)	$	353.2
Other comprehensive income (loss), net of income taxes
Unrealized holding (losses) gains on available for sale securities, net of income taxes		(0.1	)		0.4			—			0.2
Reclassification adjustment for (losses) gains included in net (loss) income, net of income taxes		0.4			(0.9	)		1.3			(1.1	)

Net unrealized (losses) gains on available for sale securities		0.3			(0.5	)		1.3			(0.9	)

Unrealized gains on cash flow hedges, net of income taxes		8.0			6.2			33.7			1.6
Reclassification adjustment for (losses) included in net (loss) income, net of income taxes		(0.8	)		(3.1	)		(8.7	)		(3.1	)
Cumulative effect of accounting change – gain on cash flow hedges		—			—			—			1.5

Net unrealized gains on cash flow hedges		7.2			3.1			25.0			—

Total other comprehensive (loss) income		7.5			2.6			26.3			(0.9	)

Consolidated comprehensive net (loss) income	$	(255.5	)	$	168.3		$	(324.6	)	$	352.3

Of the net unrealized gains on cash flow hedges, net of income taxes of $7.2 million and $25.0 million for the three and nine months ended September 30, 2002, respectively, $7.1 million and $26.0 million are related to Alliance Energy Services, which was sold on December 31, 2002. The remaining amounts of a net unrealized gain of $0.1 million for the three month period ended September 30, 2002, and a net unrealized loss of $1.0 million for the nine month period ended September 30, 2002 were related to AE Supply.

NOTE 8: BUSINESS SEGMENTS

All registrants, except for Allegheny and Monongahela, have only one segment. Allegheny and Monongahela manage and evaluate their operations in two business segments: 1) Delivery and Services and 2) Generation and Marketing. Prior to the second quarter of 2002, Allegheny’s reported segments were regulated utility operations, unregulated generation operations, and other unregulated operations. Business segments have been changed to reflect current internal management reporting. Prior period segment information has been restated for comparative purposes.

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.

	Allegheny
	Three Months Ended September 30,						Nine Months Ended September 30,
*(In millions)*	2002			2001			2002			2001
Total operating revenues:
Delivery and Services	$	857.8		$	678.0		$	2,561.9		$	2,145.1
Generation and Marketing		56.7			633.9			867.9			1,550.9
Eliminations		(377.4	)		(364.6	)		(1,103.0	)		(1,103.6	)

Total	$	537.1		$	947.3		$	2,326.8		$	2,592.4

Operating (loss) income:
Delivery and Services	$	28.7		$	97.2		$	189.2		$	328.9
Generation and Marketing		(349.2	)		235.4			(301.2	)		484.8
Eliminations		1.7			—			(3.3	)		—

Total	$	(318.8	)	$	332.6		$	(115.3	)	$	813.7

Consolidated (loss) income before cumulative effect of accounting change:
Delivery and Services	$	(23.2	)	$	41.3		$	41.9		$	137.6
Generation and Marketing		(240.6	)		124.4			(260.1	)		246.7
Eliminations		0.8			—			(2.2	)		—

Total	$	(263.0	)	$	165.7		$	(220.4	)	$	384.3

Cumulative effect of accounting change, net:
Delivery and Services	$	—		$	—		$	(130.5	)	$	—
Generation and Marketing		—			—			—			(31.1	)

Total	$	—		$	—		$	(130.5	)	$	(31.1	)

Consolidated net (loss) income:
Delivery and Services	$	(23.2	)	$	41.3		$	(88.6	)	$	137.5
Generation and Marketing		(240.6	)		124.4			(260.1	)		215.7
Eliminations		0.8			—			(2.2	)		—

Total	$	(263.0	)	$	165.7		$	(350.9	)	$	353.2

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.

	Monongahela
	Three Months Ended September 30,						Nine Months Ended September 30,
*(In millions)*	2002			2001			2002			2001
Total operating revenues:
Delivery and Services	$	187.1		$	180.3		$	636.7		$	644.7
Generation and Marketing		91.2			90.2			238.1			286.8
Eliminations		(76.2	)		(68.1	)		(210.5	)		(223.7	)

Total	$	202.1		$	202.4		$	664.3		$	707.8

Operating (loss) income:
Delivery and Services	$	(10.4	)	$	16.8		$	37.3		$	82.3
Generation and Marketing		5.2			19.6			—			52.2

Total	$	(5.2	)	$	36.4		$	37.3		$	134.5

Consolidated (loss) income before cumulative effect of accounting change:
Delivery and Services	$	(11.0	)	$	6.0		$	8.0		$	36.9
Generation and Marketing		1.8			12.0			(4.1	)		30.6

Total	$	(9.2	)	$	18.0		$	3.9		$	67.5

Cumulative effect of accounting change, net:
Delivery and Services	$	—		$	—		$	(115.4	)	$	—
Generation and Marketing		—			—			—			—

Total	$	—		$	—		$	(115.4	)	$	—

Consolidated net (loss) income:
Delivery and Services	$	(11.0	)	$	6.0		$	(107.4	)	$	36.9
Generation and Marketing		1.8			12.0			(4.1	)		30.6

Total	$	(9.2	)	$	18.0		$	(111.5	)	$	67.5

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 sheet, decreased as follows for the three and nine months ended September 30, 2002, and 2001:

Three Months

Ended

September 30,

Nine Months

Ended

September 30,

(In millions)

2002

2001

2002

2001

Decrease in adverse power purchase commitments

5.8

6.2

17.3

18.6

NOTE 10: EARNINGS PER SHARE

Allegheny’s average basic and diluted shares for purposes of computing earnings per share for the three and nine months ended September 30, 2002, and 2001, were as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2002	2001	2002	2001
Basic common shares outstanding	125,691,877	124,866,568	125,460,716	118,434,527
Shares contingently issuable	*	435,789	*	485,695
Diluted common shares outstanding	125,691,877	125,302,357	125,460,716	118,920,222

*	Effects not included as amounts are not dilutive.

The excluded shares of common stock from the diluted common shares outstanding, listed above, that are contingently issuable under Allegheny’s stock option plans for the three and nine months ended September 30, 2002, and 2001, were as follows:

Three Months Ended

September 30,

Nine Months Ended

September 30,

2002

2001

2002

2001

Shares contingently issuable

328,282

—

328,282

—

NOTE 11: OTHER INCOME AND EXPENSES, NET

Other income and expenses, net, represent non-operating revenues and expenses before income taxes. The following table summarizes Allegheny’s other income and expenses, net, for the three and nine months ended September 30, 2002, and 2001.

	Three Months Ended September 30,						Nine Months Ended September 30,
*(In millions)*	2002			2001			2002			2001
Allegheny:
Impairment charges related to unregulated investments	$	(28.9	)	$	—		$	(42.7	)	$	—
Gain on Canaan Valley land sale		—			—			14.3			—
Gain on sale of fixed assets		—			0.3			1.8			4.1
Write down of asset held for sale		(4.8	)		—			(4.8	)		—
Interest and dividend income		1.3			1.8			4.6			4.7
Other		(2.5	)		1.2			(1.0	)		(1.7	)

Total	$	(34.9	)	$	3.3		$	(27.8	)	$	7.1

AE Supply:
Write down of asset held for sale	$	(4.8	)	$	—		$	(4.8	)	$	—
Interest and dividend income		0.6			1.2			0.9			2.0
Gain on sale of fixed assets		—			—			1.3			3.5
Other		0.1			(0.5	)		(2.7	)		(0.6	)

Total	$	(4.1	)	$	0.7		$	(5.3	)	$	4.9

Monongahela:
Gain on Canaan Valley land sale	$	—		$	—		$	1.8		$	—
Interest and dividend income		1.2			0.3			4.0			1.2
Equity in earnings of AGC		1.0			0.7			3.1			3.6
Other		(1.5	)		0.5			(3.4	)		0.3

Total	$	0.7		$	1.5		$	5.5		$	5.1

Potomac Edison:
Maryland coal brokering fees	$	—		$	—		$	—		$	(0.4	)
Other		(0.2	)		0.1			0.5			0.1

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