Summary of ALLEGHENY ENERGY, INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Financial Statements and Notes to Financial Statements included in this report, as well as the Financial Statements and Supplementary Data and Management's Discussion and Analysis of Financial Condition and Results of Operations included in Allegheny's Annual Report on Form 10-K for the year ended December 31, 2008 (the "2008 Annual Report on Form 10-K"). Forward-Looking Statements
In addition to historical information, this report contains a number of forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as anticipate, expect, project, intend, plan, believe and words and terms of similar substance used in connection with any discussion of future plans, actions or events identify forward-looking statements. These include statements with respect to:
• regulatory matters, including but not limited to environmental regulation, state rate regulation, and the status of retail generation service supply competition in states served by the Distribution Companies;

• financing plans;

• market demand and prices for energy and capacity;

• the cost and availability of raw materials, including coal, and Allegheny's ability to enter into and enforce long-term fuel purchase agreements;

• provider-of-last-resort ("PLR") and power supply contracts;

• results of litigation;

• results of operations;

• internal controls and procedures;

• capital expenditures;

• status and condition of plants and equipment;

• changes in technology and their effects on the competitiveness of Allegheny's generation facilities;

• work stoppages by Allegheny's unionized employees; and

• capacity purchase commitments.

Forward-looking statements involve estimates, expectations and projections and, as a result, are subject to risks and uncertainties. There can be no assurance that actual results will not differ materially from expectations. Actual results have varied materially and unpredictably from past expectations. Factors that could cause actual results to differ materially include, among others, the following:
• the results of regulatory proceedings, including proceedings related to rates;

• plant performance and unplanned outages;

• volatility and changes in the price and demand for energy and capacity and changes in the value of financial transmission rights ("FTRs");

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• volatility and changes in the price of coal, natural gas and other energy-related commodities and Allegheny's ability to enter into and enforce supplier performance under long-term fuel purchase agreements;

• changes in the weather and other natural phenomena;

• changes in industry capacity, development and other activities by Allegheny's competitors;

• changes in market rules, including changes to the participant rules and tariffs for PJM Interconnection, L.L.C. ("PJM");

• the loss of any significant customers or suppliers;

• changes in customer switching behavior and their resulting effects on existing and future PLR load requirements;

• dependence on other electric transmission and gas transportation systems and their constraints on availability;

• environmental regulations;

• changes in other laws and regulations applicable to Allegheny, its markets or its activities;

• changes in the underlying inputs and assumptions, including market conditions, used to estimate the fair values of commodity contracts;

• complications or other factors that make it difficult or impossible to obtain necessary lender consents or regulatory authorizations on a timely basis;

• changes in access to capital markets, the availability of credit and actions of rating agencies;

• inflationary and deflationary trends and interest rate trends;

• the effect of accounting pronouncements issued periodically by accounting standard-setting bodies;

• any failure to consummate, or delay in the consummation of, contemplated asset sales;

• general economic and business conditions; and

• other risks, including the effects of global instability, terrorism and war.

A detailed discussion of certain factors affecting Allegheny's risk profile is provided under Item 1A, "Risk Factors," in the 2008 Annual Report on Form 10-K.

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Overview
Allegheny is an integrated energy business that owns and operates electric generation facilities and delivers electric services to customers in Pennsylvania, West Virginia, Maryland and Virginia. Allegheny operates its business primarily through AE's various directly and indirectly owned subsidiaries. These operations are aligned in two operating segments, the Delivery and Services segment and the Generation and Marketing segment. Additional information regarding the composition and activities of these segments is included in the 2008 Annual Report on Form 10-K. Key Indicators and Performance Factors
The Delivery and Services Segment
Allegheny monitors the financial and operating performance of its Delivery and Services segment using a number of indicators and performance statistics, including the following:
Revenue per megawatt-hour ("MWh") sold. This measure is calculated by dividing total revenues from retail sales of electricity by retail electricity sales. Revenue per MWh sold during the three months ended March 31, 2009 and 2008 was as follows:

Three Months Ended March 31, 2009 2008 Revenue per MWh sold $ 73.12 $ 61.83

Operations and maintenance costs ("O&M"). Management closely monitors and manages O&M in absolute terms, as well as in relation to total MWhs sold. This measure is calculated by dividing total O&M, excluding O&M related to transmission expansion, by retail electricity sales. O&M per MWh sold during the three months ended March 31, 2009 and 2008 was as follows:

Three Months Ended March 31, 2009 2008 O&M per MWh sold $ 7.29 $ 7.66

Capital expenditures. Management prioritizes and manages capital expenditures to meet operational needs and regulatory requirements within available cash flow constraints.

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Retail electricity sales. The following table provides retail electricity sales information.

                                                 Three Months Ended March 31,
                                               Normal         2009         2008       Change
  Delivery and Services:
  Retail electricity sales (million kWhs)         N/A        11,531       11,796       (2.2 )%
  HDD (a)                                       2,800         2,760        2,714        1.7 %

(a) Heating degree-days ("HDD"). The operations of the Distribution Companies are weather sensitive. Weather conditions directly influence the volume of electricity delivered by the Distribution Companies, representing one of several factors that impact the volume of electricity delivered. Accordingly, deviations in weather from normal levels can affect Allegheny's financial performance. Degree-day data is used to estimate amounts of energy required to maintain comfortable indoor temperature levels based on each day's average temperature. HDD is the measure of the variation in the weather based on the extent to which the average daily temperature falls below 65° Fahrenheit. Each degree of temperature below 65° Fahrenheit is counted as one heating degree-day. Changes in
HDD are most
likely to
impact the
usage of
Allegheny's
residential
and
commercial
customers.
Industrial
customers
are less
weather
sensitive.

The Generation and Marketing Segment
Allegheny monitors the financial and operating performance of its Generation and Marketing segment using a number of indicators and performance statistics, including the following:
kWhs generated. This is a measure of the total physical quantity of electricity generated and is monitored at the individual generating unit level, as well as by various unit groupings.
Equivalent Availability Factor ("EAF"). The EAF measures the percentage of time that a given amount of MWs from a generation unit is available to generate electricity if called upon in the marketplace. A unit's availability is commonly less than 100%, primarily as a result of scheduled outages for planned maintenance or unplanned outages and derates. The EAF is calculated based upon availability data reported to NERC and PJM. Allegheny monitors the EAF by individual unit, as well as by various unit groupings. One such grouping is all "supercritical" units. A supercritical unit utilizes steam pressure in excess of 3,200 pounds per square inch, which enables these units to be larger and more efficient than other generation units. Fort Martin, Harrison, Hatfield's Ferry and Pleasants are supercritical generation facilities that have supercritical units.
Station operations and maintenance costs ("Station O&M"). Station O&M includes base, operations and special maintenance costs. Base and operations costs consist of normal recurring expenses related to the on-going operation of the generation facility. Special maintenance costs include costs associated with outage-related maintenance and projects that relate to all of the generation facilities.

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The following table shows kWhs generated, excluding kWhs consumed by pumping at the Bath County, Virginia hydroelectric station, EAFs and Station O&M related to the Generation and Marketing segment:

                                       Three Months Ended March 31,
                                         2009                 2008          Change
     Supercritical Units:
     kWhs generated (in millions)            8,922               10,363       (13.9 )%
     EAF                                      80.5 %               89.2 %      (8.7 )%
     Station O&M (in millions):
     Base and operations            $         27.2       $         27.4        (0.7 )%
     Special maintenance                      17.1                 11.1        54.1 %

     Total Station O&M              $         44.3       $         38.5        15.1 %

     All Generation Units:
     kWhs generated (in millions)           10,106               12,541       (19.4 )%
     EAF                                      82.4 %               88.6 %      (6.2 )%
     Station O&M (in millions):
     Base and operations            $         41.5       $         41.6        (0.2 )%
     Special maintenance                      17.9                 14.1        27.0 %

     Total Station O&M              $         59.4       $         55.7         6.6 %

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RESULTS OF OPERATIONS
Income Summary

                                                 Three Months Ended                                                     Three Months Ended
                                                   March 31, 2009                                                         March 31, 2008
                           Delivery         Generation                                            Delivery         Generation
                             and               and                                                  and               and
(In millions)              Services         Marketing          Eliminations         Total         Services         Marketing          Eliminations         Total
Operating revenues        $    892.7       $      587.0       $       (522.5 )     $ 957.2       $    774.5       $      568.2       $       (467.7 )     $ 875.0

Fuel                               -              259.0                    -         259.0                -              249.8                    -         249.8
Purchased power and
transmission                   625.4               29.2               (520.7 )       133.9            535.5               27.5               (465.6 )        97.4
Deferred energy
costs, net                      (4.0 )            (13.0 )                  -         (17.0 )            3.1              (13.6 )                  -         (10.5 )
Operations and
maintenance                     87.0               82.0                 (1.8 )       167.2             91.9               78.9                 (2.1 )       168.7
Depreciation and
amortization                    40.0               28.5                    -          68.5             42.7               27.6                    -          70.3
Taxes other than
income taxes                    38.1               17.7                    -          55.8             36.1               16.4                    -          52.5

Total operating
expenses                       786.5              403.4               (522.5 )       667.4            709.3              386.6               (467.7 )       628.2

Operating income               106.2              183.6                    -         289.8             65.2              181.6                    -         246.8
Other income
(expense), net                   1.5                1.0                    -           2.5              3.4                4.2                 (1.4 )         6.2
Interest expense                26.5               30.8                    -          57.3             21.9               37.9                 (1.4 )        58.4

Income before income
taxes                           81.2              153.8                    -         235.0             46.7              147.9                    -         194.6
Income tax expense              34.8               66.1                    -         100.9             12.8               45.5                    -          58.3

Net income                      46.4               87.7                    -         134.1             33.9              102.4                    -         136.3
Less net income
attributable to
noncontrolling
interest                        (0.2 )                -                    -          (0.2 )           (0.2 )                -                    -          (0.2 )

Net income
attributable to
Allegheny Energy,
Inc.                      $     46.2       $       87.7       $            -       $ 133.9       $     33.7       $      102.4       $            -       $ 136.1

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CONSOLIDATED RESULTS
   This section is an overview of AE's consolidated results of operations, which
are discussed in greater detail by segment under the heading "Allegheny Energy,
Inc.-Discussion of Segment Results of Operations" below.
   The following table reconciles "Income before income taxes" for the three
months ended March 31, 2008 to the three months ended March 31, 2009.

(In millions)
Income before income taxes for the three months ended
March 31, 2008                                                                   $ 194.6
Increase in operating revenues                                                      82.2
Decreases (increases) in operating expenses:
Purchased power and transmission                                    (36.5 )
Fuel                                                                 (9.2 )
Deferred energy costs, net                                            6.5

Operating expenses                                                                 (39.2 )
Decrease in other income (expense), net                                             (3.7 )
Decrease in interest expense                                                         1.1

Income before income taxes for the three months ended
March 31, 2009                                                                   $ 235.0

Operating Revenues
Operating revenues increased $82.2 million for the three months ended March 31, 2009 compared to the three months ended March 31, 2008, primarily due to:
• a $44.9 million increase resulting from higher generation rates charged to Pennsylvania customers,

• a $36.1 million increase primarily due to increased sales of power to third parties,

• a $31.9 million increase due to higher rates under a rate settlement agreement in Virginia,

• a $23.2 million increase resulting from market-based generation pricing for Maryland residential customers effective January 1, 2009,

• a $20.3 million increase in unrealized gains related to pipeline capacity economic hedges that did not qualify for hedge accounting,

• a $16.8 million increase in unrealized gains relating to FTRs,

• an $18.2 million increase relating to higher prices for power, including marketing, hedging and trading activities and

• a $4.9 million increase primarily due to increased recoverable expenses and return on investment that are related to transmission expansion.

These operating revenue increases were partially offset by:
• a $92.6 million decrease due to a 19.4% decrease in total MWhs generated resulting from lower plant availability and less demand and

• a $21.4 million decrease due to the expiration of an earnings benefit related to stranded cost recovery in Pennsylvania.

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See "Regulatory Matters" for additional rate information. See Note 7, "Fair Value Measurements, Derivative Instruments and Hedging Activities," to the Consolidated Financial Statements for information regarding the recognition of unrealized gains and losses on FTRs and economic power sale hedges. Operating Expenses
Purchased power and transmission expense increased $36.5 million for the three months ended March 31, 2009 compared to the three months ended March 31, 2008, primarily due to increased purchases from third parties to serve customer load. This increase is the result of AE Supply no longer serving a portion of Potomac Edison's customer load that it did serve during 2008.
Fuel expense increased $9.2 million for the three months ended March 31, 2009 compared to the three months ended March 31, 2008, primarily due to increased fuel handling, emission allowance and other fuel expenses and increased coal expense as discussed in greater detail in "Discussion of Segment Results of Operations - Generation and Marketing Segment Results." Deferred energy costs, net decreased $6.5 million for the three months ended March 31, 2009 compared to the three months ended March 31, 2008, primarily due to the under-recovery of net costs related to the AES Warrior Run PURPA generation facility.
Other Income (Expense), net
Other income (expense), net decreased $3.7 million for the three months ended March 31, 2009 compared to the three months ended March 31, 2008, primarily due to lower interest income resulting from decreased average investments at lower rates and cash received from a former trading executive during 2008. Income Tax Expense
See Note 4, "Income Taxes," to the Consolidated Financial Statements for a reconciliation of income tax expense to income tax expense calculated at the federal statutory rate of 35%.

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                  DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
                             DELIVERY AND SERVICES
   The following table provides retail electricity sales information:

                                                 Three Months Ended March 31,
                                               Normal         2009         2008       Change
  Delivery and Services:
  Retail electricity sales (million kWhs)         N/A        11,531       11,796       (2.2 )%
  HDD                                           2,800         2,760        2,714        1.7 %


Operating Revenues
   Operating revenues were as follows:

                                                            Three Months Ended
                                                                 March 31,
     (In millions)                                           2009          2008
     Retail electric:
     Generation                                           $    615.1      $ 501.0
     Transmission                                               43.5         44.4
     Distribution                                              184.5        184.0

     Total retail electric                                     843.1        729.4

     Transmission services and bulk power                       36.9         34.8
     Other affiliated and nonaffiliated energy services         12.7         10.3

     Total operating revenues                             $    892.7      $ 774.5

Total operating revenues increased $118.2 million for the three months ended March 31, 2009 compared to the three months ended March 31, 2008, primarily due to a $113.7 million increase in retail revenues, which resulted from:
• a $44.9 million increase resulting from higher generation rates charged to Pennsylvania customers,

• a $38.3 million increase primarily due to an ENEC-related rate increase in West Virginia that went into effect on January 1, 2009,

• a $33.0 million increase primarily resulting from market-based generation pricing for Maryland residential customers effective January 1, 2009 and

• a $31.9 million increase due to higher rates under a rate settlement agreement in Virginia.

These operating revenue increases were partially offset by:
• a $21.4 million decrease due to the expiration of an earnings benefit related to stranded cost recovery in Pennsylvania and

• a decrease in generation revenue related to reduced industrial customer consumption.

See "Regulatory Matters," for additional rate information.

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                  DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
                             DELIVERY AND SERVICES
Operating Expenses
   Purchased Power and Transmission: Purchased power and transmission expense
represents power purchased from AE Supply, Monongahela's Generation and
Marketing segment and third-party suppliers, including purchases from qualifying
facilities under the Public Utilities Regulatory Policies Act of 1978 ("PURPA").
Purchased power and transmission consisted of the following items:

                                                           Three Months Ended
                                                                March 31,
     (In millions)                                          2009          2008
     Purchased power and transmission, excluding PURPA   $    583.3      $ 495.7
     From PURPA generation                                     42.1         39.8

     Purchased power and transmission                    $    625.4      $ 535.5

West Penn and Potomac Edison currently have power purchase agreements with AE Supply under which AE Supply provides West Penn and Potomac Edison with the majority of the power necessary to meet their obligations. Potomac Edison purchases the power necessary to serve its West Virginia customers from Monongahela's Generation and Marketing segment at a prorated share of overall Monongahela generation costs and associated revenue. Effective with the institution of the ENEC method of recovering net power supply costs for Allegheny's West Virginia service territory, the amount charged to Potomac Edison reflects the adjustment for over and/or under recovery. See "Regulatory Matters" for additional information.
Purchased power and transmission expense increased $89.9 million for the three months ended March 31, 2009 compared to the three months ended March 31, 2008, primarily due to:
• a $38.3 million increase, primarily due to an ENEC-related rate increase in West Virginia that went into effect on January 1, 2009,

• a $33.0 million increase, primarily due to higher rates under market-based generation pricing for Maryland residential customers effective January 1, 2009,

• a $13.5 million increase due to higher generation rates charged to Pennsylvania customers, which are passed on to AE Supply under the terms of a power supply agreement between West Penn and AE Supply, partially offset by decreased MWhs purchased and the elimination of an intercompany market rate adjustment and

• an $8.5 million increase due to higher rates for power purchased to serve customers in Virginia.

See "Regulatory Matters" for additional information.
Deferred Energy Costs, net: Deferred energy costs, net represent the deferral of certain energy costs from the period in which they were incurred to the period in which such costs are recovered in rates. Deferred energy costs related to the following:
AES Warrior Run PURPA Generation. To satisfy certain of its obligations under PURPA, Potomac Edison entered into a long-term contract beginning July 1, 2000 to purchase capacity and energy from the AES Warrior Run PURPA generation facility through the beginning of 2030. Potomac Edison is authorized by the Maryland PSC to recover all contract costs from the AES Warrior Run PURPA generation facility, net of any revenues received from the sale of AES Warrior Run output into the wholesale energy market, by means of a retail revenue surcharge (the "AES Warrior Run Surcharge"). Any under-recovery or over-recovery of net costs is being deferred pending subsequent recovery from, or return to, customers through adjustments to the AES Warrior Run Surcharge.

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DISCUSSION OF SEGMENT RESULTS OF OPERATIONS DELIVERY AND SERVICES Market-based Generation Costs. Potomac Edison is authorized by the Maryland PSC to recover the costs of the generation component of power sold to certain commercial and industrial customers who did not choose a third-party alternative generation provider. A regulatory asset or liability is recorded on Potomac Edison's balance sheet relative to any under-recovery or over-recovery for the generation component of costs charged to Maryland commercial and industrial customers. Deferred energy costs, net relate, in part, to the recovery from or payment to customers related to these generation costs, to the extent amounts paid for generation costs differ from prices currently charged to customers. In addition, under an order of the Virginia SCC, Potomac Edison was granted a rate adjustment to recover a portion of its increased purchased power costs. The . . .