Allegheny Energy Reports Third Quarter 2006 Results

Allegheny Energy, Inc. (NYSE:AYE) today reported consolidated net income of $110.2 million, or $0.65 per diluted share, for the third quarter of 2006, compared to net income of $35.7 million, or $0.21 per diluted share, for the same period in 2005. To provide a better understanding of core results and trends, Allegheny Energy also reported adjusted financial results, as shown in the table below: Three Months Ended September 30 2006 2005 $ millions Per Share $ millions Per Share Consolidated net income-GAAP $110.2  $0.65  $35.7  $0.21  Adjusted income from continuing operations 94.0  0.56  74.8  0.45  Adjusted income from continuing operations for the third quarter of 2006 excluded a $16.7 million (after-tax) benefit associated with a change in Pennsylvania tax law, and a $0.5 million (after-tax) loss from discontinued operations. Adjusted income from continuing operations for the third quarter of 2005 excluded debt redemption costs of $32.6 million (pre-tax), a $30.5 million (pre-tax) impairment charge associated with the sale of the company’s Ohio service territory and insurance proceeds of $11.0 million (pre-tax). Also excluded from the adjusted results for the third quarter in 2005 was a $7.8 million (after-tax) loss from discontinued operations. Adjusted results are non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to results reported in accordance with GAAP is attached to this release. "We achieved solid earnings growth in the third quarter, despite lower market prices,” said Paul J. Evanson, Chairman, President and Chief Executive Officer of Allegheny Energy. "Higher Pennsylvania generation rates, the expiration of a below-market contract and lower costs were the key contributors to our improved results. Power plant performance was in line with last year, even with the transformer failure at our Harrison generating unit.” Third Quarter Consolidated Results Income from continuing operations before income taxes and minority interest, as adjusted, was $152.6 million for the third quarter of 2006, an increase of $35.2 million compared to adjusted results for the same period in 2005. Key factors contributing to the improved results included: Operating revenues decreased by $28.4 million, reflecting lower market prices, the Harrison transformer failure and the expiration of a power purchase agreement with the Ohio Valley Electric Corporation (OVEC), partially offset by higher generation rates in Pennsylvania and the expiration of a below-market contract. Purchased power expense decreased by $22.1 million, reflecting reduced purchases from OVEC and decreased purchases from third parties to serve Maryland customers. Fuel expense increased by $12.4 million, due primarily to higher prices paid for coal. Operations and maintenance expense decreased by $35.3 million compared to adjusted expense for the third quarter of 2005, largely due to reduced litigation settlement costs, lower site remediation reserves and completion of a construction services contract. Adjusted expense for the third quarter of 2005 excluded the insurance proceeds previously mentioned. Depreciation expense decreased by $8.4 million, largely due to the previously announced extension of certain unregulated power plants’ estimated lives. Interest expense decreased by $14.1 million compared to adjusted results for the same period in 2005 due to lower debt outstanding. Adjusted expense for the third quarter of 2005 excluded the debt redemption costs previously mentioned. EBITDA for the quarter was $286.3 million, an increase of $12.1 million compared to adjusted EBITDA for the third quarter of 2005. EBITDA is a non-GAAP financial measure. Details on the calculation of EBITDA and a reconciliation of EBITDA to net income are attached to this release. Third Quarter Segment Results Generation and Marketing: The segment reported income from continuing operations of $66.9 million for the third quarter of 2006, an increase of $34.2 million compared to the same quarter of the prior year. Operating revenues and kilowatt-hours generated decreased by $7.8 million and 3 percent, respectively. The decrease in revenues was primarily due to lower market prices, the expiration of the OVEC agreement and the Harrison transformer failure. The decreases were partially offset by increased generation rates in Pennsylvania, as well as the benefits of the below-market contract expiration and the 2005 Ohio territory sale. Purchased power and transmission decreased by $10.3 million, reflecting reduced purchases from OVEC. Fuel costs increased by $12.4 million, due primarily to higher prices paid for coal. Operations and maintenance expense increased by $2.6 million, reflecting the receipt of insurance proceeds in the prior year and reduced site remediation reserves in the current period. Depreciation expense decreased by $7.9 million, reflecting the extension of power plant lives mentioned above. Interest expense decreased by $41.5 million, largely due to debt redemption costs in the prior year and lower debt outstanding. Due to higher pre-tax earnings, income taxes increased by $2.8 million, despite the $16.7 million Pennsylvania tax benefit recorded in the current period. Delivery and Services: The segment reported income from continuing operations of $43.8 million for the third quarter of 2006, an increase of $33.1 million compared to the same quarter of the prior year. The 2005 results included the Ohio sale impairment charge. Operating revenues and retail electric kilowatt-hour sales decreased by $28.8 million and 10 percent respectively. The decrease in operating revenues reflected the expirations of a below-market contract and transmission capacity contracts and the completion of a construction services contract, along with milder weather. These detriments were partially offset by higher Pennsylvania generation rates, the sale of the Ohio service territory and customer growth. Purchased power and transmission costs decreased by $19.0 million, primarily due to the below-market contract expiration, the sale of the Ohio territory and milder weather, partially offset by higher Pennsylvania generation rates and customer growth. Operations and maintenance expense decreased by $27.8 million, primarily due to reduced litigation settlement costs and the completion of a construction services contract. Interest expense decreased by $4.8 million, reflecting lower debt balances, and income taxes increased by $16.7 million. Discontinued Operations: Allegheny reported a $0.5 million (after-tax) loss on discontinued operations, compared to a $7.8 million loss in the same quarter of the prior year. The 2006 results relate to the Gleason generating facility. The 2005 loss was attributable to the West Virginia natural gas operations and the Gleason and Wheatland generating facilities. Allegheny sold the gas operations and Wheatland during 2005. Nine-Month Consolidated Results For the first nine months of 2006, Allegheny reported consolidated net income of $254.7 million, or $1.51 per diluted share, as compared to net income of $59.9 million, or $0.38 per diluted share, for the first nine months of the prior year. Adjusted net income from continuing operations was $246.0 million, or $1.46 per diluted share, for the first nine months of 2006, compared to $146.1 million, or $0.90 per diluted share, for the same period of 2005. Adjusted net income from continuing operations is a non-GAAP financial measure, and excludes items mentioned above and other items described in the attached reconciliation of non-GAAP financial measures. Reconciliation of Non-GAAP Financial Measures This news release and the attached table include non-GAAP financial measures as defined in the Securities and Exchange Commission’s Regulation G. Where noted, we present financial information on an adjusted basis to exclude the effect of certain items as described herein. By presenting adjusted results, management intends to provide investors with a better understanding of the core results and underlying trends from which to consider past performance and prospects for the future. We also present EBITDA as an additional measure of our operating performance. Users of this financial information should consider the types of events and transactions for which adjustments have been made. Neither the adjusted information nor EBITDA should be considered in isolation or viewed as substitutes for or superior to net income or other data prepared in accordance with GAAP as measures of our operating performance or liquidity. In addition, neither the adjusted information nor EBITDA are necessarily comparable to similarly titled measures provided by other companies. Pursuant to the requirements of Regulation G, we have attached tables that reconcile non-GAAP financial measures, including those presented in this release, to the most directly comparable GAAP measures. Investor Conference Call Allegheny Energy will comment further on these results in an investor conference call at 8:30 a.m. Eastern Daylight Time on Friday, October 27, 2006. To listen to a live Internet broadcast of the call, visit www.alleghenyenergy.com. The slide presentation to be used during the conference call will be available on the company’s Web site at 7:00 a.m. on October 27. A taped replay of the call will be available after the live broadcast. Allegheny Energy Headquartered in Greensburg, Pa., Allegheny Energy is an investor-owned utility consisting of two major businesses. Allegheny Energy Supply owns and operates electric generating facilities, and Allegheny Power delivers low-cost, reliable electric service to customers in Pennsylvania, West Virginia, Maryland and Virginia. For more information, visit our Web site at www.alleghenyenergy.com. Forward-Looking Statements In addition to historical information, this release contains a number of "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Words such as anticipate, expect, project, intend, plan, believe, and words and terms of similar substance used in connection with any discussion of future plans, actions, or events identify forward-looking statements. These include statements with respect to: regulation and the status of retail generation service supply competition in states served by Allegheny Energy’s delivery business, Allegheny Power; the closing of various agreements; financing plans; demand for energy and the cost and availability of raw materials, including coal; provider-of-last-resort ("PLR”) and power supply contracts; results of litigation; results of operations; internal controls and procedures; capital expenditures; status and condition of plants and equipment; capacity purchase commitments; regulatory matters; and accounting issues. Forward-looking statements involve estimates, expectations and projections and, as a result, are subject to risks and uncertainties. There can be no assurance that actual results will not materially differ from expectations. Actual results have varied materially and unpredictably from past expectations. Factors that could cause actual results to differ materially include, among others, the following: plant performance and unplanned outages; changes in the price of power and fuel for electric generation; general economic and business conditions; changes in access to capital; complications or other factors that render it difficult or impossible to obtain necessary lender consents or regulatory authorizations on a timely basis; environmental regulations; the results of regulatory proceedings, including proceedings related to rates; changes in industry capacity, development and other activities by Allegheny Energy’s competitors; changes in the weather and other natural phenomena; changes in the underlying inputs and assumptions, including market conditions used to estimate the fair values of commodity contracts; changes in customer switching behavior and their resulting effects on existing and future PLR load requirements; changes in laws and regulations applicable to Allegheny Energy, its markets or its activities; the loss of any significant customers or suppliers; dependence on other electric transmission and gas transportation systems and their constraints or availability; changes in PJM, including changes to participants rules and tariffs; the effect of accounting pronouncements issued periodically by accounting standard-setting bodies; and the continuing effects of global instability, terrorism and war. Additional risks and uncertainties are identified and discussed in Allegheny Energy’s reports and registration statements filed with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this document. Allegheny Energy undertakes no obligation to update its forward-looking statements to reflect events or circumstances after the date of this document. ALLEGHENY ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)   (In thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2006 2005 2006 2005 Operating revenues $816,645  $845,064  $2,384,526  $2,313,744    Operating expenses: Fuel consumed in electric generation 223,810  211,428  623,202  551,454  Purchased power and transmission 101,972  124,111  298,301  337,176  Gain on sale of OVEC power agreement and shares --  --  (6,124) --  Impairment charge on Ohio T&D assets --  30,500  --  30,500  Deferred energy costs, net (181) (4,181) 5,225  (4,800) Operations and maintenance 157,809  182,095  525,543  545,678  Depreciation and amortization 68,308  76,724  204,319  230,493  Taxes other than income taxes 53,762  53,300  159,630  160,096  Total operating expenses 605,480  673,977  1,810,096  1,850,597    Operating income 211,165  171,087  574,430  463,147    Other income and expenses, net 7,841  7,294  25,770  33,781    Interest expense and preferred dividends: Interest expense 66,073  111,803  209,886  365,874  Preferred dividends of subsidiary 293  1,259  879  3,778  Total interest expense and preferred dividends 66,366  113,062  210,765  369,652  Income from continuing operations before income taxes and minority interest 152,640  65,319  389,435  127,276    Income tax expense 40,883  21,428  130,128  54,619    Minority interest in net income of subsidiaries 1,011  433  2,380  900  Income from continuing operations 110,746  43,458  256,927  71,757    Loss from discontinued operations, net of tax (539) (7,758) (2,203) (11,822) Net income $110,207  $35,700  $254,724  $59,935    Common share data: Weighted-average common shares outstanding Basic 164,813  162,711  163,813  152,379  Diluted 168,629  166,784  168,587  166,017    Basic income (loss) per common share: Income from continuing operations $0.67  $0.27  $1.56  $0.47  Loss from discontinued operations --  (0.05) (0.01) (0.08) Net income per common share $0.67  $0.22  $1.55  $0.39    Diluted income (loss) per common share: Income from continuing operations $0.65  $0.26  $1.52  $0.45  Loss from discontinued operations --  (0.05) (0.01) (0.07) Net income per common share $0.65  $0.21  $1.51  $0.38  ALLEGHENY ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited)   (In thousands) September 30, 2006 December 31, 2005 ASSETS Current Assets: Cash and cash equivalents $249,588  $262,212  Accounts receivable: Customer 175,412  179,634  Unbilled utility revenue 85,460  129,111  Wholesale and other 66,856  82,261  Allowance for uncollectible accounts (15,538) (16,778) Materials and supplies 95,069  98,069  Fuel 65,466  67,273  Deferred income taxes 42,308  93,404  Prepaid taxes 55,381  45,758  Assets held for sale 911  1,521  Collateral deposits 44,965  147,775  Commodity contracts 2,617  9,325  Restricted funds 161,836  21,589  Regulatory assets 38,023  38,418  Other 13,880  14,246  Total current assets 1,082,234  1,173,818    Property, Plant and Equipment, Net: Generation 5,765,260  5,751,077  Transmission 1,048,050  1,028,323  Distribution 3,556,970  3,448,350  Other 398,902  429,108  Accumulated depreciation (4,600,105) (4,508,707) Subtotal 6,169,077  6,148,151  Construction work in progress 242,646  129,277  Total property, plant and equipment, net 6,411,723  6,277,428    Investments and Other Assets: Non-current assets held for sale 21,182  48,559  Goodwill 367,287  367,287  Investments in unconsolidated affiliates 28,081  28,555  Intangible assets 27,396  27,396  Other 27,633  49,413  Total investments and other assets 471,579  521,210    Deferred Charges: Regulatory assets 513,750  544,810  Other 31,039  41,546  Total deferred charges 544,789  586,356  Total Assets $8,510,325  $8,558,812  ALLEGHENY ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) (unaudited)   (In thousands, except share amounts) September 30, 2006 December 31, 2005 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Long-term debt due within one year $494,212  $477,217  Accounts payable 202,211  316,713  Accrued taxes 167,849  154,587  Commodity contracts 14,589  92,934  Accrued interest 112,140  91,433  Other 142,443  153,570  Total current liabilities 1,133,444  1,286,454    Long-term Debt 3,408,148  3,624,483    Deferred Credits and Other Liabilities: Commodity contracts 17,773  22,994  Investment tax credit 72,666  76,965  Deferred income taxes 781,817  692,241  Obligations under capital leases 17,407  16,427  Regulatory liabilities 460,435  454,275  Adverse power purchase commitment 171,259  184,224  Other 407,820  459,465  Total deferred credits and other liabilities 1,929,177  1,906,591    Commitments and Contingencies   Minority Interest 10,531  21,989    Preferred Stock of Subsidiary 24,000  24,000    Common Stockholders’ Equity: Common stock—$1.25 par value per share, 260 million shares authorized and 165,287,497 and 163,002,295 shares issued at September 30, 2006 and December 31, 2005, respectively 206,609  203,753  Other paid-in capital 1,902,896  1,880,644  Retained earnings (accumulated deficit) 10,101  (244,625) Treasury stock at cost; 49,493 shares (1,756) (1,756) Accumulated other comprehensive loss (112,825) (142,721) Total common stockholders’ equity 2,005,025  1,695,295  Total Liabilities and Stockholders’ Equity $8,510,325  $8,558,812  ALLEGHENY ENERGY, INC.—CONSOLIDATED RESULTS OF OPERATIONS BY SEGMENT (unaudited)   Three Months Ended September 30, 2006 (In millions) Delivery and Services Generation and Marketing Eliminations Total Operating revenues $702.2  $488.6  $(374.2) $816.6    Fuel consumed in electric generation --  223.8  --  223.8  Purchased power and transmission 466.2  8.2  (372.4) 102.0  Impairment charge on Ohio T&D assets --  --  --  --  Deferred energy costs, net (0.2) --  --  (0.2) Operations and maintenance 84.3  75.4  (1.8) 157.9  Depreciation and amortization 37.7  30.6  --  68.3  Taxes other than income taxes 33.5  20.2  --  53.7  Total operating expenses 621.5  358.2  (374.2) 605.5  Operating income 80.7  130.4  --  211.1  Other income and expenses, net 5.3  3.4  (0.8) 7.9  Interest expense and preferred dividends 20.2  47.0  (0.8) 66.4  Income from continuing operations before income taxes and minority interest 65.8  86.8  --  152.6  Income tax expense 22.0  18.9  --  40.9  Minority interest --  1.0  --  1.0  Income from continuing operations 43.8  66.9  --  110.7  Loss from discontinued operations, net of tax --  (0.5) --  (0.5) Net income $43.8  $66.4  $--  $110.2      Three Months Ended September 30, 2005 (In millions) Delivery and Services Generation and Marketing Eliminations Total Operating revenues $731.0  $496.4  $(382.4) $845.0    Fuel consumed in electric generation --  211.5  --  211.5  Purchased power and transmission 485.2  18.5  (379.6) 124.1  Impairment charge on Ohio T&D assets 30.5  --  --  30.5  Deferred energy costs, net (4.2) --  --  (4.2) Operations and maintenance 112.1  72.8  (2.8) 182.1  Depreciation and amortization 38.2  38.5  --  76.7  Taxes other than income taxes 32.9  20.4  --  53.3  Total operating expenses 694.7  361.7  (382.4) 674.0  Operating income 36.3  134.7  --  171.0  Other income and expenses, net 4.7  3.0  (0.4) 7.3  Interest expense and preferred dividends 25.0  88.5  (0.4) 113.1  Income from continuing operations before income taxes and minority interest 16.0  49.2  --  65.2  Income tax expense 5.3  16.1  --  21.4  Minority interest --  0.4  --  0.4  Income from continuing operations 10.7  32.7  --  43.4  Loss from discontinued operations, net of tax (6.8) (0.9) --  (7.7) Net income $3.9  $31.8  $--  $35.7  ALLEGHENY ENERGY, INC.—CONSOLIDATED RESULTS OF OPERATIONS BY SEGMENT (continued) (unaudited)   Nine Months Ended September 30, 2006 (In millions) Delivery and Services GenerationandMarketing Eliminations Total Operating revenues $2,037.3  $1,409.8  $(1,062.6) $2,384.5    Fuel consumed in electric generation --  623.2  --  623.2  Purchased power and transmission 1,328.8  26.6  (1,057.1) 298.3  Gain on sale of OVEC power agreement and shares --  (6.1) --  (6.1) Impairment charge on Ohio T&D assets --  --  --  --  Deferred energy costs, net 5.2  --  --  5.2  Operations and maintenance 264.2  266.9  (5.5) 525.6  Depreciation and amortization 113.3  91.0  --  204.3  Taxes other than income taxes 98.7  60.9  --  159.6  Total operating expenses 1,810.2  1,062.5  (1,062.6) 1,810.1  Operating income 227.1  347.3  --  574.4  Other income and expenses, net 16.5  11.5  (2.2) 25.8  Interest expense and preferred dividends 62.4  150.6  (2.2) 210.8  Income from continuing operations before income taxes and minority interest 181.2  208.2  --  389.4  Income tax expense 67.7  62.4  --  130.1  Minority interest --  2.4  --  2.4  Income from continuing operations 113.5  143.4  --  256.9  Loss from discontinued operations, net of tax --  (2.2) --  (2.2) Net income $113.5  $141.2  $--  $254.7      Nine Months Ended September 30, 2005 (In millions) Delivery and Services GenerationandMarketing Eliminations Total Operating revenues $2,133.6  $1,317.8  $(1,137.7) $2,313.7    Fuel consumed in electric generation --  551.5  --  551.5  Purchased power and transmission 1,406.3  61.5  (1,130.6) 337.2  Gain on sale of OVEC power agreement and shares --  --  --  --  Impairment charge on Ohio T&D assets 30.5  --  --  30.5  Deferred energy costs, net (4.8) --  --  (4.8) Operations and maintenance 296.3  256.4  (7.1) 545.6  Depreciation and amortization 115.3  115.2  --  230.5  Taxes other than income taxes 98.9  61.2  --  160.1  Total operating expenses 1,942.5  1,045.8  (1,137.7) 1,850.6  Operating income 191.1  272.0  --  463.1  Other income and expenses, net 16.9  17.6  (0.7) 33.8  Interest expense and preferred dividends 102.0  268.3  (0.6) 369.7  Income from continuing operations before income taxes and minority interest 106.0  21.3  (0.1) 127.2  Income tax expense 28.7  25.9  --  54.6  Minority interest --  0.9  --  0.9  Income (loss) from continuing operations 77.3  (5.5) (0.1) 71.7  Loss from discontinued operations, net of tax (2.5) (9.4) 0.1  (11.8) Net income (loss) $74.8  $(14.9) $--  $59.9  RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (in millions, except per share data) (unaudited)   THREE MONTHS ENDEDSEPTEMBER 30, 2006 INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST   NET INCOME DILUTED INCOME PER SHARE Calculation of Adjusted Income: Income - GAAP basis $152.6  $110.2  $0.65    Adjustments: Loss from discontinued operations 0.5  Change in Pennsylvania state income tax law1     (16.7) Adjusted Income $152.6    $94.0  $0.56    Calculation of Adjusted EBITDA: Net Income - GAAP basis $110.2  Loss from discontinued operations 0.5  Interest expense and preferred dividends 66.4  Income tax expense 40.9  Depreciation and amortization     68.3  EBITDA from continuing operations 286.3  No adjustments     --  Adjusted EBITDA from continuing operations     $286.3    THREE MONTHS ENDEDSEPTEMBER 30, 2005 INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST   NET INCOME DILUTED INCOME PER SHARE Calculation of Adjusted Income: Income - GAAP basis $65.3  $35.7  $0.21    Adjustments: Loss from discontinued operations 7.8  Receipt of Hatfield power station insurance proceeds2 (11.0) (6.8) Redemption costs of 10.25% and 13.0% Senior Notes3 32.6  20.1  Impairment charge on Ohio T&D assets 30.5    18.0  Adjusted Income $117.4    $74.8  $0.45    Calculation of Adjusted EBITDA: Net Income - GAAP basis $35.7  Loss from discontinued operations 7.8  Interest expense and preferred dividends 113.1  Income tax expense 21.4  Depreciation and amortization     76.7  EBITDA from continuing operations 254.7  Receipt of Hatfield power station insurance proceeds (11.0) Impairment charge on Ohio T&D assets     30.5  Adjusted EBITDA from continuing operations     $274.2  FOOTNOTES: 1 This amount is included in income tax expense on the Consolidated Statement of Operations. 2 This amount is included in operations and maintenance expense on the Consolidated Statement of Operations. 3 This amount is included in interest expense on the Consolidated Statement of Operations. RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (continued) (in millions, except per share data) (unaudited)   NINE MONTHS ENDEDSEPTEMBER 30, 2006 INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST NET INCOME DILUTED INCOMEPER SHARE Calculation of Adjusted Income: Income - GAAP basis $389.4  $254.7  $1.51    Adjustments: Loss from discontinued operations 2.2  Change in Pennsylvania state income tax law1 (16.7) Write-off of prior deferred financing costs2 9.5  5.8  Adjusted Income $398.9  $246.0  $1.46  Calculation of Adjusted EBITDA: Net Income - GAAP basis $254.7  Loss from discontinued operations 2.2  Interest expense and preferred dividends 210.8  Income tax expense 130.1  Depreciation and amortization   204.3  EBITDA from continuing operations 802.1  No adjustments   --  Adjusted EBITDA from continuing operations   $802.1  NINE MONTHS ENDEDSEPTEMBER 30, 2005 INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST NET INCOME DILUTED INCOMEPER SHARE Calculation of Adjusted Income: Income - GAAP basis $127.3  $59.9  $0.38    Adjustments: Loss from discontinued operations 11.8  Interest expense related to Merrill Lynch summary judgment3 38.5  24.3  Expense related to conversion of trust preferred securities2 47.2  29.8  Cash receipt from former trading executive’s forfeited assets4 (11.2) (6.9) Receipt of Hatfield power station insurance proceeds5 (17.7) (10.9) Redemption costs of 10.25% and 13.0% Senior Notes2 32.6  20.1  Impairment charge on Ohio T&D assets 30.5  18.0  Adjusted Income $247.2  $146.1  $0.90  Calculation of Adjusted EBITDA: Net Income - GAAP basis $59.9  Loss from discontinued operations 11.8  Interest expense and preferred dividends 369.7  Income tax expense 54.6  Depreciation and amortization   230.5  EBITDA from continuing operations 726.5  Cash receipt from former trading executive’s forfeited assets (11.2) Receipt of Hatfield power station insurance proceeds (17.7) Impairment charge on Ohio T&D assets   30.5  Adjusted EBITDA from continuing operations   $728.1  FOOTNOTES: 1 This amount is included in income tax expense on the Consolidated Statement of Operations. 2 These amounts are included in interest expense on the Consolidated Statements of Operations. 3 This amount is included in interest expense on the Consolidated Statement of Operations. This amount represents the estimated interest owed to Merrill Lynch from March 16, 2001 thru March 31, 2005. It does not include interest accrued subsequent to March 31, 2005. 4 This amount is included in other income and expenses, net, on the Consolidated Statement of Operations. 5 This amount is included in operations and maintenance expense on the Consolidated Statement of Operations. RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (continued) (in millions) (unaudited)   ADJUSTED EXPENSES THREE MONTHS ENDEDSEPTEMBER 30, 2006 THREE MONTHS ENDEDSEPTEMBER 30, 2005 Operations and maintenance expense: As reported $157.8  $182.1    Receipt of Hatfield power station insurance proceeds --  11.0  As Adjusted $157.8  $193.1    Interest expense and preferred dividends of subsidiary: As reported $66.4  $113.1    Redemption costs of 10.25% and 13.0% Senior Notes --  (32.6) As Adjusted $66.4  $80.5    Income tax expense from continuing operations: As reported $40.9  $21.4    Change in Pennsylvania state income tax law 16.7  --  As Adjusted $57.6  $21.4    ADJUSTED EXPENSES AND OTHER INCOME AND EXPENSES, NET NINE MONTHS ENDEDSEPTEMBER 30, 2006 NINE MONTHS ENDEDSEPTEMBER 30, 2005 Operations and maintenance expense: As reported $525.5  $545.6    Receipt of Hatfield power station insurance proceeds --  17.7  As Adjusted $525.5  $563.3    Other income and expenses, net: As reported $25.8  $33.8    Cash receipt from former trading executive’s forfeited assets --  (11.2) As Adjusted $25.8  $22.6    Interest expense and preferred dividends of subsidiary: As reported $210.8  $369.7    Write-off of prior deferred financing costs (9.5) --  Interest expense related to Merrill Lynch summary judgment --  (38.5) Redemption costs of 10.25% and 13.0% Senior Notes --  (32.6) Expense related to conversion of trust preferred securities --  (47.2) As Adjusted $201.3  $251.4    Income tax expense from continuing operations: As reported $130.1  $54.6    Change in Pennsylvania state income tax law 16.7  --  As Adjusted $146.8  $54.6  ALLEGHENY ENERGY, INC. AND SUBSIDIARIES OPERATING STATISTICS (unaudited) Three Months Ended September 30,       2006     2005   Change DELIVERY AND SERVICES: Retail electricity sales (million KWH) 11,026 12,247  -10.0% Usage per customer (KWH): Residential 3,083 3,251  -5.2% Commercial 16,190 16,392  -1.2% Industrial 148,291 (a) 178,101  -16.7% GENERATION AND MARKETING: Generation (million KWH) 12,798 13,188  -3.0%   (unaudited) Nine Months Ended September 30,       2006     2005   Change DELIVERY AND SERVICES: Retail electricity sales (million KWH) 32,257 36,116  -10.7% Usage per customer (KWH): Residential 9,024 9,420  -4.2% Commercial 45,314 46,078  -1.7% Industrial 450,558 (a) 552,967  -18.5% GENERATION AND MARKETING: Generation (million KWH) 37,048 36,574  1.3% (a) Reflects the expiration of a below-market contract with a Maryland industrial customer