Allegheny Energy Reports Third Quarter 2008 Results

Allegheny Energy, Inc. (NYSE: AYE) today reported financial results for the three months and nine months ended September 30, 2008.

Adjusted net income for the third quarter of 2008 excludes net unrealized pre-tax losses of $4.0 million associated with economic hedges that do not qualify for hedge accounting. There were no adjustments to net income for the third quarter of 2007.

"Lower earnings in the quarter were due to higher coal prices and mild weather, partially offset by favorable market prices,” said Paul J. Evanson, Chairman, President and Chief Executive Officer of Allegheny Energy. "Our financial condition and earnings growth outlook remain strong. Transmission expansion and the transition to market-based rates are key growth catalysts. Our investment grade credit ratings reflect considerable credit capacity, including major financings in place to support our capital plan, and no significant debt maturities until 2011.”

Third Quarter Consolidated Results

Adjusted net income for the third quarter of 2008 decreased by $23.6 million compared with the same period in 2007. Key factors contributing to the results include:

• Adjusted operating revenues increased by $7.0 million compared to the third quarter of 2007, reflecting higher market prices, increased sales to third parties, and revenue from transmission expansion, partially offset by lower generation output as well as lower retail sales reflecting mild weather.

• Fuel expense increased by $53.7 million, largely due to higher coal prices.
• Purchased power and transmission expense increased by $14.2 million, primarily due to increased purchases from third parties.
• Deferred energy costs decreased expenses by $22.3 million, primarily due to the fuel and energy cost recovery clause in West Virginia.
• Operations and maintenance expense decreased by $2.6 million, primarily due to lower special maintenance costs at the power plants, partially offset by higher spending for system reliability and storm-related service restoration work.

• Other income decreased by $10.3 million, primarily due to a real estate gain in the third quarter of 2007.
• Adjusted income taxes decreased by $21.3 million, largely due to a decrease in pre-tax income.

Adjusted EBITDA for the third quarter of 2008 was $262.6 million, a decrease of $46.0 million compared to the same quarter of the prior year. EBITDA and adjusted EBITDA are non-GAAP financial measures. Details on the calculation of these amounts and a reconciliation of EBITDA to net income are attached to this release.

Third Quarter Segment Results

Adjusted net income for the Generation and Marketing segment in the third quarter of 2008 excludes the unrealized losses previously discussed. There were no adjustments in the Delivery and Services segment for the third quarter of 2008, or in either segment for the third quarter of 2007.

Generation and Marketing: Adjusted net income for the quarter decreased $15.1 million compared to the same period a year earlier. Results were negatively impacted by higher coal costs, lower generation output, and a real estate gain in the third quarter of 2007. These factors were partially offset by higher generation rates, capacity prices and energy prices, as well as lower interest expense and income taxes.

Delivery and Services: Adjusted net income for the quarter decreased by $8.5 million compared to the same quarter of the prior year. Key factors contributing to the decrease were the expiration of an earnings benefit related to stranded cost recovery, lower retail sales primarily due to mild weather, higher costs for purchasing power to serve Virginia customers, and increased interest expense. These factors were partially offset by revenues from transmission expansion and lower income taxes.

Nine-Month Segment Results

Adjusted net income for the Generation and Marketing segment in the nine-month period of 2008 excludes the unrealized gains and losses previously discussed. There were no adjustments in the Delivery and Services segment for the nine-month period of 2008, or in either segment for the nine-month period of 2007.

Reconciliation of Non-GAAP Financial Measures

This news release and the attached tables 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 more complete 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, is 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 discuss these results in a live Internet broadcast today at 1:00 p.m. Eastern Standard Time. To listen to the broadcast, visit www.alleghenyenergy.com. A taped replay will be available after the live broadcast.

Allegheny Energy

Headquartered in Greensburg, Pa., Allegheny Energy is an investor-owned electric utility with total annual revenues of over $3 billion and more than 4,000 employees. The company owns and operates generating facilities and delivers low-cost, reliable electric service to 1.6 million 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 may contain 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: rate regulation and the status of retail generation service supply competition in states served by Allegheny Energy’s distribution business, Allegheny Power; financing plans; demand for energy and the cost and availability of raw materials, including coal; provider-of-last-resort and power supply contracts; results of litigation; results of operations; internal controls and procedures; capital expenditures; status and condition of plants and equipment; 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 markets; 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 customer switching behavior and their resulting effects on existing and future load requirements; changes in the underlying inputs and assumptions, including market conditions used to estimate the fair values of commodity contracts; changes in laws and regulations applicable to Allegheny 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 participant rules and tariffs; the effect of accounting policies issued periodically by accounting standard-setting bodies; and the continuing effects of global instability, terrorism and war. Additional risks and uncertainties are identified and discussed in Allegheny Energy’s reports filed with the Securities and Exchange Commission.

Notes to Reconciliation of Non-GAAP Financial Measures:

(1) Consists of unrealized losses of $106.6 million on financial transmission rights ("FTRs”), $81.1 million of unrealized gains on power hedges, and a $21.5 million unrealized gain associated with a hedging strategy pertaining to a natural gas transportation contract. These unrealized mark-to-market gains and losses were included in operating revenues on the Consolidated Statements of Income.

(2) Consists of unrealized gains of $90.0 million on financial transmission rights ("FTRs”), $24.9 million of unrealized gains on power hedges, and a $8.4 million unrealized gain associated with a hedging strategy pertaining to a natural gas transportation contract. These unrealized mark-to-market gains were included in operating revenues on the Consolidated Statements of Income.